Loan

Delinquency
Credit and Collection
 Rationale
• The loan portfolio is considered as the largest
income- generating asset of a lending institution.
• Like any other asset, it has inherent RISKS!
• One of the biggest risks faced by the bank is non-
repayment by clients or delinquency. This risk in the
bank portfolio changes as loans are disbursed.
• Problems with loan delinquency affect not only
loan clients but the whole institution and community
as well.
• However, the bank is ultimately responsible for
delinquency.
2
Session
Objectives
■ Understand the basic concepts of zero
tolerance and delinquency
■ Learn how to measure delinquency
■ Know the costs and causes associated
with delinquency
 What is Loan
Delinquency?

Any loan with a missed

amortization of even one day
is a delinquent account.
What is zero tolerance
against delinquency ?
• Zero tolerance means NO LEVEL OF
DELINQUENCY IS ACCEPTABLE!
• It is the attitude of the bank management & staff
towards loan delinquency - no level of late
payment is acceptable. It is an institutional
culture in which late payments are totally
unacceptable
• The bank will aggressively pursue past due
clients, whatever the cost, to establish and
maintain zero loan delinquency.
 What makes loan delinquency
distinct from other problems?
• The costs of delinquency are hidden. The
true level of loan delinquency can be
concealed, making it difficult to recognize the
true extent of the problem.

• Lenders tend to attribute delinquency

excessively to external factors. Consequently,
they do not confront and resolve the causative
factors within their control.

• Delinquency is contagious. It tends to spread

and worsen, leading to high levels of default,
unless it is aggressively controlled.
Measuring Delinquency

• Arrears Rate/Past Due Ratio

• Portfolio at Risk Ratio
• Annual Loan Loss Rate
 Measuring Delinquency
Arrears/Past Due Rate
• Indicates how commonplace non payment is
• measures amount of loan principal that is due but unpaid
• Less rigorous yardstick in measuring portfolio quality
•Only shows amount of overdue payments
• Does not reflect portfolio risk
Amount past due
Total Loan Outstanding

Unpaid Principal Balance of all loans
with missed payments of 1 day or more
Outstanding portfolio
▪Applicable measuring tool use to
evaluate portfolio quality of microfinance
loans;
▪ it considers a loan account with a missed
payment of even one (1) day as already a
delinquent account
▪ more pro-active approach in looking at
delinquency problems
 Measuring Delinquency
■ Indicates how much could a bank lose if all
late borrowers default
■ Aging of portfolio at risk separates more
risky loans from less risky (see next slide)
Measuring Delinquency
Measuring Delinquency
 Measuring Delinquency

Loan Loss Rate

■ Shows how much of the portfolio

has been lost; annual cost of default,
which must be balanced by higher
interest income

■ Measures the amount written off as a

percentage of average outstanding
portfolio

■ Provides a complement to PAR

 Measuring Delinquency
Loan Loss Rate

• Complements the portfolio at risk rate (PAR)

• Compare over time to see if write offs are increasing
▪ Loan loss rates over 4% are dangerous - best kept under 3%
• MFI should continue efforts to recover loans that are written off
 Is collection rate a tool for measuring delinquency?
Collection/ Repayment Rate

Used to:
• Predict and plan cash flow
• Analyze repayment trends
• Examine collection performance
Is a 95%
collection rate
good?
95% collection rate (amounts
received/amounts due) Total
amount disbursed P500,000
Implication of
95% CR
 Why is delinquency not acceptable?
▪ It reduces profitability;
▪ It reduces the bank's competitiveness;
▪ It affects the bank's image in the
community negatively
can lead to:

BANK FAILURE!!!
Impact of Delinquency

PROFITABILITY SUFFERS
THROUGH:
• Direct Costs
• Indirect Costs
 DIRECT COSTS
Expenses

COLLECTION
Loan Officers/ PROVISIONIN LEGAL
Management G Higher Loan FEES for
spend more time Loss Provisions pursuing
on it most serious
cases

Income
DELAYE SLOWER SLOWED
D PORTFOLIO PORTFOLIO
INTERES ROTATION EXPANSION
T Less Interest Less Interest
Negative and fewer and fewer
Impact on fees fees
Cash Flow
Cost of
Delinquency
 Cost of Delinquency
RB Loan Data:
Loan Amount P 15,000
Interest 3% per month
Term 3 months(12 weeks)
Assumptions:
The loan has become a problem account. After receiving only 5 full payments of principal
and interest, the borrower has fled the municipality. The total payment amount due per week
on this loan is P1,362.50 Assume that cost per loan for the RB has been calculated at P150.
Requirement:
Calculate for the following: a) lost interest income, b) lost principal, c) net revenue per loan,
d) number of loans required to earn the lost principal and interest.
 Cost of
Delinquency
 Cost of
Delinquency
 INDIRECT COSTS

• Breakdown of credit discipline;

• Reduced staff morale;
• Reduced access to fund sources
 Conclusion

Delinquency hurts!

It hurts the bank where it matters most-

PROFITABILITY AND IMAGE IN THE
COMMUNITY.
 Conclusion
There is a direct link between an increase in delinquency and
decrease in the bank's profitability and sustainability.
There is also a direct reduction in staff productivity when
delinquency increases.
The bank ultimately loses the opportunity to fulfill its
business objectives - that of making a profit and providing
credit access to the community - as it either runs out of
money, or focuses too much time on chasing delinquent
loans.
 Group Presentor’s
Wenibet Silvano
Thank You Kim Claire Sacare
James Lloyd
Sambitan