Trainer’s Manual for - Microsave...Trainer’s Manual for Loan Portfolio Assessment of Micro...

Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions

MicroSave – Market-led solutions for financial services

Offices across Africa, Asia

and Latin America

www.MicroSave.net

[email protected]

Trainer’s Manual for

Loan Portfolio Assessment of

Micro Finance Institutions

Graham A. N. Wright, Ramesh S. Arunachalam, Manoj Sharma, Madhurantika Moulick

Micro-Finance Consulting Group

August 2006

http://www.microsave.net/

mailto:[email protected]


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Acknowledgements

MicroSave acknowledges the contributions of Sonal Mishra and S Narayanan of MCG in preparing this

training manual.

This trainer‟s manual needs comments from trainers to provide additional training tips, examples and ideas!

Your thoughts and comments are anticipated and welcomed for the next version.


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Table of Contents

Trainer‟s Manual for Loan Portfolio Assessment of Micro Finance Institutions .............................. 4

Session 1: Participants Introduction and Overview ........................................................................... 8

Session 2: Introduction to Loan Portfolio Assessment .................................................................... 11

Session 3: 7 Key Steps in Loan Portfolio Assessment .................................................................... 15

Session 4: Ageing of Loan Portfolio using the Correct Methodological Approach ........................ 28

Session 5: Ageing of Loan Portfolio using the Installment Method Approach............................... 34

Session 6: Six: Understanding the Implications of the different methods and PAR ....................... 37

Session 7: Seven: Step 4, Verification of Loan Administration and Documentation ..................... 53

Session 8: Eight: Step 5, Verification of Rollovers and Restructuring ........................................... 65

Session 9: Step 6, Review of loan portfolio management policies/procedures/system................... 67

Session 10: Step7, Verification of internal and external controls for loan portfolio management 71

Session 11: Using the Loan Portfolio Assessment Tool.................................................................. 74

Session 12: Implementing Loan Portfolio Assessment ................................................................... 76


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Welcome to the MicroSave Loan Portfolio Assessment for MFIs Training Curriculum. This guide is

meant for those people who have taken the MicroSave Loan Portfolio Assessment training course and are

going to reproduce the training elsewhere – or are going to “live it” by undertaking a Loan Portfolio

Assessment exercise within their own organisation. The guide provides comprehensive session plans and

also offers the experiences of some of our research partners, staff members and trainers who have used the

information herein to conduct loan portfolio assessment in the microfinance context.

It is intended that the trainer delivering this course will be familiar with Loan Portfolio Assessment Toolkit

as well as being a capable trainer. However, for those who may want to brush up on their training skills,

there is an accompanying manual (or Microsoft Word file on CD) specifically discussing training skills and

training issues. There are many other training manuals which the trainer may consult, including the

“Participatory Learning & Action: A Trainer‟s Guide” of the IIED Participatory Methodology Series.1

Several of the “Ice Breakers, Refreshers, etc.” come from these manuals.

There’s already a Loan Portfolio Assessment Toolkit on the MicroSave Website. Why is there a

training manual also?

Some people will read the Loan Portfolio Assessment toolkit that is on our website and find that to be

enough for their organisation to go forward with a Loan Portfolio Assessment exercise. However, we have

had many people and organisations who asked for a training course as well. Some people feel that it is faster

and easier to train all the members of a potential Loan Portfolio Assessment team at once. This way they will

literally all be “reading from the same page”.

Who should I be training? You may choose (or be chosen) to run this course for different types of participants. Each will have different

positives and challenges.

Training an MFI’s potential Loan Portfolio Assessment team:

Training the potential members of the Loan Portfolio Assessment team in one MFI is the ideal training

situation. All exercises will be directly relevant and useful in the immediate future – they will be developing

the actual preparatory work needed for Loan Portfolio Assessment within the MFI. For the trainer, all

examples would require tailoring to directly address the needs of the one MFI. However, because the MFI

team will be using the training as also an actual worksite, it may take slightly longer than the timings given

here.

Training potential Loan Portfolio Assessment team members – multiple MFIs:

It may not be feasible (cost, time, number of requests) to train just one organisation. The trainer should

insist – as much as possible – that the MFIs must send at least three or four members of the “inner core” of

the Loan Portfolio Assessment team to the training. Training the key members of the team will show that the

MFIs are serious about the training and will allow the teams to breakout into their own organisations,

performing the exercises as relevant to their own MFIs. It may also provide for interesting and rich

discussion between MFIs as to why/how their responses to the various exercises differ. But, beware – if your

clients are in the same market, they are not likely to go into the details– it simply wouldn‟t make sense to

give your competitors such an edge!

Training individuals: It will be more difficult to provide this training to many individuals from many different organisations. If

this is the case, the training should be handled more like a Training of Trainers as these individuals should

be responsible for taking back the information to their organisation in order to train up the Loan Portfolio

Assessment team and management on how to plan and conduct the Loan Portfolio Assessment exercise

within their respective MFIs.

Training consultants:

1 They can be reached at International Institute for Environment and Development/ 3 Endsleigh Street, London, WC1H ODD, UK


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It will be more difficult to provide this training to consultants from many different organisations. If this is

the case, the training should be handled more like a Training of Trainers as these individuals should be

responsible for taking back the information to their clients (MFIs) in order to train up the Loan Portfolio

Assessment team and management on how to plan and conduct the Loan Portfolio Assessment exercise

within their respective MFIs. Sometimes, you may also find yourself training policy makers, regulators

and/or wholesalers and much of what is said has been said for individuals and consultants applies in such

situations.

What do I need to tell my participants to bring with them? The trainer must insist –and ensure- that the participants to the course are coming to learn and “do”. They

are not coming to learn how to do it much later, after they return to their organizations. Therefore, this

course is limited to MFIs and participants who are ready – or almost ready – to do a Loan Portfolio

Assessment exercise. The amount of information “lost” in the long delay between the training course and an

actual Loan Portfolio Assessment exercise dictates that this training follows directly on an actual Loan

Portfolio Assessment exercise in the field. Thus, the participants must bring with them laptops that ideally

have been loaded with all the information that they will need to prepare for a Loan Portfolio Assessment.

The key is to have as much detailed information as the organisation is comfortable providing.

What do I need from MicroSave for the Training? This manual is intended to be utilised with several accompanying documents, all of which are located on the

MicroSave resource CD or website www.MicroSave.org :

Manuals:

Participants’ Toolkit: MicroSave’s Loan Portfolio Assessment Toolkit for MFIs. The toolkit is a step by step guide for

participants to ensure that they plan and conduct the Loan Portfolio Assessment exercise in the most

efficient and effective manner. The toolkit provides handouts, examples and checklists for various

steps in the process. The trainer should make sure that the toolkit can be downloaded to the

participant‟s laptops (or sent via email).

Handouts: An electronic folder of handouts is included. There are

two kinds of handouts:

1) Information handouts which replicate and/or add to

information in the toolkit; and

2) Exercise handouts which will require

participants to work on problems and exercises during the

workshop.

Slideshows: The slideshow folder is again separated by suggested

training sessions. This course can be trained in several

ways, as discussed herein. Ensure that you have the

slideshow in the format most useful to you. Slides can

be printed onto overhead slides and utilised with an

overhead projector. However, due to the number

of slides, the amount of text, and the “animation” of slides, it is highly recommended that the trainer

utilises an LCD projector, if one can be located (and electricity is available, etc.). Many participants

request that they are provided with a copy of the slideshows at the end of the course, which the trainer

is free to provide to them.

Practical Examples

Practical examples have been provided throughout the course based on the experience of MicroSave with its

Action Research Partners and other MFIs/Financial service providers. The trainer should review the practical

examples and where possible supplement or replace the examples given on the basis of his/her experience.

Providing examples based on experience adds considerable value to the course, especially where examples

are contextually and culturally appropriate for those being trained.

http://www.microsave.org/


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I hate “animation”. How do I turn it

off?

Highlight all slides at once by

clicking on the bottom left icon

that shows four squares (slides).

This will give you a view of all the

slides in the show. Then press Ctrl

and A at the same time; this will

highlight all of the slides in the

show.

Now that they are all highlighted,

look on the toolbar at the top and

click on “slideshow”, then click on

“preset animation” and select

“off”. There will be no more

animation on any of the slides.

What else do I need for the training? To conduct the training you will need:

A digital projector, although an overhead projector could

be used.

Some knowledge of PowerPoint: The slideshows may

need some “customisation” – inserting the course

schedule for example, customising exercises to meet the

needs of the MFI being trained, adding local terms for

savings and credit, the names of the MFI being trained,

etc. The trainer should be very familiar with the

slideshow, running through it several times before the

training starts. This will help him/her note when to

“click” onto the next slide and to understand the kind of

“animation” that is on each slide. Generally, the

animation should NOT be too complex or distracting, but

the trainer may choose to eliminate all animation as well

(see box).

Standard Training Room items: flip chart stands, flip

charts, marker pens of various colours, hole puncher,

stapler, masking tape, etc.

Workshop materials for participants: Encourage them to

take notes in their manuals (so pads of paper may not be

needed) so they will remember the discussions better when they get back to their offices. However

folders will be helpful considering the number of handouts and exercises that there will be during the

course. It may be helpful to have pens, pencils, erasers, etc.

Computers (ideally 1 for every 3-4 participants) to run the exercises. Participants should be encouraged

to bring their own computers (laptops) to allow them to complete much of the initial planning for their

Loan Portfolio Assessment on their own machines.

How do I use this Training Guide? The training guide is, hopefully, self-explanatory.

Each session provides the Trainer with the Session Objectives, Time, Methods, Materials, Slides

Overview and Process and FAQs with illustrative examples, where appropriate:

The time that each session will take is flexible depending on the trainer, the number of participants, skill

levels of the participants and whether or not the participants are all from the same organisation or from

different ones.

The methods simply alert the trainer as to whether the session is to be conducted as, for example, a

presentation – which generally means the slideshow will be utilised, or as a breakout session and that

breakout areas may be required.

A list of all the materials that the trainer will need, above and beyond the list provided above, for the

session is also included. Flipcharts, markers, tape should be assumed, even when not listed.

The slides overview and process section provides just that – an overview of slide in the upcoming

session including the key aspects and process to be followed. Each session signs off with a list of FAQs

relevant to the session topic and where necessary illustrative examples have been provided. It is not

intended that the trainer memorises the text (then we would have added some of our standard jokes!),

but rather that the trainer feels confident discussing the issues at hand. The trainer should bring in

relevant examples from his/her own MFI experiences and encourage participants to discuss their own

experiences. Adults generally learn better from “real life” rather than theoretical discussions.

Finally, the trainer would find it very useful to become thorough with the actual toolkit and other

resources like briefing notes, as they, apart from concepts and methods, also contain extremely valuable

real world experiences, which could be very useful in conducting the training

Finally, the trainer will find the following SYMBOLS in the manual to signify different things.


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Idea:

The idea symbol means that you will find comments from our experienced staff and

certified trainers. More comments, questions and ideas can be directed to

MicroSave, their research partners or their trainers by using the e-mail

addresses on the front of this manual, or accessing the website.

This symbol helps the trainer find the exercises that are in each session.

Preparation for Training

You have chosen your participants for the course (or they have chosen

you!) and you have:

COSTED and CONTRACTED the training and agreed with the MFI the number of days for training and

follow-up; you have sub-contracted additional trainers and assured that all contracts and TORs are

prepared.

Sent, via e-mail or hard-copy, all the “pre-course” handout files to your participants, if there are going to

be any.

Sent via e-mail and/or hard copy, a letter requesting that the participants bring laptops, MFI Portfolio

statements and all relevant information to ensure that the training is as useful and “real-life” as possible.

Sample e mail and preparation guidelines are enclosed as annex 1 and annex 2 to this manual (end of

trainer‟s manual day 3).

Chosen an appropriate venue (steady supply of electricity, enough room for “breakout groups”, etc.) and

seating plan for the number of participants you will have (a “U” shaped seating arrangement; 6 tables

angled towards the front, etc.).

Ensured that participants are all in the process of doing a product Loan Portfolio Assessment and have

the appropriate information available to them on the laptops that they will be bringing with them.

Copied, bound and prepared all the manuals and handouts.

Practiced with the slideshow so that you are confident how to use it.

