Standard banking regulation requires that nonperforming loans be classified as nonaccrual if principal and interest have not been paid for at least 90 days, except in cases where the lender has adequate collateral to cover the loan.
Banks and lending institutions maintain reserves to cover nonaccrual-loan losses. When borrowers resume making payments on the loan, the cash is applied first to principal and then to interest.
For bookkeeping purposes, banks deem nonaccrual loans as “cash basis loans.” These loans can have interest credited only when the borrower makes payment; the bank can no longer credit the interest to its revenue until actual receipt. Interest is then recorded as earned income.
Investment dictionary. Academic. 2012.
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