- Delinquency management training - Delinquency management

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- Delinquency management training - Delinquency management Urban Program for Livelihood Finance and Training

Transcript of - Delinquency management training - 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

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

Training flow

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What is delinquency in Micro-finance?

• 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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Delinquency occurs when one loan

payment is one day late.

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What is delinquency in Micro-finance?

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• 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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What is delinquency in Micro-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

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What is the effects of delinquency?

• 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?

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

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

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Measuring delinquency in Micro-finance

Features of an outstanding loan portfolio:

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Quantitative measureSize of the portfolio

Qualitative measureCapability to generate income => bad debts

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Measuring delinquency in Micro-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

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Unpaid principal balance(1 late payment or more)

Outstanding portfolioPortfolio at risk =

P.A.R is the best indicator to measure potential losses !

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Measuring delinquency in Micro-finance

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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-(2*200)=1600. Php1600 are considered at risk.

The portfolio at risk is 1600/1600=1

In percentage, it is 100%.

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Measuring delinquency in Micro-finance

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Measuring delinquency in Micro-finance

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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

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Installments Just after release

1st 2nd 3rd 4th 5th 6th

Payments Miss A

  Php400 Php400 Php400 Php400 Php400  

Payments Miss B

  Php500 Wala Wala Php500 Php500 Php500

Outstanding portfolio

Php5000 Php4100 Php3700 Php3300 Php2400 Php1500 Php1000

Unpaid balance (1 myspayment or more)

0 0 Php2500 Php2500 Php2000 Php1500 Php1000

PAR after installment.

0% 0% 67.5% 75.7% 83.3% 100% 100%

Example 2:

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Measuring delinquency in Micro-finance

Repayment rate =amount received (less prepayments)

total amount due this period (including past due from previous period)

It shows the amount paid compared to the amount expected. It is a measure of the MFI capability to be paid on time.

Repayment ratio =

(on maturity)

amount received on maturity date

total amount due.

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

amount of arrears or past due

outstanding portfolio.

Arrears rate or past due rate =

It gives an indication on how common is non-payment.

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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.

Measuring delinquency in Micro-finance

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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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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

List the reasons of delinquency

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What motivates my clients not to pay me back?

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Preventing delinquency

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1) Image of the MFI

2) Value the access of credit

3) Screening

4) Capacity to pay based on actual

5) Incentives to pay, disincentives not to pay

6) Incentive on staff if effective

7) Provide field staff with information on their portfolio

8) Provide management with information to monitor delinquency

9) Design a clear process for late payment

10)Defining acceptable level of delinquency

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On time payments Late or no payments

Benefits for clients

Probability of immediate larger follow up loans Development of positive credit history Positive reputation among peers Access to training, savings or other program

services Acess to advice from credit officers Award or prizes for timely repayment Lower interest rates on second and third loans Interest rebates

Lower expenses if interest payments not made Maintain capital (or portion) from loan in business or

use for other purposes Fewer or no trips to financial institution to make

payments (lower transaction costs, in case of branch or area collection)

Lower transaction costs of attending meetings and other activities of lending institution

May not have to repay at all, if there is a low cost to default

Cost for clients

Pay interest and capital on current loan Pay time and transportation costs to make

payments Opportunity costs (if time is spent in meetings, it

prevents the clients from working on his/her business).

Late fees for late payments Delay future loans or loss of access to future loans Possible legal action and costs Possible loss of collateral Loss of access to other program services Hassle of frequent visits by loan officers Hassle of pressure from group members if group

loans Negative reputation among peers

Borrowers perceptions