Alternative Lesson Planning

Especially if you are working with only one MFI, you may be called on to deliver this training in stages. For

example, you may want to train “Day 1” on a Monday and allow them the rest of the week to complete the

Steps covered in Day 1. The following Monday you may train “Day 2”, etc. If you do choose to train in this

way, be aware of timing issues. You will need to take some time in the morning to review the work of the

participants in the prior week. You may need to provide an hour or so to allow them to finalise the

information that they produced over the prior week. This will necessitate some changes in the timing of each

training “Day”.

It is not recommended that the training be compressed into a very short time period nor overly extended. The

“Days” have been calculated to allow the team plenty of time to work in detail on their MFI‟s own needs for

Loan Portfolio Assessment. Compressing this time may lead to confusion, and extending it may mean that

the group is spending too much time in an “academic” setting and not enough time “doing it”.

Offers training suggestions – trainer could try brainstorming, trainer

could lecture, etc.


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Session 1: Participants Introduction and Overview

Session Objectives:

Get to know all participants, their organisations and their roles within their MFIs

Understand what is expected of them, and what they expect from the course

Provide an overview of the course, its outline and schedule

Time:

30 Minutes

Methods:

Presentation

Exercise for introducing participants

Materials:

Slide Show:

PowerPoint Presentation titled “Session 1” – customized by

the trainer with the course content pages.

This session consists of 12 slides

Handouts:

Handout 1.1 Session Plan Loan Portfolio Assessment Training

Exercise:

Participants introduction exercise

Overview: This session welcomes the participants to the course and gives them an idea of what to expect

over the next three days.

Opening Remarks Time: 20 minutes

Slides: 2

Welcome participants and introduce facilitators and participants through some exercise.

Introducing MicroSave and its training rules Time: 10 minutes

Slides: 10

Give a brief introduction of MicroSave and refer to the related documents and the website for

details. The trainer may choose to add/subtract ground rules from the list on the Power point show.


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Course Overview:

This course will be covering the various stages in Loan Portfolio Assessment. We have broken it

into seven steps, and we have arranged the training sessions along the seven steps. We will have

exercises in each of the sessions to ensure that we all understand the concepts being discussed.

Sometimes, participants will also be asked to work with data from their organisation context. The

trainer should ensure that the participants realise that the lessons in this course will apply to a broad

range of microfinance institutions, not just the traditional MFIs.

It may be useful for the trainer to know those participants who have had previous experience in Loan

Portfolio Assessment, especially to form working groups for exercises. Additionally, if time permits, those

with prior experiences could be asked to briefly talk about what exactly they have done with regard to Loan

Portfolio Assessment.

Q: What are the objectives of a loan portfolio assessment?

The loan portfolio is the primary income generating asset for an MFI2 and it is most commonly subject to

material misstatements. Most MFI failures stem from the deterioration in the quality of the loan portfolio.

An assessment of the risks and inadequacies inherent in an MFI‟s portfolio therefore assumes tremendous

importance and this is the most important objective of a „loan portfolio assessment‟.

Q: How to derive full benefits from Loan Portfolio Assessment?

Loan Portfolio Assessment is a skill that can be learned fairly easily, given proper instruction and sufficient

time. Deriving the full benefits of Loan Portfolio Assessment, however, is a discipline, in the same way that

accounting, and lending are disciplines. Provided that MFI management is willing to implement the changes

proposed, an assessor‟s ability to analyse a portfolio and recommend institutional improvements can result

in enormous gains in portfolio quality, efficiency and profitability. If Loan Portfolio Assessment can have

such a profound effect on an organisation, it seems only logical that it should become an integral part of the

organisation‟s methodologies.

Q: What does a Loan Portfolio Assessment Entail? The loan portfolio assessment would include an assessment of the loan assets (an MFI‟s portfolio) and

assessment of the systems and procedures and associated lending internal controls as well. Thus, it will not

only provide essential feedback with a view to safeguard the MFI‟s primary asset - the loans to its members

– but more importantly, it should also enable stakeholders to understand the risks inherent in the MFI‟s loan

portfolio and systems/ procedures used to mitigate this risk. This information could prove useful in two

ways: (1) facilitate prudent decisions regarding investing in the MFI (either directly or indirectly); and more

importantly, (2) help isolate specific areas for capacity building and technical assistance for enhancing the

portfolio management by the MFI.

Q: What are essentials of effective Loan Portfolio Assessment training

in MFIs?

The keys to good Loan Portfolio Assessment training are not dramatically different from those for any kind

of training. As we often saw in the days of TQM (Total Quality Management) training, however, these

lessons tend to be ignored in the rush to get people's quality "ticket punched." TQM training tended to be

dry, uninspiring, and irrelevant to people's everyday jobs. It also left people with an awareness-level

understanding of concepts and tools, but without the depth of knowledge to actually use them. The following

are some of the essentials you should keep in mind when planning your Loan Portfolio Assessment training,

especially using MicroSave’s approach:

2 The term MFI is broadly used and includes traditional Microfinance Institutions, Commercial Banks, Non Banking Finance Companies /

Institutions, Cooperatives/Credit Unions and other such entities involved in delivering financial services to low income people


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Emphasize "hands-on" learning: From leaders to experts to practitioners, people learn best when they can

put concepts and skills into immediate practice. Ideally, such "hands-on" work will include efforts directed

at assessing on the ground.

Provide relevant examples and links to the "real world': If your people are going to internalize how Loan

Portfolio Assessment will work in your organization, the examples and exercises you provide will have to

reflect the business and its specific challenges. Generally, a Service business (like micro-finance) needs to

use related examples; Even if you haven't done Loan Portfolio Assessment yet, a good training provider who

knows the methodologies should be able to come up with some good examples that will work in your

environment.

Build knowledge. With so much material to cover, it's easy to fall into the "data dump" trap. The concepts

of Loan Portfolio Assessment can be interesting and exciting, but starting with advanced ideas and jargon

will turn people off. Establishing a foundation of key principles and ideas stated in common terms sets the

stage for more sophisticated skills and methods. It's also important to put tools into a context so that their

application and relevance is clear.

Cater to a variety of learning styles - visual, games, exercise, so on should be varied and, for most

audiences, include some fun.

Make training something more than learning. Training is a key element in your Loan Portfolio

Assessment “marketing plan”. It represents a golden opportunity to gain buy-in, to deputize change agents,

and to clarify the themes of the effort and its value to the business. Look for ways to reinforce those

messages during the training. Make training an ongoing effort. One of the comments we most often hear

from participants in Loan Portfolio Assessment training is the suggestion that they get "refreshers" on a

regular basis. Businesses, however, tend to offer only "hit-and-run" training. We give kids (ages 5 through

21) about 16 years to absorb an education, but people in the working world are expected to learn and master

major new concepts and tools in (if they're lucky) three days! Learning organizations will almost certainly

have to adopt a practice of continuous education and training, just as their business processes themselves are

in need of continuous renewal and improvement considering the speed of change today, occasional once-off

cutter training won't make it in the 21st century.


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Session 2: Introduction to Loan Portfolio Assessment

Session Objectives:

To understand the uniqueness of an MFIs loan portfolio

To list what an assessment entails

To see the varied uses of loan portfolio assessment report

Time:

45 Minutes

Methods:

Presentation

Materials:

Slide Show:

PowerPoint Presentation titled “Session 2”

This session consists of 16 slides

Handouts: None

Exercise :

None

Overview: This session gives a basic idea of what a loan portfolio assessment entails and initiates

discussion on the first three of the seven steps of assessment.

What are the unique characteristics of loan portfolio assessment? Time: 30 minutes

Slides: 8

Discuss with the participants the uniqueness of the loan portfolio, its critical role in an MFI and thus why a

detailed review of it becomes important.

What are the key questions to be asked during a loan portfolio assessment? Time: 5 minutes

Slides: 5

A loan portfolio assessment makes an institution question its basic assumptions, even though they might

have been followed for a long time. Every activity needs to be questioned and discussed in details.


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What are the uses of a loan portfolio assessment? Time: 10 minutes

Slides: 3

A loan portfolio assessment report can be used in the institution in varied ways. It can be used for taking

management decisions, improving efficiency, redefining policies, restructuring human resources etc.

Q: What are the unique characteristics associated with micro-

finance loans that portfolio assessors must understand?

MFI credit (lending) operations have unique characteristics that portfolio assessors must first understand.

Several aspects that need attention include:

Difficulty in maintaining portfolio information - MFIs grant a large number of small loans, and

process a very large number of (repetitive) tiny payments. Their operations are often tend to be dispersed

over a wide geographic area. As a result, MFIs utilize streamlined and decentralized operating structures

in order to be efficient. These factors make it a challenge to maintain effective portfolio information and

management systems. Lack of portfolio information is a serious aspect which could result in lower

portfolio quality - „bad‟ loans not being identified and followed up.

Decentralization could cause deviation from prescribed credit policy and result in fraud, error or

manipulation - Decentralization implies that relatively few staff members are involved in approving,

disbursing, monitoring, and collecting each loan. This structure increases the opportunity for deviation

from approved policies, and for fraud, as well as increases the risk of error or manipulation when

branches transfer information to headquarters.

Mandate of efficiency may result in lesser controls/procedures/information/supervision - To handle

small and repetitive transactions efficiently, MFIs come under great pressure to cut costs, sometimes,

even at the expense of adequate portfolio controls and information, as well as sufficient supervision of

clients and loan officers, which, in turn, could affect portfolio quality.

Burgeoning growth of portfolio could result in failures of established systems - Many MFI

portfolios are growing rapidly. First, this growth puts pressure on systems and can camouflage

repayment problems – this can happen especially when growth exceeds the administrative capacity to

manage that growth. Second, a rapidly growing portfolio has a larger percentage of loans in the early

stages of repayment. Delinquency problems often occur in the later stages of the repayment cycle.

Receiving large grants, and the pressure from donor agencies to report impact places pressure on

managers to disburse loans quickly and sometimes, even without demand – this is clearly a recipe for

disaster. This pressure has created an environment for fraud in several cases as well.

Restructuring (rescheduling and refinancing) of delinquent loans is an often-used strategy to

camouflage portfolio quality - MFIs generally dislike provisioning for problem loans or writing them

off. They want to maintain a good image in the eyes of outsiders, especially donors. This sometimes

leads to restructuring or refinancing as a tool to hide delinquency. Other strategies for shrouding

delinquency include write-offs and repeated fresh loan disbursements.

Weak information systems may not even permit MFIs to recognize delinquency - MFI information

systems are often weak and thus systems for operational loan tracking are seldom integrated with their

accounting systems. The lack of appropriate systems may mean that MFIs may not even recognize

delinquency in their portfolio, which can be tackled in the first place only if MFIs are aware of it.

These issues, among others, make the loan portfolio assessment a very crucial but rather complicated and

time consuming exercise. Assessors will need to allocate significant effort in the review of the loan portfolio

and to carry out field visits. This tool kit is designed to help portfolio assessors in their efforts of conducting

an effective assessment of an MFI‟s loan portfolio.

Q: Where can Loan Portfolio Assessment be used?

Loan Portfolio Assessment is not restricted in its usage. In fact, it has broad applicability as outlined below:


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Specific Use Area

Develop risk management strategies for Loan Portfolio Management Risk Management and

Reduction

Orient and train new employees in Loan Portfolio Management. Training/HRD

Identify improvement opportunities, with regard to Loan Portfolio

Management.

Quality and improvement

Evaluate, establish, and/or strengthen performance measures. Performance/HR

Establish and document best practices for Loan Portfolio

Management.

Best practices

Create training and reference manuals especially for internal audits. Development of training /

reference manuals and

Internal Audit Systems

Policies and procedures for Loan Portfolio Management. Systems, Policies and

Procedure Improvement

Ensure effective integration of business operations, including

formation of common business practices and understanding of

system platforms – especially, those for Loan Portfolio Management.

Systems Integration

Reduce many types of risk, including: reputation risk, fraud,

operating errors, human-resource-related risk, and systems failure.

Institutional Risk

Management

Benchmark and standardise for staff incentive schemes, performance

analysis etc.

Benchmarking and

standardisation

Q: What can be learned from Loan Portfolio Assessment?

Loan Portfolio Assessment is the most important step in assessing an MFI‟s portfolio. It uses tools that

enable an MFI to assess, analyse, improve and streamline its loan portfolio management and related systems.

Armed with the loan portfolio assessment, an MFI can:

Q: How long does Loan Portfolio Assessment take?

