What is the definition of an impaired loan?

An impaired loan is specifically defined as a loan for which it is determined that all principal and interest will not be repaid. This assessment often arises when there is substantial doubt about the borrower's ability to fulfill the loan obligation due to financial difficulties or other factors impacting repayment. Recognizing a loan as impaired triggers certain accounting practices and provisions for potential losses, which helps financial institutions manage risk more accurately.

When a loan is identified as impaired, it suggests that the values of the collateral may be insufficient to cover the outstanding amounts owed, prompting the need for financial institutions to adjust their financial statements to reflect this diminished value. Overall, identifying an impaired loan is critical in maintaining accurate financial reporting and managing credit risk effectively.