Bad debt occurs when credit sales are not collected as cash. Each industry has its own “normal” level of bad debt as a proportion of total credit sales. For banks, the allowance for bad debt is an account created to estimate the amount of a bank’s loan portfolio that will be ultimately uncollectible. It is also known as “loan-loss reserve”.
The Bloomberg article discusses the recent increase in bad loans at Italian banks. The amount of bad loans achieved its highest level in more than 12 years due to the deep and long recession. This is caused, primarily, because hundreds of small companies are forced to go out of business each day and families are struggling to repay their debts as unemployment rises.
Non-performing loans increased by 18% last year to $163.3 billion and it is expected that bad loans amount keeps rising until the economy starts to recover.
Sources: http://www.bloomberg.com/news/2013-03-19/italian-banks-bad-loan-ratio-rises-to-highest-in-12-years.html