Understand the real risks in its portfolio and try to mitigate these risks

Locate process and systems flaws that are creating portfolio quality problems

Identify systems flaws that subject the MFI‟s portfolio to unnecessary risk

that could be avoided at a reasonable cost

Identify internal controls that could serve as risk mitigating mechanisms to

protect the loan portfolio.

Increase efficiency by streamlining and improving portfolio monitoring to

protect the loan portfolio

Identify processes/systems that need to be strengthened and/or reengineered

for better/effective portfolio management

Improve customer satisfaction


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The time taken to assess an MFIs portfolio varies depending upon several factors:

Experience: The level of experience of the Loan Portfolio Assessment team. A more

experienced team will be quicker than a less experienced team.

Nature of the portfolio being assessed: The more complex a portfolio is in terms of higher

diversity of products and markets, the longer the time spent on a loan portfolio assessment.

The level of systems in the MFI: MIS is very important and the more organized the MIS, the

quicker the assessment.

However, assessing an MFIs loan portfolio will typically take between Fourteen/Twenty One days,

using a team of 2/3 people.

Q: Why is composition of the loan portfolio assessment team crucial?

Careful composition of the team is important – they must have skills, knowledge, experience, willingness,

time and positions to positively influence the entire exercise. The team should preferably include people

directly involved in the operation at both the lowest and highest levels of the organisation (for example, the

operations manager, branch manager, branch supervisor, and teller). The team must be empowered to

recommend significant changes if required; it must be given not only responsibility, but also authority and

flexibility. If front-line workers have not typically been included in decision-making, they may exhibit some

scepticism or reluctance. In such a case, the manager should appoint someone trusted by both management

and workers to lead the team, while assuring team members that their contributions will be rewarded and

taken very seriously.

Q: What else needs to be done with the team? Choose an appropriate team leader and outline responsibilities

Define task to team - clearly spell out what is expected of them

Communication about the team and its Loan Portfolio Assessment assignment within the organization

Provide the team the authority and flexibility along with the responsibility required for carrying out the

tasks


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Session 3: 7 Key Steps in Loan Portfolio Assessment

Session Objectives To facilitate understanding with regard to the 7 Key steps in Loan Portfolio Assessment

To understand why the sequence of 7 steps is as has been suggested

Review and analyse each of the possibilities of Steps 1, 2 and 3 of a Loan Portfolio Assessment

Time:

315 Minutes

Methods:

Presentation

Puzzle exercise in mixed groups

PRA exercise in mixed groups

Materials:

Slide Show:

PowerPoint Presentation entitled “Session 3” . This

session consists of 74 slides

PRA Cards

Handouts: None

Exercise: Exercise 3.1: Seven steps of Loan Portfolio Assessment

(60 minutes for exercise, 30 minutes for discussion)

Exercise 3.2: Review of steps 1, 2 and 3. (180 minutes)

Overview: This session gives a basic idea of what a loan portfolio Assessment entails and the initiates

discussion on the first three of the seven steps of assessment.

What are the key steps to be undertaken to do a loan portfolio assessment? Time: 30 minutes, after 60 minutes of exercise

Slides: 3

Participants answer this though exercise 3.1, by arranging the steps and sub processes of a loan portfolio

assessment. The exercise ends with a discussion on why the steps are so sequenced and other lead questions

that are listed on the slide.

What do Steps 1, 2 and 3 of loan portfolio assessment entail? Time: 45 minutes + 120 minutes of exercise + 60 minutes of discussion

Slides: 71


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This is best done by the PRA exercise as it enables participants to go through each of the different scenarios.

The participants are given instructions and cards for Steps 1, 2 and 3 and on completion of the exercise the

facilitator summarises by highlighting the key issues that are likely to emerge in these three steps.

The slides listing all the different cases/aspects have been provided as hidden slides. The trainer

may choose to use them to discuss the scenarios.

Exercise 3.1

Given in the envelope are slips of paper that relate to procedures for conducting a loan portfolio assessment.

Please arrange them in an order in which you think a loan portfolio assessment needs to be sequenced and

explain the reasons for the same.

Objective: Understand the steps for conducting a loan portfolio assessment

Group Formation: Buzz groups of 4/5 people

Resources: Cut pieces of paper in an envelope, paper and pen/pencils, tape, charts

Time: 60 minutes of group exercise plus 30 minutes of discussion

Tasks: 1. Use the cut pieces of paper and please order the seven steps (required for

conducting a loan portfolio assessment) in sequence and explain the same

2. Please discuss and understand each of the 7 steps before beginning to order

them.

3. Please choose and present the one ordering of the seven steps that best

represents views of the group as a whole. Please do not present many

alternatives ways of ordering the steps.

Facilitator’s Role: Facilitator should help the participants in groups work and finalise the ordering

of the steps. (S)/he must ensure that all group members are vocal and participate

in the exercise.


17

Q: What are the Seven Steps in a Loan Portfolio Assessment exercise?

These steps complement each other in a comprehensive manner: By following these steps, you will

be able to assess an MFIs loan portfolio and assess its quality.

Methodology for Conducting a Loan Portfolio Assessment

Step 1 Tracing Individual Loans:

Head Office to Borrower

Step 2

Step 3

Tracing Individual Loans:

Borrower to Head Office

Cross-verification with other

accounting records like

cashbook, receipts, vouchers

and reconciliation of these with

loan ledgers and the like

Step 4

Step 5

Step 6

Verification of loan

administration/documentation

Verification of loan accounts for

rollovers/restructuring/write-offs

Review of portfolio

management

policies/systems/procedures

Review of internal and external

controls for loan portfolio

management at MFI

Step 7


18

Q: What is the basic methodology for conducting a loan portfolio

assessment?

Step 1. Tracing Individual Loans: Head Office to Borrower3

1.1 Select 50-100 borrowers with outstanding (and some closed) loans and specific loan numbers from

the Head Office records at random.

1.2 Selection of borrowers/loans should be done such that there is enough of a sample in the different

loan types provided by the MFI. Also, at least 75% of the loans should be outstanding while the

remaining 25% should include properly closed/written-off loans in sufficient quantity.

1.3 Trace the loan status (with outstanding/closure/written-off amounts) of these 50-100

borrowers/loans down to the Branch Office records.

1.4 Trace the loan status (with outstanding/closure/written-off amounts) of these 50-100

borrowers/loans down to the borrowers own passbooks.

1.5 Trace regular and overdue repayments and reconcile into the MFI‟s PAR analysis including method

of assessment of age of overdue, sequence of appropriation of client repayments and the like.

1.6 If differences exist in the loan outstanding/closure/write-offs for a client across various levels of

analysis, then all concerned transactions need to be reviewed and reconciled.

Step 2. Tracing Individual Loans: Borrower to Head Office

2.1 Select 50-100 borrowers with outstanding (and some closed) loans and specific loan numbers at

random from a series of 10-20 randomly selected group meetings.

2.2 Selection of borrowers/loans should be done such that there is enough of a sample in the different

loan types provided by the MFI. Also, at least 75% of the loans should be outstanding while the

remaining 25% should include properly closed/written-off loans in sufficient quantity.

2.3 Trace the loan status (with outstanding/closure/written-off amounts) of these 50–100 borrowers

from their passbooks up to the Branch Office records.

2.4 Trace the loan status (with outstanding/closure/written-off amounts) of these 50-100 borrowers up

from the Branch Office records to the Head Office records.

2.5 Trace regular and overdue repayments and reconcile into the MFI‟s PAR analysis including method

of assessment of age of overdue, sequence of appropriation of client repayments and the like.

2.6 If differences exist in the loan outstanding/closure/write-offs for a client across various levels of

analysis, then all concerned transactions need to be reviewed and reconciled.

Step 3. Cross-verification with other accounting records like cashbook, receipts, vouchers and

reconciliation of these with loan ledgers and the like

3.1 Take 25-50 cash and/or cheque/draft (preferably loan related) transactions from and/or to Branch

Offices and trace these transactions from/to Head Office cashbook and/or Branch Office cashbook

and reconcile with bank statements and receipts/vouchers at both Head Office and branch levels.

3.2 Take 25-50 cash and/or cheque/draft (preferably loan related) transactions from/to Branch Offices

and trace these transactions from/to Branch Office cashbook to client passbooks and reconcile

receipts/vouchers at Branch Office and other levels.

3.3 To save time as well as enhance efficiency and effectiveness, this can be done for the selection of

the 50-100 clients given in Steps 1/2.

Step 4. Verification of loan administration and documentation (primarily on the basis of the loans and

accounting records reviewed in Step 1-3)

4.1 Verify whether loan administration is in accordance with policies and procedures

4.2 Ascertain whether the loan documentation in accordance with approved policies and procedures

4.2.1 Is loan size in accordance with the MFI‟s policies and procedures?

4.2.2 Has the collateral/group guarantee been appropriately documented and communicated to the

borrowers?

3 Note: For SHG institutions, the above references to “Head Office” should be taken to refer to the bank/MFI that finances the SHGs and the

references to “Branch” should be taken to refer to the SHG.


19

4.2.3 Are the nominal and effective interest rates/fees the same as is stated in the loan policy and

documentation?

4.2.4 Are other loan terms and conditions the same as is stated in the loan policy and

documentation?

Step 5. Verification of loan accounts for rollovers and restructuring (This step is designed to ascertain

whether the client really proved willingness and ability to satisfy the loan obligation or is the apparent

loan repayment affected by a follow-up fresh loan disbursement?)

5.1 Review loan ledgers in 3 randomly selected branches for lump-sum repayments at the end of the

loan period and immediate disbursement of follow-on loans over the last 12 months

5.2 Review the loan ledgers in 3 randomly selected branches for re-scheduling/re-financing/write-off of

loans over the last 12 months:

5.2.1 Are re-scheduling/re-financing/write-offs are in accordance with policies and procedures?

5.2.2 Are re-scheduling/re-financing/write-offs are appropriately captured in the PAR analysis?

Step 6. Review of loan portfolio management policies/procedures/systems

6. See detailed checklist below for detailed review steps.

6.1 Review loan (credit) policy including all terms and conditions for various types of loans

6.2 Review delinquency measurement and management policy

6.3 Review loan loss provisioning and write-off policy

6.4 Review other policies for loan portfolio management

Step 7. Verification of internal and external controls for loan portfolio management

Q: How to assess loan disbursements?

Steps to follow…

1. For given loan number and client, check the client loan application and corresponding loan contract for

amount approved

2. Compare with loan ledger and look at amounts and dates of disbursement

3. Compare with cash book/bank records to see actual disbursements – amounts and dates

4. Compare with DPN (Demand Promissory Note) if applicable and verify all aspects including client

signature, amounts and date. Please note the disbursing officer and if necessary, the place and time of

disbursement

5. If disbursal is into client savings/current account, then compare with amount credited into account and

the date on which this has happened

6. If amounts, dates and other aspects in 3 or 4 or 5 (which must be consistent with one another) are

different than those in 1 or 2 (which must also be internally consistent with each other), then there is a

problem with loan disbursement clearly

Records to Peruse…

1. Cash/bank books/records including client savings/current accounts

2. Loan ledgers

3. Demand promissory notes (DPNs)

4. Proof of receipt of loan by clients (voucher etc)

5. Client loan utilisation check records (if applicable)

6. Client records (if applicable)

7. MIS records of loan disbursement (cash payments reports on a daily basis for the period concerned)

8. Reconciliation of dates and amounts among the above

Special Aspects to Consider…

Apart from perusal of records, also need to interview clients and staff


20

Cross checking with clients can be really useful here and if the model permits clients to have copies of

records, please verify that and also talk to them.

In some models, there is a loan utilisation check and these records could be looked at as well.

In models with many levels/layers of staff between headquarters and client, reconciliation of records is

very critical to ensure physical transfer of cash from headquarters to client

Depending on the context, a time lag of a maximum of 1 week between disbursal at HQs and receipt of

client money could be acceptable – the key is to track flow of the loan money and ensure that it indeed

reached the client in the said amounts and said dates (with a maximum variance of 1 week)

Q: How to assess repayment schedules? Steps to follow…


amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along

with other terms and conditions including treatment of over dues and penalties (if any)

2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments

including periodicity along with Installment due amounts/dates – both principal and interest

3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates

4. Compare with client records to see actual disbursement and repayment – amounts and dates

5. Analyse whether the pattern in 3 and 4 are different from that stated in 1 and 2

6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4

(which must be internally consistent with one another and also same as stated in 1 and 2) are different

from each other, then there is a problem with loan repayment schedules


1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)

2. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,

deposit slips (if applicable)

3. MIS records of client transactions


Comparison of these records for changes in repayment pattern would help isolate any changes in

repayment schedules

Q: How to assess principal amounts collected from clients?

