Nonaccrual Loans
Definition
A nonaccrual loan is a loan whose interest income is no longer recognized on an accrual basis because the borrower is seriously delinquent or full collection is doubtful. The loan still exists, but the lender is no longer treating scheduled interest as reliably earned income.
Why it matters
Nonaccrual is an early but serious impairment signal. It usually appears before charge-off or OREO, so it helps investors separate loans that are merely late from loans where accounting recognition has changed. A lender with rising nonaccruals may be building loss pressure before those losses show up in realized charge-offs.
Common misconceptions
- •Nonaccrual is not the same as foreclosure; the asset is still a loan.
- •A nonaccrual loan can cure and return to accrual status.
- •Low charge-offs can coexist with high nonaccruals if losses have not yet been resolved.
Technical details
Typical treatment
Interest accrual stops when collectability becomes doubtful or delinquency crosses policy thresholds.
Cash received may be applied to principal, interest, or suspense depending on policy and legal documents.
If recovery worsens, the loan can move to charge-off, foreclosure, or OREO.