Delinquency management

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Delinquency management
Urban Program for Livelihood Finance
and Training
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Urban Program for Livelihood Finance
and Training
Training flow

• Topic 1 What is delinquency in Micro-lending?
• Topic 2 The effect of delinquency in
  Micro-lending
• Topic 3 Measuring delinquency in Micro-lending
• Topic 4 Causes of delinquency in Micro-lending
• Topic 5 Preventing delinquency in Micro-lending
• Topic 6 Acting on delinquent clients

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What is delinquency in Micro-finance?
Urban Program for Livelihood Finance
and Training
 
 

• Delinquency is the situation that occurs when
  loan payments are past due (CGAP).
• A delinquent loan (or loan in arrears) is a loan
  on which payments are past due (Calmeadow).
• Delinquent payments/payments in arrears are loan
  payments which are past due.

 
 
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What is delinquency in Micro-finance?
Urban Program for Livelihood Finance
and Training

• Delinquency occurs when one loan payment is one
  day late.

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What is delinquency in Micro-finance?
Urban Program for Livelihood Finance
and Training

• Default occurs when a borrower cannot or will not
  pay his or her loan. The MFI no longer expects to
  receive repayment. The MFI may continue the
  collection efforts.
• Usually, a loan is declared in default when the
  borrower has stopped payment on a loan for more
  than 2 or 3 due dates.
• Once a loan is declared in default, the MFI will
  try to collect collaterals.

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Urban Program for Livelihood Finance
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• Credit without strict discipline is nothing but
  charity.
• Charity does not help to overcome poverty.

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Credit without strict discipline is nothing but
charity. Charity does not help to overcome
poverty. Poverty is a disease that has a
paralyzing effect on mind and body. A meaningful
poverty alleviation program is one that helps
people gather will and strength to make cracks in
the walls around them. Mohammad Yunus 1998
Urban Program for Livelihood Finance
and Training
8
What is the effects of delinquency?
Urban Program for Livelihood Finance
and Training

• On the Micro-finance institution?
• On the clients/beneficiaries?
• On the staff?
• On the donors?

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What is the effects of delinquency?
Urban Program for Livelihood Finance
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• On MFI
• Less income, less interest
• Less clients
• Shortening life of MFI
• Increasing expenses
• Restructural
• Bankrupcy
• Decrease sustainability
• Limit the spread
• Image of institution
• Ever-increasing delinquency

• On clients
• Less discipline
• Less trust
• Less motivation
• More difficult to sustain the family needs
• No possibility to reloan
• Bad image in the community
• Client not served effectively
• Chain reaction
• No svings anymore
• Loose the money of clients (savings)

• On staff
• Low performance
• Decreasing benefits
• Must focus on delinquent
• No bonus
• Loss of motivation
• Retrenchments/Forced resignation/Downsizing
• Extra efforts to motivate clients
• Laziness

• On donors
• Loosing credibility
• No donation

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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training

• The outstanding portfolio of a Micro-finance
  institution is defined as the principal amount of
  loan balances outstanding.
• It is the remaining balance in principal of all
  the outstanding loans

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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training
Features of an outstanding loan portfolio

• Largest asset
• Generates income
• Demanded by clients
• Reason for MFI existence

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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training

• Quantitative measure
• Size of the portfolio
• Qualitative measure
• Capability to generate income gt bad debts

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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
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• Only ratios with outstanding portfolio in their
  formula can measure the quality of a portfolio!

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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training

• Unpaid principal balance
• (1 late payment or more)
• Outstanding portfolio

Portfolio at risk
P.A.R is the best indicator to measure potential
losses !
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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training

• Example 1 A client receive a loan of Php2000.
  She/he made two payments of Php250 and Php200 are
  principal, Php50 are interest. Then she/he has
  two mispayments.
• At the time she/he started not to pay, the
  remaining balance was 2000-(2200)1600. Php1600
  are considered at risk.
• The portfolio at risk is 1600/16001
• In percentage, it is 100.

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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training
Example 2 2 loans are granted. A Php2000 loans
to Miss A and a Php3000 loan to Miss B are
released the same day. Miss A must pay in 5
installments. Miss B must pay in 6 installments.
Miss A pays regularly. Miss B does not pay the
2nd and 3rd installments. Miss B pays all the
other installments.
What are the P.A.R after the release? After every
installment?
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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training
Example 2
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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training
amount received (less prepayments) total amount
due this period (including past due from previous
period)
Repayment rate
It shows the amount paid compared to the amount
expected. It is a measure of the MFI capability
to be paid on time.
amount received on maturity date total amount due.
Repayment ratio (on maturity)
It shows the amount paid compared the amount
expected to be paid on maturity. It measures the
capability of a MFI to be paid on time, on
maturity. In other words it measures the
capability of the MFI to make the clients respect
their contract.
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Measuring delinquency in Micro-finance
Urban Program for Livelihood Finance
and Training
Arrears rate or past due rate
amount of arrears or past due outstanding
portfolio.
It gives an indication on how common is
non-payment.
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Urban Program for Livelihood Finance
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Measuring delinquency in Micro-finance

• Measuring delinquency in UPLIFT
• Total outstanding
• PAR
• Repayment ratio on maturity
• of non past-due partners
• It is measured at the level of a LDO, a branch, a
  program and the entire organization.

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Urban Program for Livelihood Finance
and Training
Measuring delinquency in Micro-finance
MFI must have a loan loss reserve and loan loss
provision for accurate financial
statements. These should be based on historical
portfolio performance Loan loss provision is an
expense and affects the sustainability Loan loss
reserve is recorded as a negative asset on the
balance sheet and reduces the outstanding loan
portfolio. MFI should have a reasonable write-off
policy
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Urban Program for Livelihood Finance
and Training
Measuring delinquency in Micro-finance
Annual loan loss rate Amount of loans written
off a year Average outstanding portfolio the same
year It measures the annual cost of default. It
must be covered by interest income.
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Causes of delinquency
Urban Program for Livelihood Finance
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• List the reasons of delinquency

What motivates my clients not to pay me back?
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Preventing delinquency
Urban Program for Livelihood Finance
and Training

• Image of the MFI
• Value the access of credit
• Screening
• Capacity to pay based on actual
• Incentives to pay, disincentives not to pay
• Incentive on staff if effective
• Provide field staff with information on their
  portfolio
• Provide management with information to monitor
  delinquency
• Design a clear process for late payment
• Defining acceptable level of delinquency

KEY I SSUES
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Urban Program for Livelihood Finance
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Borrowers perceptions