Steps to follow…








5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over

dues along with age and the appropriation of client repayments towards these in the correct sequence.

This would require the creation of a loan repayment table consistent with the terms of the loan and best

practices principles of ageing a loan using the correct sequence for appropriation of client repayments

(penalties first followed by interest overdue, interest due, principal over due and finally principal)




21

from each other and the calculations in 5 above, then there is a problem with the principal amount

collected and the actual loan repayment



2. MIS records of client transactions (both principal and interest, over dues etc)



4. Loan closure reports from MIS


Comparison of these records for principal repayment would help isolate if any of these aspects with

principal repayment exist.

Sequence of appropriation of client repayments is very critical as is the definition of over dues

Method of appropriation of client repayments is very fundamental to understanding this aspect as also

the calculation of over dues and the age of the past due loan


very critical to ensure physical transfer of cash from client to headquarters

Sometimes, flexible Installments and grace periods could affect (distort) the calculation of over dues and

their age. Appropriate adjustments would have to be made for these aspects

Q: How to assess interest, service, and other charges actually charged

from/refunded to clients?

Steps to follow…















from each other and the calculations in 5 above, then there is a problem with the interest amount

collected and also the actual loan repayment









22

Comparison of these records for interest repayment would help isolate if any of these aspects with

interest repayment exist


Method of appropriation of client repayments is very fundamental to understanding this aspect as also

the calculation of over dues and the age of the past due loan


very critical to ensure physical transfer of cash from client to headquarters

Sometimes, flexible Installments and grace periods could affect (distort) the calculation of over dues and

their age. Appropriate adjustments would have to be made for these aspects

Please make sure that interest charges are appropriately calculated. For example, when flat rates of

interest are used in some models and the total number of Installments have passed and if the institution

collects interest first, then principal amounts may remain overdue beyond loan term and credit policy

may not stipulate what interest should be levied on the over due principal beyond loan term (as interest

was collected on a flat basis)

Q: How to assess the calculation of over due amounts?

Steps to follow…















from each other and the calculations in 5 above, then there is a problem with the over due amount

calculation and also the actual loan repayment






4. MIS records of past dues loans and portfolio report of all loans


Comparison of these records would help isolate whether any of these aspects is present or absent


Q: How to assess the appropriation of client repayments?

Steps to follow…


23















from each other and the calculations in 5 above, then there is a problem with the appropriation of client

repayments and also the actual loan repayment






4. Methods (along with rationale) used for appropriating client repayments towards principal, interest, over

dues – sequence and amount calculations


Comparison of these records would help isolate whether any of these aspects is present or absent

The definition of over dues is very critical and here, it may be useful to take into account grace and

moratorium periods afforded to clients ex ante (or even a priori)

Sequence of appropriation should be as per best practices

Q: How to assess loan repayments from clients?

Steps to follow…















from each other and the calculations in 5 above, then there is a problem with the actual loan repayment




24




4. Methods (along with rationale) used for appropriating client repayments towards principal, interest, over

dues – sequence and amount calculations


Check for client names. This can particularly be a problem in some cultures where same names exist for

several clients including initials. Photo or other identification could be crucial here

If appropriation is correct, then this can be spotted. So, first make sure that there is correct appropriation

and then check on average loan outstanding done at least on a monthly basis. A 10-20% variance is

permissible here


Q: How to assess loans for delinquency?

Steps to follow…















from each other and the calculations in 5 above, then there is a problem with the actual loan repayment

in terms of delinquency





deposit slips (if applicable) and other client records (if available)

4. MIS records of receipts and payments reports on a daily basis for the period concerned

5. Comparison of these records would help isolate if any of these aspects are present or absent


1. Sequence of appropriation of client repayments is very critical as is the definition of over dues, method

of ageing past due loans, adjustments for grace periods and other such factors

2. Interviews with clients and talking to staff would also be useful

Q: How to assess loan write-offs?

Steps to follow…


25





including periodicity along with Instalment due amounts/dates – both principal and interest








6. Using the result from 5 above, check to see whether the loan is still outstanding or overdue or both (in

case the loan is beyond the loan term).

7. This can be verified using the formula, Date of Assess - Date of Disbursement.

8. If this is > Loan Term, then loan is past the loan term; otherwise not. Here adjustments will have to be

made for any rescheduling that may have occurred and this requires computation of the following:

Checking the Date of Disbursement + Loan Term and this should not be greater than Date of

Assessment.

If it is the case (or loan is passed the loan term) and there are outstanding loan amounts (as per the

original loan contract) but loan is not shown as an over due loan, then rescheduling is said to have

occurred

9. Using data from steps 6, 7 and 8, check with other client records to see if the client money (savings,

shares etc) have been adjusted to the loan outstanding (which could be over due) and the balance written

off

10. Check the loan write-off records in MIS for the specific client

11. If amounts, dates and other aspects in 10 are different from the calculations in 5, 6, 7, 8 and 9 above,

then there is a problem with the loan write-off


26







5. MIS records of receipts and payments reports on a daily basis for the period concerned

6. Comparison of these records would help isolate if any of these aspects are present or absent



Interviews with clients whose loans have been written off are essential to determine if collections were

made.

Talking to staff would also be useful

Exercise 3.2

Facilitator gives each group a set of cards with one specific items printed on each of them.

Objective: Understand the steps for conducting a loan portfolio assessment


Time: 120 + 60 minutes (for discussion)

Tasks: 1. Please look at each card and rank the relevance (or importance) of that

specific item while doing a loan portfolio assessment, using the 3-point

scale given below.

i. Most important

ii. Important

iii. Not important

2. One-way to assess/rank the relevance (or importance) of an item is to first

ask the following questions: (1) Can the item provide information on likely

(hidden) risks in the MFI‟s portfolio? (2) Can the item help discern the real

quality of the MFI‟s portfolio? (3) Can the item facilitate knowledge with

regard to the strengths and weaknesses with regard to an MFI‟s portfolio

management?

3. Next, please attempt to outline what records need to be perused to

determine the presence or absence of the specific item during a loan

portfolio assessment. This again needs to be done only for items with a

relevance (or importance) ranking of 1 or 2

4. Finally, outline, what specific steps could be employed and in what

sequence to detect the presence (or absence) of the specific item during a

loan portfolioassessment. This again needs to be done only for items with a

relevance (or importance) ranking of 1 or 2

5. Please note the numbers as shown below

Facilitator’s Role: Facilitator should help the participants in groups work and finalise the ordering

of the steps. (S)/he must ensure that all group members are vocal and participate

in the exercise.


27

PRA INDEX CARD with BLANK SPACE

Relevance of Item

ONLY 1

RESPONSE as they

are mutually

exclusive

Please provide one,

two or three reasons

for the level of

relevance accorded

to the item

Multiple Responses

To determine the

presence or absence of

the specific item, what

records need to be

perused and why?

Multiple Responses

What specific steps

could be employed

and in what sequence?

Multiple Responses


28

Session 4: Ageing of Loan Portfolio using the Correct Methodological Approach

Session Objectives: To facilitate participants to understand what is ageing of loans and the key steps of ageing

To learn the best practices process of creating a loan repayment table and ageing past due loans

through two examples

Time:

180 Minutes

Methods:

Presentation

Puzzle exercise in mixed groups

Exercise in small groups

Materials:

Slide Show:

PowerPoint Presentation entitled “Session 4”. This session

consists of approximately 44 slides

Handouts: None

Exercise: Exercise 4.1: Key steps of Ageing Past Dues Loans (30 minutes)

Exercise 4.2: Ageing of Loans, using the Correct

Methodological Approach – 1st Example (30 minutes)

Exercise 4.3: Ageing of Loans, using the Correct

Methodological Approach – 2nd Example (30 minutes)

Overview: This session introduces participants to ageing of loan portfolio, sequence the steps of aging and

to prepare a ageing table.

What is ageing? Time: 10 minutes

Slides: 2

Participants answer this though exercise 3.1, by arranging the steps and sub processes of a loan portfolio

assessment. The exercise ends with a discussion on why the steps are so sequenced and other lead questions

that are listed on the slide.

What are the key steps of ageing loan portfolio?


29

Time: 30 minutes + 30 minutes of exercise

Slides: 11

Participants learn the steps of ageing a loan portfolio by matching the pieces given. The facilitator

summarises with the help of the slides detailing the steps of ageing a loan portfolio.

How do you prepare an ageing table? Time: 50 minutes + two exercises of 30 minutes each

Slides: 31

Participants construct and ageing table with the help of two examples.

Exercise 4.1

Given in the envelope are slips of paper that relate to procedures for conducting a loan portfolio

assessment. Please assemble the same into meaningful steps (diagram) and explain the same

Objective: Understand the key steps for aging past due loans


Resources: Cut pieces of paper in an envelope, paper and pen/pencils, tape, charts

Time: 30 minutes of group exercise

Tasks: 1. Use the cut pieces of paper and please order the steps for aging of past

due loans in sequence and explain the same

2. Please discuss and understand each of the steps before beginning to

order them.

3. Please choose and present the one ordering of the steps that best

represents views of the group as a whole. Please do not present many

alternatives ways of ordering the steps.

Facilitator’s Role: Facilitator should help the participants in groups work and finalise the

ordering of the steps. (S)/he must ensure that all group members are vocal

and participate in the exercise

Q: How to age a loan portfolio and calculate portfolio quality

indicators? Step 1 Using the loan policy and business rules please clearly identify the following for each and

every (outstanding) loan:

Loan Amount Disbursed

Number of Installments

Frequency of Installments

Interest Rate (Annual)

Interest Computation Method

Repayment Assumptions (including grace/moratorium period, whether equal installments for principal

are there etc)

Step 2 Using the above fill out the Principal and Interest Amounts Due with Dates Due for each

installment of every loan.


30

Step 3 Write down the total amounts paid by clients along with dates of payments (these are

transactions of repayments made by clients)

Step 4 Calculate interest due as per payment date for each installment. If due date of installment and

payment date are one and the same then interest due as per payment date will be the same as

interest due as per schedule. Otherwise it will differ. This is a very crucial aspect that should

not be ignored

Step 5 Once the transaction amounts are available allocate or distribute these total amounts as per the

following norms

1st towards Fines/penalties (1st),

2nd towards Interest Overdue (2nd)

3rd towards Interest Due if it is actually due on the date of payment (3rd)

4th towards Principal Overdue (4th)

5th towards Principal (5th)

If there are no fines, it will first go towards Interest Overdue, then Interest Due if it is actually due on

that date, then Principal Overdue and Last towards Principal

Step 6 Now at end of each installment check whether total amount paid = Fines Paid + Interest O/D

Paid + Interest Paid + Principle O/D Paid + Principle Paid

Step 7 At end of each installment also get the following totals

Principle Outstanding,

Principle Overdue,

Interest Overdue

Principle Paid

Interest Paid

Fines Paid, and

Prepayments

Prepayments will occur when a client makes payment in excess of principal + interest due (including over

dues) plus fines to be paid till that installment

Step 8 Check if Principle or Interest O/D > 0 and if so then determine age of the over

due loan as of a particular date or installment.

7 Step 9 To calculate age as at end of any installment check for unpaid over dues

(principle or interest) and also ascertain when they occurred.

Step 10 Age at end of installment can be calculated as follows

Age of Overdue Loan

= Date at which Age is being Calculated (i.e., today or date at end of installment)


31

– (Minus)

Date at which earliest UNPAID Overdue occurred

= “Y” Days.

Here unpaid is as of the reference date of calculating the age.

Step 11 Then categorize loans as per age as given below. This would lead to a loan loss

provision table given later

Current Loans (Loans with No Over Dues)

Loans < = 30 Days Past Due

Loans between 31-60 Days Past Due




Loans between 181- 365 Days Past Due

Loans > 365 Days Past Due

Step 12 Calculating Portfolio Quality Indicators

Calculate Portfolio at Risk (PAR), Portfolio in Arrears (PIA) and Aged Portfolio at Risk

(Aged PAR) using the loan loss provision table or aggregated loan repayment format.

Cumulative Repayment Rate (CRR) and On-Time Repayment Rate (OTRR) can be

calculated for each loan from the individual loan repayment formats or for the entire

portfolio from the aggregated loan repayment format

Q: What are the key steps and critical issues to consider for ageing

past due loans? This annex briefly highlights the distorting impact of using the instalment method of ageing in portfolio

management. Many other technical issues are equally important for loan portfolio management in micro-finance

and some of these are identified below. The MIS analyst must be careful of such aspects when making the reports

and keep these issues in mind.

