What are "impaired loans"?

Impaired loans refer specifically to loans where the borrower has experienced financial difficulties that prevent them from making timely payments, leading to concerns about the collectability of the outstanding loan balance. This situation may arise from various factors, including significant deterioration in the borrower’s financial condition, which can include defaults or late payments.

When a loan is classified as impaired, it typically means that the bank must evaluate its potential losses and make necessary adjustments to its financial statements. This process often involves estimating the future cash flows expected from the loan and recognizing any impairment losses that might need to be recorded.

In contrast, loans that have been fully paid would not be categorized as impaired since there are no ongoing payment concerns. Similarly, loans that are written off completely would have already been deemed uncollectible, making them distinct from impaired loans, which suggest that there’s still an expectation of receiving some payments, albeit in jeopardy. Loans given to new borrowers do not fall under the impaired category simply because they lack the historical performance data needed to assess impairment risk.

Therefore, the correct understanding of impaired loans relates directly to difficulties in timely payment by the borrower, emphasizing the need for financial institutions to carefully monitor their loan portfolios and manage credit risk effectively.