Non-performing assets – What it is, definition and concept

Non-performing assets are those that, in addition to not offering any type of economic return, can generate expenses for their owner. Many types of goods can thus be categorized at a certain point in their useful life.

In other words, non-performing assets are those assets that a company owns from which an economic return cannot be obtained. In addition to this, some of these assets may incur expenses for the simple fact of keeping them in property.

For example, a supermarket that has a batch of expired milk, not only will not be able to sell it, but it will also generate a cost of storage and transportation to the garbage plant.

It is very common to find this type of asset in the banking sector. In fact, after the Great Recession, one of the main problems for banks was the holding of non-performing assets.

The opposite of unproductive assets are productive assets that are those that offer the opportunity to obtain an economic return to their owner.

At this point, we must also remember that an asset is a resource with a certain value that has the purpose of offering a benefit (economic or non-economic) for its owner in the future.

Non-performing asset characteristics

An unproductive asset usually meets the following characteristics in the business world:

  • They do not offer any type of economic profitability and can even generate expenses.
  • Non-performing assets do not have to be related to the main activity of the company.
  • In the past they did have the possibility of offering a certain economic return.
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Differences between non-performing and productive assets

As we have mentioned previously, productive assets are those capable of offering profitability to their owner. In order for you to better understand the difference between these two types of assets, we are going to give an example.

Let’s imagine that a real estate agency decides to acquire a property worth $ 280,000. However, due to an earthquake, the house is damaged and uninhabitable, unless a very expensive work is carried out.

At this same moment, the asset goes from being productive, since it could be rented or sold at a higher price than the compared, to being an unproductive asset. This home can no longer be used by anyone, so it will not be possible to obtain an economic return from it.

Examples of non-performing assets

Finally, we explain some examples of unproductive assets:

  • Expired or expired goods. For example, food sold in a supermarket or medicines from a pharmacy.
  • Goods that were directed to a specific moment. Let’s imagine a soccer team that wins the Champions League. If you decide to make merchandise related to that achievement, it will only be sold in a time slot after the achievement of the title.
  • A credit granted to someone who is declared insolvent or to a company that files for bankruptcy.

In conclusion, non-performing assets are those that do not give their owner the opportunity to obtain an economic return.

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