1. What happens when MFIs use a different sequence for client repayments? Some MFIs first adjust a

client’s repayment towards principal and then towards interest. When this happens and there is

delinquency this triggers a reduced portfolio yield (as compared to effective interest rates) rather than a

higher portfolio at risk.

2 Likewise when clients make prepayments there is a strong possibility that Prin. Overdue could be „0‟

while interest overdue could still be there. Take the case of a client making equal instalment payments of

100 (Prin.) on reducing interest (18%) for a 10 month period Let us assume that on the due date for the

1st instalment the client pays 215 (units of currency) towards the following - 15 towards interest for 1

st


32

installment100 towards prin for 1st instalment and 100 towards prin for 2

nd instalment

4 (prepayment

made for 2nd

instalment during 1st instalment).

Assume that the client who has prepaid the prin for the 2nd

instalment (at the 1st instalment itself) does

not come to pay the interest for the 2nd

instalment (which is due only on the actual due date (of the 2nd

instalment).

When this happens, the client will not have any prin overdue (as prin was prepaid) but will most

certainly have interest overdue. Any ageing report will find it difficult to track this because most often

loan ageing is based on the prin amounts rather than interest amounts. The key question is how should

MFIs treat this issue and what should portfolio managers do?

3 Likewise, there are many other aspects like adjusting the portfolio at risk measure for rescheduling,

refinancing, write offs, fresh loan disbursements for which repayment is yet to begin and the like.

Unless aspects like these are followed according to technical best practices norms, managing an MFI‟s

portfolio, will, at best, be inaccurate and inefficient just like when the instalment method of ageing is

used to classify and manage an MFI‟s loan portfolio.

Exercise 4.2

Objective: To understand the best practices approach to ageing of past due loans

and also construction of the loan repayment schedule


Time: 30 minutes

Tasks: 1. Please discuss the process of how to create a best practices based loan

repayment schedule using correct method of ageing, proper sequence of

appropriating client repayments and the like

2. Please create a loan repayment schedule for the loan given in example

3. Individuals in groups should do the calculations themselves. They could

consult other group members/facilitator, when they require

help/assistance

4. Group should discuss the solution and have one final solution to the

whole exercise

Please be prepared to share your results with the larger group (plenary),

and turn in your calculations to the facilitators.


calculations. He/she should also receive a copy of the calculations from each

participant, prior to wrapping up the course

Exercise 4.3

Objective: To understand the best practices approach to ageing of past due loans

and also construction of the loan repayment schedule


Time: 30 minutes

4 This is because interest for the 2nd instalment cannot be collected at the time of the 1st instalment as it is not due then and is due

only at the time of the 2nd instalment.


33

Tasks: 1. Please discuss the process of how to create a best practices based loan

repayment schedule using correct method of ageing, proper sequence of

appropriating client repayments and the like

2. Please create a loan repayment schedule for the loan given in exercise

4.2 (handout)



help/assistance


whole exercise







34

Session 5: Ageing of Loan Portfolio using the Installment Method Approach

Session Objectives: To undertake ageing using the instalment method

To verify why is the instalment method incorrect

To compare the results of both methods and understand the implication on Loan Portfolio

Time:

70 Minutes

Methods:

Presentation


Materials:

Slide Show:



Handouts: Handout 5.1 Why should the Instalment Method of Ageing not be

used

Handout 5.2 Summary Impact of Using Incorrect Instalment

Method of Ageing

Exercise:

Exercise 5.1: Ageing of Loan Portfolio using

the Instalment Method (30 minutes)

Exercise 5.2: Implications when using the Installment Method of

Ageing of Loan Portfolio (15 minutes)

Overview: This session teaches participants the alternative method of ageing – ageing by instalments. The

focus of the session is to show participants why the instalment method of aging is wrong. The

implication of the same is discussed as participants learn through an exercise based session.

Why should ageing not be done using the instalment method? Time: 25 minutes

Slides: 10

The session details step by step how to age a loan by the instalment method.

What are differences in the results of ageing by the correct method and by the instalment

method?


35

Time: 45 minutes + exercise of 30 minutes and 15 minutes

Slides: 2

Participants do ageing through the instalment method for the previous example. This now gives different

answers. The facilitator asks participants to briefly analyse the difference in the results and the implications

of the same. This is discussed in detail in the next session.

Q: Why the Instalment Method of Ageing should not be used?

Instalment Method of Ageing,

if used…

When all Loans are past the

Loan term

When all Loans are within the

Loan term

1. Understates age of past due loans

2. Shrouds the risk in an MFI‟s

portfolio while it is actually higher

3. Results in lower than prudentially

required provisioning

4. Causes interest to be accrued when

it should not

5. Prevents write-offs of loans that

need to be written off

6. Portrays higher than actual

profitability and sustainability

7. Causes severe income (or loss)

recognition and de-recognition

problems

8. Presents inaccurate financial

situation of an MFI

9. Leads to inaccurate assessments

with regard to credit risk

1. Overstates age of past due loans

2. Overstates the risk in an MFI‟s

portfolio while it is actually lower

3. Results in higher than prudentially

required provisioning

4. Could result in accrued interest

being reversed when not necessary

5. Could result in write-offs of loans

that need not be written off

6. Portrays lower than actual

profitability and sustainability

7. Causes severe income (or loss)

recognition and de-recognition

problems

8. Presents inaccurate financial

situation of an MFI

9. Leads to inaccurate assessments

with regard to credit risk

Has the

following Impact …

Has the

following Impact …


36

Exercise 5.1

Objective:

To age overdue portfolio as per the installment method and contrast it

with best practices. Only principal repayments have been tracked to

keep the example simple.


Time: 30 minutes for the exercise

Tasks: 1. Please discuss the process of how to calculate age of overdues with the

installment method and contrast with best practices aging solution.

2. Please specially observe the difference between the two methods in

terms of age of overdue for loans within loan term and those beyond

loan term.



help/assistance


whole exercise






Exercise 5.2

Objective:

To briefly discuss in plenary the differences between the results of the

calculation of ageing by the correct method and the installment

methods, the reasons for variation and the implications if the variation

on the loan portfolio.


Time: 15 minutes for the exercise

Tasks: 1. Please discuss the process of how to calculate age of overdues with the

installment method and contrast with best practices aging solution.

2. Please specially observe the difference between the two methods in

terms of age of overdue for loans within loan term and those beyond

loan term.



help/assistance


whole exercise







37

Session 6: Six: Understanding the Implications of the different methods and

PAR

Session Objectives: To understand what is PAR and how is it calculated

To review the implications of aged PAR

Time:

150 Minutes

Methods:

Presentation


Materials:

Slide Show:


consists of approximately 62 slides.

Handouts: Handout 6.1: Flow Chart for Generating and Comparing Portfolio

Report

Exercise: Exercise 6.1: Understanding the Implications of the different

methods and calculating PAR

(60 minutes)

Overview: Session 6 explains the implication of aged PAR on provisioning for loan loss, sustainability of

the MFI and loan write offs.

What the implications of aged PAR? Time: 45 minutes

Slides: 44

The facilitator discusses in details the implications of aged PAR by running through the steps of ageing by

using an apt example as given in the slides.

What are the asset quality indicators? Time: 20 minutes

Slides: 5

The facilitator lists the four indicators to assess asset quality. Of the four, PAR is taken as the key indicator

and explained in details.

What is PAR? How is it calculated?


38

Time: 25 minutes + 60 minutes of exercise

Slides: 13

Participants understand PAR by calculating it for the example given to them. This is a new example for

which the participants first age the sample loan portfolio in the correct method and then the instalment

method, calculate aged APR for both the cases and then compare the results and analyse reasons for

differences and its implications on the institution.

Q: What is Portfolio at Risk5 and how to calculate and interpret it?

Step 1 Use the formula given below

Unpaid Principal Balance of Past Due Loans (1 to 365 days and more past due)

Total Gross Outstanding Loan Portfolio

Description 2000 2001 2002

Unpaid Principal Balance of Past Due Loans (A) 40000 40000 36000

Step 2 Take the Unpaid Principal Balance of Past Due Loans for Year 2000 – it is 40000

(Please refer to Portfolio Report, Row 9, Column IV for Unpaid Principal Balance of

Past Due Loans for Year 2000)


Total Gross Outstanding Loan Portfolio (B) 104000 140000 168000

Step 3 Take the Total Gross Outstanding Loan Portfolio for Year 2000 – it is 104000

(Please refer to Portfolio Report, Row 6, Column IV for total gross outstanding loan

portfolio for Year 2000)

Step 4 Divide Unpaid Principal Balance of Past Due Loans by Total Gross Outstanding

Loan Portfolio and as shown below, we get Portfolio at Risk as 38.46% for year

2000

Portfolio at Risk 2000 2001 2002

Unpaid Principal Balance of Past Due Loans (A) 40000 40000 36000


Portfolio at Risk Value = A / B 38.46% 28.57% 21.43%

Step 5 Likewise, as given above, the portfolio at risk for Years 2001 and 2002 are

respectively 28.57% and 21.43%

Step 6 - The trend in portfolio at risk, as depicted by the graph next page, is decreasing, which

5 The sample portfolio report can be found at the end of this annex – Table 4.1

Numerator of Formula

Denominator of Formula


39

is positive. PAR has come down by nearly 17.03% during the period 2000-2002.

While the Total Outstanding Loan Portfolio has grown by 20.23% during 2000-2002,

the unpaid principal balance of past due loans has come down by just 10%. However,

there have been loan write-offs as well during this period. Hence, reduction in PAR

appears to be due to some collection of arrears, increase in total outstanding loan

portfolio and loan write-offs.

Step 7 Calculation of Portfolio at Risk by Age

Table1.1 Ageing Analysis of Loans - Year 2002

I II III IV V VI VII VIII IX X

PR 17 Type of Loans Number

of Loans

Arrears

Amount

Unpaid

Principal

Balance

% of Loan

Outstanding

Portfolio

at Risk

Provisioning

%

Provision

amount

PR 18 Current Loans 2,880 0 132,000 78.57% 0.00% 0% 0

PR 19 Less than 30 Days past due 400 7,000 17,500 10.42% 10.42% 10% 1750

PR 20 31- 60 Days past due 150 3,000 10,000 5.95% 5.95% 50% 5000

PR 21 61- 90 Days past due 120 2,000 5,000 2.98% 2.98% 75% 3750

PR 22 > 90 Days past due 50 2,000 3,500 2.08% 2.08% 100% 3500

PR 23 Total 3,600 14,000 168,000 100.00% 21.43% na 14000

PAR > =1 day (past due) is

Sum of

PAR < 30 days (past due) – 10.42% (Portfolio Report, Row – 19, Column – VIII) +

PAR > 31 – 60 days (past due) – 5.95% (Portfolio Report, Row – 20, Column – VIII) +


PAR > 90 days (past due) – 2.08% (Portfolio Report, Row – 22, Column – VIII)

= 21.43% for year 2002 (Portfolio Report, Ageing Table, Row – 23, Column – VIII)

Similarly,

PAR > 30 days (past due) is

Sum of



PAR > 90 days (past due) – 2.08% (Portfolio Report, Row – 22, Column – VIII)

= 5.95% + 2.98% + 2.08% = 11.01%


40

Likewise,

PAR > 60 days (past due) is

Sum of

PAR > 61 – 90 days (past due) (Portfolio Report, Row – 21, Column – VIII) +

PAR > 90 days (past due) (Portfolio Report, Row – 22, Column – VIII)

= 2.98% + 2.08% = 5.06%

Similarly,

PAR > 90 days (past due) is 2.08%

This, way portfolio at risk by age can be calculated. The detailed procedure is given in annex 3, which

outlines the technically correct procedure for ageing past due loans.

Graph – 1

38.46%

28.57%

21.43%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2000 2001 2002

Trends in Portfolio at Risk

Q: What is Arrears Rate and How to Calculate and Interpret it?



