Bad debt is debt that is unlikely to be paid. It is particularly important for banks and financial institutions that make their profits by lending money, but a high or rising level of bad debt can be an indicator of problems in any organisation.
When debts are classified as bad, they are charged as a cost on the profit and loss account. Because a certain level of bad debt is expected, it is common practice for companies to make a provision for the amount of debt that is expected to become bad.
For banks (and other financial institutions), the level of non-performing assets is a leading indicator of bad debt.