41

Arrears Amounts (or Principal Overdue / Past Due)

Total Gross Outstanding Loan Portfolio


Arrears Amount (A) 20000 18000 14000

Step 2 Take the arrears amount for Year 2000 – it is 20000 (Please refer to Portfolio

Report, Row 8, Column IV for arrears amount for Year 2000)



Step 3 Take the Total Gross Outstanding Loan Portfolio for Year 2000 – it is 104000

(Please refer to Portfolio Report, Row 6, Column IV for total gross outstanding loan

portfolio for Year 2000)

Step 4 Divide arrears amount by Total Gross Outstanding Loan Portfolio and as shown

below, we get arrears rate as 19.23% for year 2000

Arrears Rate 2000 2001 2002

Arrears Amount (A) 20000 18000 14000


Arrears Rate Value = A / B = 19.23% 12.86% 8.33%




42

Step 5 Likewise, as given above, the arrears rate for Years 2001 and 2002 are respectively

12.86% and 8.33%

Step 6 The trend in arrears rate, as depicted by the graph below, is decreasing, which is

positive. Arrears Rate has come down by nearly 10.90% over the 3 year period, while

the Total Outstanding Loan Portfolio has grown by 20.23%

during the same period

Graph – 2

19.23%

12.86%

8.33%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

2000 2001 2002

Trends in Arrears Rate


43

Q: What is Loan Loss Reserve Ratio and how to calculate and

Interpret it?


Loan Loss Reserve Amount

Total Outstanding Loan Portfolio


Loan Loss Reserve Amount (A) 10000 10000 14000

Step 2 Take the Loan Loss Reserve Amount for Year 2000 – it is 10000 (Please refer to

Balance Sheet Adjusted 2, Row 10, Column IV for Loan Loss Reserve Amount for

Year 2000)


Total Outstanding Loan Portfolio (B) 104000 140000 168000

Step 3 Take the Total Outstanding Loan Portfolio for Year 2000 – it is 104000 (Please

refer to Portfolio Report, Row 6, Column IV for total gross outstanding loan portfolio

for Year 2000)

Step 4 Divide Loan Loss Reserve Amount by Total Outstanding Loan Portfolio and as

shown below, we get Loan Loss Reserve Ratio as 9.62% for year 2000

Loan Loss Reserve Ratio 2000 2001 2002

Loan Loss Reserve Amount (A) 10000 10000 14000

Total Outstanding Loan Portfolio (B) 104000 140000 168000

Loan Loss Reserve Ratio Value = A/B = 9.62% 7.14% 8.33%

Step 5 Likewise, as given above, the loan loss reserve ratio for Years 2001 and 2002 are

respectively 7.14% and 8.33%

Step 6 The overall trend in loan loss reserve ratio, as depicted by the graph below, is

decreasing6. Please note that the loan loss reserve ratio decreases (in year 2001) and

6 Whether this is positive or not, actually depends on the specific situation and overall portfolio quality – i.e., whether a portfolio is under reserved or

over reserved.




44

again increases (in year 2002). The reason for this is that there has been a substantial

write-off in year 2001. Please note that the loan loss reserve amount of 14000 is

derived from the Portfolio Report, based on an ageing analysis of all loans.

Graph – 3

9.62%

7.14%

8.33%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2000 2001 2002

Trends in Loan Loss Reserve Ratio


45

Q: What is Loan Loss Ratio and How to Calculate and Interpret it?


Amount Written-Off

Average Outstanding Loan Portfolio


Amount Written-Off (A) 0 6000 1000

Step 2 Take the Amount Written-Off for Year 2000 – it is 0 (Please refer to Portfolio

Report, Row 10, Column IV for Amount Written-Off for Year 2000)


Average Outstanding Loan Portfolio (B) 90000 122000 150000

Step 3 Take the Average Outstanding Loan Portfolio for Year 2000 – it is 90000 (Please

refer to Portfolio Report, Row 7, Column IV for average outstanding loan portfolio for

Year 2000)

Step 4 Divide Amount Written-Off by Average Outstanding Loan Portfolio and as shown

below, we get Loan Loss Ratio as 0.00% for year 2000

Loan Loss Ratio 2000 2001 2002

Amount Written-Off (A) 0 6000 1000

Average Outstanding Loan Portfolio (B) 90000 122000 150000

Loan Loss Ratio Value = A/B = 0.00% 4.92% 0.67%

Step 5 Likewise, as given above, the loan loss ratio for Years 2001 and 2002 are respectively

4.92% and 0.67%




46

Step 6 The overall trend in loan loss ratio, as depicted by the graph below, is decreasing,

which is positive. As noted earlier, in 2001, 6000 worth loans were written-off, which

is why the ratio increases and then again decreases in 2002.

Applying the same for year 2001, we have the following:

which is 10000 + 6000 – 10000 = 6000

(Portfolio Report, Row = 10, Column = V)

How to find out if write-offs have been made in a particular year?

Loan Loss Reserve (Opening Balance)

+

Loan Loss Provision (during year)

-

Loan Write-offs (during year)

=

Loan Loss Reserve (Closing Balance)

Loan Loss Reserve (Opening Balance) = 10000

(Balance Sheet, Adjusted 2, Row =10, Column = IV)

+

Loan Loss Provision Created (during 2001) = 6000

(Income Statement, Adjusted 2, Row = 14, Column = V)

-

Loan Reserve (Closing Balance) = 10000

(Balance Sheet, Adjusted 2, Row = 10, Column = V

=

Loan Write-off during year 2001 = 6000


47

Graph – 4

0.00%

4.92%

0.67%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2000 2001 2002

Trends in Loan Loss Ratio

Exercise 6.1

Objective: To understand the impact of using alternative methods of ageing on

portfolio quality assessment, provisioning and sustainability


Time: 30 minutes

Tasks: 1. Using data given in the Exercise, please compare and contrast the results

obtained by using the accurate best practices ageing method versus the

erroneous installment method of ageing

2. Please discuss and recap the process of how to create a best practices

based loan repayment schedule using correct method of ageing, proper

sequence of appropriating client repayments and the like



help/assistance


whole exercise






Q: What are asset quality indicators?


48

1. This group of ratios are very crucial because the “portfolio" is the primary income generating asset of a

micro-finance institution (MFI or CDFI)

2. The risk that some of the loans will not earn revenue and may not be paid back (at all) is very real and

must be anticipated

3. Hence, management of this risk is critical because it impacts the very viability of the micro-credit

operation

4. Therefore, timely and periodic monitoring of this group of ratios should enable MFIs to detect

delinquency, which, in the long-term, could de-capitalise the revolving loan fund of the MFI and put

the entire micro-finance operations in jeopardy

Portfolio at Risk/Aged Portfolio at Risk (Pessimistic Measure of Delinquency)

Arrears Rate7 (Optimistic Measure of Delinquency)

Loan Loss Provision Ratio

Loan Loss Ratio

Apart from the above asset quality ratios, there are the traditionally used Repayment Rates (On-Time

Repayment Rate, Cumulative Repayment Rate, and Current Repayment Rate). They are not genuine

measures of portfolio quality.

Q: What statements/reports are required for calculating asset quality

indicators?

Statement/

Reports/Records

Requirements

Portfolio Report

with Ageing

Analysis

Yes, this alone is required and sufficient. But, the ageing of loans must

be done in an accurate manner.

Balance Sheet Could be used if appropriately structured, especially to include

information on past due and restructured loans

Income Statement Some information is useful, especially with regard to loan loss provisions

Loan Ledger

(Individual)

Yes, required and very important

Statement/Reports / Records

Requirements

7 This is not a healthy indicator but is often required for statutory reporting


49

1 PAR - Portfolio at Risk CRR - Cumulative Repayment Rate

PIA - Portfolio in Arrears OTRR – On-Time Repayment Rate

Step 1 Prepare Basic Loan Repayment

Format

For Each Loan

Step 2

Step 3

Complete Loan Repayment

Format For Each Loan

Calculate Accurate Age for Each

Individual loan

Prepare Aggregated Loan

Repayment Format

For All Loans

Categorize Loans

According To Age and Risk

Prepare Loan Loss Provision

Table

Calculate PAR, PIA,

CRR, OTRR

Step 4

Step 5

Step 6

Step 7

FIGURE 6.1 - CALCULATING PORTFOLIO QUALITY INDICATORS


50

Q: What is the best practices format for generating the Portfolio

Report?

Step 1 Prepare the Basic Loan Repayment Format for each Loan.

Step 2 Complete Loan Repayment Format for each Loan

Step 3 Calculate Accurate Age for each Individual Loan

Step 4 Prepare Aggregated Loan Repayment format for all Loans

Step 5 Categorize Loans according to Age and Risk

Step 6 Prepare Loan Loss Provision Table

Step 7 Calculate PAR, PIA, CRR, OTRR and Aged PAR indicators

Step 8 Fill out other basic information required as per Column’s given

above in the portfolio report

Step 9 Interpret the individual Portfolio Report formats

Step 10 Compare portfolio report formats on 2 pre-specified dates.

Step 11 Interpret the comparative Portfolio Report formats


51

Q: What is the best practices format for the Portfolio Report?

Loan (Principal) Amounts, Key Parameters as on... Date 1/04/2004

Total value of loans disbursed (End of period) 445,000

Total number of loans disbursed (End of period) 48

Value of loans outstanding (End of period) 200,996

Number of loans outstanding (End of period) 31

Average outstanding balance of loans (End of period) 6,484

Value of payments in arrears (End of period) 3,426

Value of outstanding balance of loans in arrears (End of period) 48,969

Value of loans re-scheduled (End of period) 0.00

Value of loans re-financed (End of period) 0.00

Value of loans written-off (End of period) 0.00

Value of cumulative principal due (End of Period) 247,430

Value of cumulative principal paid (End of Period) 244,004

Value of cumulative principal paid on-time (End of Period) 210,637

Value of principal prepaid (End of Period) 2,190

Average loan size (End of period) 9,271

Average loan term (months) (End of period) 10

Loan Loss Provision Table

Description Loans

days in Past Due

No. of

Loans

Amount in

Arrears (US $)

Unpaid

Principal

Balance (US $)

Portfolio at

Risk

Provision

Rate

Loan Loss

Provision (US $)

Current Loans 26 0 152,027 0.0 % 0 % 0

1 – 30 Days Past Due (PD) 2 488 13,305 6.62 % 10 % 1,330

31 – 60 Days PD 1 1,406 33,291 16.56 % 25 % 8,322

61 – 90 Days PD 0 0 0 0.00 % 50 % 0

91 – 180 Days PD 1 902 1,743 0.87 % 75 % 1,307

181 – 365 Days PD 0 0 0 0.00 % 90 % 0

above 365 Days PD 1 630 630 0.31 % 100 % 630

Total 31 3,426 200,996 24.36 % 11,590

Total Outstanding Portfolio (US $.) : 200,996

Loan Loss Provision Ratio : 5.77%

Key Indicators

Arrears

Rate

Portfolio at Risk (PAR)

>= 1 Day

PAR > = 1 Day, PAR Adjusted for Rescheduling, Refinancing,

Write-offs and Fresh Loan Disbursements

1.70% 24.36% 24.36%

Aged Portfolio At Risk (PAR) and Repayment Rates (RR)

PAR > 30 (Days) PAR > 60 (D) PAR > 90 (D) PAR > 180 (D) On-Time RR Cumulative RR

17.74% 1.18% 1.18% 0.31% 85.13% 97.73%

Ageing done as per best practices method and prepayments are subtracted for repayment rates


52

Q: What is the best practices format for the Comparative Portfolio

Report?

Loan, (Principal) Amounts

Key Indicators as on...

Report

Date -

1/04/2003

Comparison

Date -

1/04/2002

Change in

Indicator

Direction of

Change

Remarks

Portfolio at Risk (PAR) > = 1 Day 24.36% 3.40% 20.96% Increased Negative

PAR Adjusted for Rescheduling,

Refinancing and Write-offs

24.36% 3.40%

20.96% Increased Negative

PAR > 30 Days 17.74% 3.40% 14.34% Increased Negative

PAR > 60 Days 1.18% 3.40% -2.22% Decreased Positive



Loan Loss Provision Ratio 5.77% 2.67% 3.10% Increased Negative

On-Time Repayment Rate 85.13% 79.25% 5.88% Decreased Negative

Cumulative Repayment Rate 97.73% 97.81% -0.08% Decreased Negative

Arrears Rate 1.70% 1.38% 0.32% Increased Negative

Loan (Principal) Amounts,

Key Parameters as on...

Report

Date -

1/04/2003

Comparison

Date -

1/04/2002

Change in

Parameter

Direction of

Change

Remarks

Total value of loans disbursed

(End of period) 445000.00 250000.00 195000.00 Increased Positive

Total number of loans disbursed

(End of period) 48 28 20 Increased Positive

Value of loans outstanding (End of

period) 200996.00 131242.00 69754.00 Increased Positive

Number of loans outstanding

(End of period) 31 25 6 Increased Positive

Average outstanding balance of loans

(End of period) 6483.74 5249.68 1234.06 Increased Positive

Value of payments in arrears

(End of period) 3426.00 1814.00 1612.00 Increased Negative

Value of outstanding balance of

loans in arrears (End of period) 48969.00 4458.00 44511.00 Increased Negative

Value of loans re-scheduled (End of

period) 0.00 0.00 0.00 No Change Status Quo

Value of loans re-financed (End of


Value of loans written-off (End of


Average loan size (End of period) 9270.83 8928.57 342.26 Increased Positive

Average loan term (months)

(End of period) 10 10 0 No Change Status Quo

Loan Loss Provision Amount 11590.50 3498.30 8092.30 Increased Negative


53

Session 7: Seven: Step 4, Verification of Loan Administration and

Documentation

Session Objectives: To facilitate participants to understand the need to verify documents related to loan

Time:

140 Minutes

Methods:

Presentation

PRA exercise in mixed groups

Materials:

Slide Show:



PRA Cards

Handouts: None

Exercise: Exercise 7.1: Review of step 4 (75 minutes)

Overview: This session explains step 4 of loan portfolio assessment, which deals with verification of

documents relating to loans.

What is step 4 of the loan portfolio assessment? Time: 15 minutes + 60 minutes for exercise

Slides: 3

The facilitator briefly describes step 4 and introduces participants to the PRA exercise to help them go

through the different cases possible.

What are key issues to be addressed while verifying loan documents? Time: 65 minutes

Slides: 5

The facilitator uses the remarks slides to highlighting the key issues that are likely to emerge in step 4. The

slides listing all the different cases/aspects have been provided as hidden slides. The trainer may

choose to use them to discuss the possibilities.

This session also has slides hidden for cases of individual lending. They are to be used if relevant

for any participating MFI.


54

Q: How to assess loan administration and credit policy?

Steps to follow…

1. Examination of documents given below with data gathered in steps above will automatically reveal

whether any of the aspects are present or absent


1. Loan/credit policy document and its examination for various aspects like definition of delinquency,

loan terms and other issues

2. Letter of offer/contract/application, repayment schedule and client records

3. Borrower‟s loan file and all related documents like DPN‟s

4. MIS records of borrower‟s past credit history including transactions

5. Comparison with list of overdue loans and the associated conditions


7. Loan ledger

8. Cash/bank books/records including client savings/current accounts, receipts and their

reconciliation, deposit slips (if applicable) and other client records (if available)

9. Best practices construction of loan repayment by clients using correct method of ageing past

due loans, appropriation of loan repayments and other aspects – this would have been

calculated in steps 1- 3 and compiled.


55


Sometimes, policy may be silent on these aspects and that needs to be noted. For example, when

flat rates of interest are used in some models and the total number of Installments have passed and if

the institution collects interest first, then principal amounts may remain overdue beyond loan term and

credit policy may not stipulate what interest should be levied on the over due principal beyond loan

term (as interest was collected on a flat basis)

Must check for large lump sum payments by clients for previous loans, which could be followed

immediately by disbursement of a fresh loan.

The key is to isolate the number of Installments that were overdue in a previous loan along with the

average time taken to settle the over dues. Merely looking at whether the total loan has been repaid can

be misleading

Must check whether loans with „0‟ principal overdue and interest overdue are classified as overdue

loans. The converse is also true

Look for informal grace or moratorium periods. For example, sometimes, policy may stipulate that

clients could pay back in 46 weekly Installments over a 52 week loan period and as a result,

sometimes, a loan whose Installment has not been paid for 6 weeks could still be called a current loan

while in reality it is not

Other aspects would have been examined in Steps 1 – 3

Q: How to verify the loan application?

Steps to follow…











7. Loan ledger

8. Cash/bank books/records including client savings/current accounts, receipts and their

reconciliation, deposit slips (if applicable) and other client records (if available)

9. Best practices construction of loan repayment by clients using correct method of ageing past due loans,

appropriation of loan repayments and other aspects – this would have been calculated in steps 1- 3 and

compiled.


Signatures and verification are critical and must be examined for

Exceptions typically occur when signatures and verification are not present

Legal enforcement of loan contract could become problematic when such conditions exist

Borrower past data must be checked thoroughly – it could be incomplete or inaccurate

Q: How to verify the loan terms?

Steps to follow…


56











7. Loan ledger





compiled.


Comparison of loan policy document with data from steps 1-3 (especially, best practices construction

of loan repayment by client) is very critical and it will highlight whether any of the aspects are present

Q: How to assess loan authorization and approval?

Steps to follow…











7. Loan ledger





compiled.

10. Credit committee minutes and files at various levels and the respective notes


Comparison of loan policy document with credit committee decisions and notes along with data from

steps 1-3 (especially, best practices construction of loan repayment by client) is very critical and it will

highlight whether any of the aspects are present

Q: How to verify the letter of offer (loan contract)?


57

Steps to follow…











7. Loan ledger





compiled.


Credit committee minutes and files at various levels and the respective notes Signatures and

verification are critical and must be examined for

Client account names, number and loan number and borrower name must be matched


Legal enforcement of loan contract could become problematic when loan contract is incomplete

Borrower past data must be checked thoroughly – it could be incomplete or inaccurate

Q: How to verify chattels mortgage – borrower?

Steps to follow…




1. Instrument (affidavit) and all details therein including date, place and process of creation

2. Supporting documents for the instrument if any










Assets details including serial numbers must be noted

Any encumbrance on the asset must also be ascertained


58

Clear evidence of whether process adopted is transparent and witnesses require to be checked

Q: How to verify chattels mortgage – guarantor?

Steps to follow…





2. Supporting documents for the instrument if any including asset documents










Assets details including serial numbers must be noted


Clear evidence of process adopted and guarantor‟s/witnesses to it and their guarantee/witness to the

process require to be checked

Q: How to verify chattels/goods – borrower?

Steps to follow…















Assets details including serial numbers must be noted and matched with original approvals



59

Clear evidence of process adopted and guarantor‟s/witnesses and their guarantee/witness to the process

require to be checked

Q: How to verify chattels/goods – guarantor?

Steps to follow…

















Clear evidence of process adopted and guarantor‟s/witnesses and their guarantee/witness to the process

require to be checked

Q: How to verify vehicles as collateral?

Steps to follow…




1. Documents and all details therein including those with regard to ownership, insurance and other

aspects


loan terms and other issues like hypothetication etc



Credit committee minutes and files at various levels and the respective notes Ownership and insurance

documentation is critical as also transfer forms etc

Legal enforcement of loan contract could become problematic when these aspects are incomplete




60

Q: How to verify property (land) as collateral?

Steps to follow…

1. Examination of documents given in next column with data gathered in steps above will automatically

reveal whether any of the aspects are present or absent


1. Property documents and all details therein including those with regard to ownership, title, insurance

and other aspects




Credit committee minutes and files at various levels and the respective notes Ownership, title, and

insurance documentation is critical


Assets details including registration/survey numbers must be noted and matched with original

approvals


Q: How to verify references?

Steps to follow…



Records to peruse…

1. Reference forms and all details therein including signatures





Credit committee minutes and files at various levels and the respective notes Completed forms are

critical as also signatures


Q: How to verify guarantee?

Steps to follow…




1. Guarantee documents and all details therein for completeness





61


Credit committee minutes and files at various levels and the respective notes Clear intention to

guarantee must be ascertained

Presence of signatures and their verification is also very critical including the that of the witness

Q: How to verify other documents?

Steps to follow…




1. All necessary documents including Memorandum and Articles of Association, evidence of

incorporation, insurance certificates and all details therein for completeness





Credit committee minutes and files at various levels and the respective notes Look for notes or

remarks on whether originals had been verified as copies can be fabricated

Notarised copies are useful here

Cross-checking with notary may be required in some cases

Q: How to verify original title documents for vehicles?

Steps to follow…




1. Documents and all details therein including those with regard to ownership, insurance and other

aspects





Credit committee minutes and files at various levels and the respective notes Ownership and insurance

documentation is critical as also transfer forms etc




Storage of originals in a safe and fire proof place is very critical

Q: How to verify original title documents for property (land)?


62

Steps to follow…




1. Property documents and all details therein including those with regard to ownership, title, insurance

and other aspects


loan terms and other issues like hypothetication, margins etc



Credit committee minutes and files at various levels and the respective notes Ownership, title, and

insurance documentation is critical


Assets details including registration/survey numbers must be noted and matched with original

approvals


Storage of originals in a safe and fire proof place is very critical

Q: How to verify securities?

Steps to follow…




1. Security documents and all details therein including those with regard to ownership, title, insurance

and other aspects


loan terms and other issues like hypothetication, margins etc



Storage of original securities in a safe and fire proof place is very critical

Any encumbrance on the security must also be ascertained

Ownership, title, and insurance documentation is critical


Valuation of security provided must be appropriately done through a transparent process as also any

substitution of the security

Q: How to verify general records with regard to loans/other

products?

Steps to follow…




63









7. Loan ledger





compiled.


Credit committee minutes and files at various levels and the respective notes Basically, data from steps

above would indicate whether any of these conditions are present or absent

The key is look for deviations (or exceptions) from authorisations and check whether they have

approved or not

In case discrepancies exist, specific interviews with clients, staff and credit committee concerned is a

must to bring transparency to the whole process and the associated data and records

Q: How to verify loan documentation?

Steps to follow…











7. Loan ledger





compiled.


Credit committee minutes and files at various levels and the respective notes The key is look for

deviations (or exceptions) from authorisations and check whether they have approved or not


64

In case discrepancies exist, specific interviews with clients, staff and credit committee concerned is a

must to bring transparency to the whole process and the associated data and records

Perusal of records as on the dates of the assessment are very critical to ascertain whether they are

regularly updated and complete

Judgements about accuracy will come from the steps given earlier including construction of the loan

repayment schedule as per best practices, after making the necessary adjustments

Exercise 7.1 Instructions same as Exercise 3.2


65

Session 8: Eight: Step 5, Verification of Rollovers and Restructuring

Session Objectives: To understand the need to review cases relating to refinancing of loans

To understand the need to review cases relating to rescheduling of loans

To understand the implication of refinancing or rescheduling of loans on the overall

performance of the loan portfolio

Time:

60 Minutes

Methods:

Presentation


Materials:

Slide Show:



PRA Cards

Handouts: None

Exercise:

Exercise 8.1: Review of Step 5

(30 minutes)

Overview: Session 8 deals with step 5 of loan portfolio assessment– special loan cases where the

loan has be refinanced or rescheduled for different reasons.

What is step 5 of loan portfolio assessment process? Time: 10 minutes + 30 minutes for exercise

Slides: 5



What are key issues to be addressed while dealing with refinanced or restructured loans? Time: 20 minutes

Slides: 13


66




Q: How to verify for loan rescheduling/refinancing etc?

Steps to follow…




1. MIS design documents including database design, loan ledger and tracking system (if manual),

delinquency, credit and write-off policy documents, portfolio report for last three years (at least) and

data from all other records given in steps above


Most critical thing to look for is the date of original disbursement

Add loan term to this to see if the loan is passed the loan term

If on the dates of the assessment, the loan is passed the original loan term and the loan is outstanding

and not been classified as overdue, then rescheduling has occurred

Please also look for any lump sum payments made for overdue amounts, followed by immediate

disbursal of fresh loans. This again is a symptom of rescheduling/re-financing

A review of the receipts and their reconciliation at various levels coupled with construction of the

correct best practices ageing based repayment schedule (given in steps 1 –3) above will ensure one to

ascertain whether there has been re-scheduling etc

Q: How to verify loan write-offs?

Steps to follow…




1. Credit, delinquency and write-off policies and procedures and data from all other records given in steps

above


Written approvals for write-offs and corresponding dates to ensure that there is no write-off using a

back dated procedure

Check the corresponding accounting records

In case a reserve exists, the typical write-off is processed as follows: Decrease loan outstanding (credit

of asset) and Decrease of loan loss reserve (debit of negative asset)

MIS (computerised) systems need to be validated for this as well



67

Session 9: Step 6, Review of loan portfolio management

policies/procedures/system

Session Objectives: To understand the need for defined policies and procedures

To review various cases and analyse the implications of variations from prescribed norms

Overview: Step 6 is introduced in this session. Participants understand the need to document policies,

how to review polices to identify risks, contradictions, identify variations and analyse the reasons for

variation.


Slides: 5



What are key issues to be addressed while reviewing the loan policies and cases related to

loan policy? Time: 10 minutes

Time:

60 Minutes

Methods:

Presentation

PRA exercise in small groups

Materials:

Slide Show:



PRA Cards

Handouts: None



68

Slides: 37




Q: How to assess policies with regard to loan portfolio management?

Steps to follow…




1. Credit, delinquency and write-off policies and procedures and data from all other records given in steps

above


Look for written down policies

Look for evidence with regard to use of these policies

Look for evidence of violation of these policies

In case of write-offs, there are mere accounting entries and see how the institution handles these

written off loans, after the actual write-off. Pursuing recovery until the economic cost of recovery is

greater than the written-off amount is necessary

Please check for how collections from written-off loans are to be handled and how they are actually

handled. Some internal control failures are possible here

Q: How to verify definition of delinquency (past or over due) and

default?

Steps to follow…





delinquency, credit and write-off policy documents, portfolio report for last three years (at least) and

data from all other records given in steps above


Grace periods need to be spotted and adjusted for as noted earlier

Irrespective of the date of disbursement, some models keep the 1st repayment date as the last of the

succeeding month. This aspect needs to be noted

Another way grace period can affect portfolio quality is through the definition of delinquency. For

example, sometimes, policy may stipulate that clients could pay back in 46 weekly Installments over a

52 week loan period and as a result, sometimes, a loan whose Installment has not been paid for 6

weeks could still be called a current loan


69

Q: How to ascertain portfolio quality and repayment?

Steps to follow…





portfolio report for last three years (at least) and data from all other records given in steps above


Standard definitions of indicators, standard method of calculation and standard ways of interpretation

are very critical

Adjustments for rescheduling, refinancing, write-offs and/or fresh loan disbursements are very critical

Portfolio quality indicators are better than repayment indicators but they suffer limitations, especially

with aspects that increase the denominator and/or decrease the numerator

Sometimes, institutions show good portfolio quality indicators but because they use a wrong method of

appropriation. A simultaneous look at the interest yield should reveal whether this is the case or not –

lower yield coupled with good portfolio quality indicators suggests serious delinquency

In many models, there are many levels and there may be silent delinquency in that at the lowest

(individual client) level, there is delinquency but the group manages it at its level using savings/other

cash resources. This cannot go on for long and hence, it is important to get a good understanding of the

portfolio quality indicators at various and all levels rather than just the superficial and uppermost levels

Q: How to assess loan-tracking systems?

Steps to follow…





portfolio report for last three years (at least) and data from all other records given in steps above


Method of appropriation, ageing method and method of generation of loan loss provision table etc need

to be carefully ascertained.

Sometimes, as from a computerised system, it may be difficult to isolate this and hence, an assessment

of the MIS is very essential using MIS experts

Q: How to verify age calculation for overdue loans?

Steps to follow…





70

1. Portfolio report for last three years (at least) and data from all other records given in steps above


Method of ageing is very critical and that must be as per best practices

Correct age of a past due loan on a specific date = Date of age calculation – date of earliest unpaid

overdue

Method of appropriation is very critical and must be as per best practices sequence

Loan rescheduling, loan refinancing and other aspects must be taken into account

All over dues (principal, interest and fines etc) must be included while generating list of past due loans

Provisioning must be based on actual age and must match age which is a surrogate for the risk with

regard to a loan

Q: How to verify loan loss provisioning and write-offs?

Steps to follow…




1. Portfolio report for last three years (at least) and data from all other records given in steps above


Understanding how provisioning is done is critical – what is the basis for provisioning? Is it historical

data or ageing or some mere percentage of loan outstanding (with no rationale what-so-ever)

It is critical to check the ageing of past due loans at point of verification and compare provisioning

percentage after ageing with actual

Method of appropriation of client repayments, definition of delinquency, levy of penalties and other

fines have an impact on provisioning and must be understood

Whether all overdues are used as a basis for generation of the loan loss provision table also needs

clarity as one can have impact if only principal overdue is used to generate a list of overdue loans – in

such cases, those loans with „0‟ principal overdue and some interest overdue may be left out and would

distort the true picture and camouflage the true risk in the portfolio

Sometimes, best practices and regulatory requirements may differ and if the institution is adopting

more stringent norms because of adoption of best practices while being different from that prescribed

by regulation, the institution need not be penalised. The converse may also be true and needs to be

ascertained whether by keeping the provisioning to the regulatory requirements, the institution is at

perceived risk because the regulatory requirements are less stringent than best practices

Sometimes, institutions say that they have a 15% loan loss provision ratio, which actually means

nothing by itself. Institutions could have provisioned 15% when their ageing suggests that they may

actually require 30% (case of under provisioning) whereas some organisations could have provisioned

just 5% whereas as per the ageing they may require just 3% (case of over provisioning)



71

Session 10: Step7, Verification of internal and external controls for loan

portfolio management

Session Objectives: To review the internal controls designed in the MFI

To understand the role of financial statements in Loan Portfolio Assessment

Time:

60 Minutes

Methods:

Presentation

PRA exercise in small groups

Materials:

Slide Show:



PRA cards

Handouts: Handout 10.1: Micro Finance Transaction Summary for Loan

Portfolio Assessment


Overview: Step 7 is introduced in this session. Participants understand the need to review internal and

external controls that are in place.


Slides: 4



What are key issues to be addressed while reviewing the internal and external control

systems? Time: 20 minutes


72

Slides: 26




Q: How to assess the internal control systems?

Steps to follow…




1. Internal audited reports for last three years (at least) and data from all other records given in steps

above


Walking through the internal audit process is very critical

Ensuring independence of reporting of internal auditors is also very important

Action taken reports of internal audits must also be closely evaluated and cross-checked with

successive internal audit reports

Reconciliation of receipts and payments and their associated records is very crucial to determining this

Timing of recognition of income and expenses also critical

Income recognition norms and rules for reversal of recognised income also important

Method of accounting employed is also critical

Segregation of duties is very important for delivery of financial services and this must be ascertained at

various levels

Security of MIS (especially, computerised) must be evaluated in terms of various aspects

It is important to check for use of delinquency lists and action plans with regard to these. Action taken

report with regard to delinquency action plans will help understand the proactiveness of the institution

in tackling delinquency

Ability of institution to spot delinquency through use of correct method of ageing, appropriation of

client repayments, classification of loan delinquency and other aspects are also critical

Action on deviant behaviour with regard to internal control failures is also critical to provide the

demonstration effect and serve as a safeguard or control mechanism in the future. In other words,

please check whether the organisation has taken action on staff for reported and identified internal

control failures – failure to take action relegates the control to a dummy control often

Q: How to compare loan portfolio data and financial

statements/external audit data?

Steps to follow…




1. Audited Statements for last three years (at least) and data from all other records given in steps above


73


Vertical and horizontal analysis of the financial statements is critical

Method of ageing, appropriation of client repayments, classification of loan delinquency and other

aspects are critical to matching portfolio records and financial statements

Reconciliation of receipts and payments and their associated records is very crucial to determining this

Timing of recognition of income and expenses also critical

Income recognition norms and rules for reversal of recognised income also important

Method of accounting employed is also critical



74

Session 11: Using the Loan Portfolio Assessment Tool

Session Objectives: To introduce participants to the Loan Portfolio Tool

To help participants use the Loan Portfolio Tool through a case study

Overview: Having understood the seven steps of loan portfolio assessment in details, the participants

are introduced to the excel tool which summarises the findings of a loan portfolio assessment.

Participants are given a case study and they use the tool for assessing the MFI given in the

case study.

Analysing case study Time: 80 minutes

Slides: 3

Facilitator should give soft copy of the loan portfolio assessment tool to the participants and explain the

scoring of the tool with the help of the handout. Participants will fill the tool for MFI READ of the case

study.

Time:

80 Minutes

Methods:

Presentation


Excel tool

Materials:

Slide Show:



Laptops

Handouts: Handout 11.1 Instruction for Using Excel Tool

Exercise: Exercise 11.1: Case Study of MFI READ (45 minutes)

Exercise 11.1b Loan Portfolio Assessment Tool

(30 minutes)


75

Q: How to Use the Excel Sheet for Loan Portfolio Assessment?

Using the Branch Rating Sheet

Step 1 Record whether condition is absent (1) or present (0). Other options include: Not applicable marked as

NA

Step 2 Count the number of responses in a column and list under the three categories given above:

a) Not Applicable; b) Present; and c) Absent

Step 3 Total the number of responses across the three categories given above

Step 4

Determine the percentage of responses of Absent to Total and this gives the Branch Credit Score. The

higher the percentage score, the better are the loan portfolio controls and compliance within the

branch.

All of this has been linked in the excel sheet given earlier, which also lists common and

critical issues for head office attention as well as highlights above average, below average and

critical branches

Exercise 11.1

Objective: Applying the loan portfolio assessment tools to a real life situation

Group Formation: Groups of 4/5 people

Time: 75 minutes and open ended, if required

Tasks: 1. The portfolio assessment of Branch # 1 of a large multi branch MFI

READ revealed the prevailing situation with regard to the MFI‟s loan

portfolio. Please use the loan portfolio assessment tool provided and

rank the branch in the excel sheet.

2. For items that seem irrelevant to the MFI and its model, please feel free

to use the “Not Applicable” (NA) option.

3. In case you make any assumptions because of lack of sufficient

information (on these specific items) in the case study, please state them

and rank the branch accordingly.

4. Please also point out any contradictions in the auditor‟s observations (if

any) and correct these while ranking the branch.

5. Please read through the entire case study first and fill in the required

pieces of information (to be calculated) and then rank the branch


and turn in your analysis to the facilitators.


ranking/analysis. He/she should also receive a copy of the analysis from the

group, prior to wrapping up the course


76

Session 12: Implementing Loan Portfolio Assessment

Session Objectives: To learn the steps of pilot testing the recommendations of a loan portfolio assessment

To understand the benefits of institutionalising Loan Portfolio Assessment

To prepare individual/institutional follow up plan of the training

Overview: The concluding session of the loan portfolio assessment training lists the activities to be

undertaken after the assessment has been done. It gives an opportunity to participants also to

develop an action plan which they want to implement as a follow up activity.

What follows a loan portfolio assessment? Time: 20 minutes

Slides: 12

After the assessment is completed, it is important that the assessment report is shared with relevant

personnel in the MFI, to ensure that action is taken for the areas of risk that get identified. If changes are to

be implemented, they should ideally be pilot tested, reviewed and then rolled out only if the results of the

pilot test approve so. The long term goal is to institutionalise loan portfolio assessments which then need to

be done at regular intervals.

How do we know that we have completed the loan portfolio assessment successfully? Time: 10 minutes

Time:

60 Minutes

Methods:

Presentation

Action plan in institutional groups

Materials:

Slide Show:



Handouts: Handout 12.1 Critical Issues for Loan Portfolio Assessment and

Summary Checklist

Handout 12.2 Course Evaluation Form

Exercise: Exercise 12.1: Action Plan (30 minutes)


77

Slides: 4

The facilitator ends the training with a checklist which summarises the key items that are assessed. This list

also works as a check list to ensure that the assessment is complete in all respects.

Action Plan and course evaluation Time: 30 minutes for developing action plan

Slides: 1

The participants work individually (if consultants) or in institutional groups to identify the key initiatives

they could take as a follow up of this training on return to their base and share it with the facilitator.

Participants can be encouraged to work on this from the second day of the training itself and discuss with

the facilitator when time permits. Participants complete the course evaluation before leaving the training.

Exercise 12.1

Objective: Action Planning

Group Formation: Institutional groups of 4/5 people

Time: 30 minutes and open ended, if required

Tasks: 1. In light of your experience in the last three days, draft a preliminary

memo to the senior management in your organisation stating the

advantages of conducting a loan portfolio assessment

2. Please also highlight specific reasons as to why it may be desirable to

undertake a loan portfolio assessment within the organisation at this

juncture

3. Additionally, please also identify the specific locations (within the

organisation) where such an assessment could be conducted and also

highlight potential team members


and turn in your analysis to the facilitators.

Facilitator’s Role: Facilitator should help the participants in institutional groups work and

finalise the memo. He/she should also receive a copy of the memo from each

institution prior to wrapping up the course

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