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Financial Shields to Delinquency

Financial Shields to Delinquency. Financial Shields. Loan Loss Reserve represents the amount of the outstanding principal that is not expected to be recovered recorded as a negative asset on the balance sheet could also be recorded as liability Loan Loss Provision

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Financial Shields to Delinquency

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  1. Financial Shields to Delinquency

  2. Financial Shields • Loan Loss Reserve • represents the amount of the outstanding principal that is not expected to be recovered • recorded as a negative asset on the balance sheet • could also be recorded as liability • Loan Loss Provision • amount expensed on the income statement as a result of establishing the loan loss reserve • increases the loan loss reserve Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  3. Financial Shields • Loan Losses or Write-Offs • occurs as an accounting entry • amount deducted from the loan loss reserve when a delinquent account is removed from the outstanding portfolio • loan recovery should still be PURSUED • decreases the outstanding portfolio and loan loss reserve, not the net outstanding portfolio Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  4. How often should writing off be practiced?

  5. Which MFI is Better?

  6. BSP Circular 409

  7. Loan Loss Provision - Bolivia Measuring Microcredit Delinquency: Ratios Can Be harmful to Your Health, June 1999

  8. Loan Loss Provision - CGAP Disclosure Guidelines for Financial Reporting by Microfinance Institutions, CGAP, January 2001

  9. Mini Case 1: Conservative MFI

  10. Mini Case 1: Conservative MFI

  11. Loan Loss Provision • One-Time Loan Loss Provision • May cause loss of investor confidence • May cause bad image of the organization • Shows the real picture of the portfolio • Amortized Loan Loss Provision • Unnecessarily distribute dividends to stockholders • May preserve image of the organization • Shown as Non-Performing Asset in the Balance Sheet • Still reflects the true picture Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  12. Loan Loss Provision • An MFI should diligently account or adjust for loan loss reserve as it happens • Accounting Entry (Debit) LLProvision 1550K(Exp.) (Credit) LLReserve 1550K(B.S.) Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  13. Loan Loss Provision • Balance Sheet Before Provision Outstanding Loans: 10,000,000 • Balance Sheet After Provision Outstanding Loans: 10,000,000 (Loan Loss Res.) (1,550,000) Net Loans Outs. 8,450,000

  14. Loan Loss Reserve 1,550,000 Write Off 1,000,000 New Loan Loss Reserve 550,000 Mini Case 2: Conservative MFI Step 1. Determine the New Loan Loss Reserve

  15. Outstanding Balance 10,000,000 Write Off 1,000,000 New Outstanding Balance 9,000,000 Mini Case 2: Conservative MFI Step 2. Determine the New Outstanding Balance

  16. Balance Sheet Before Write Off Balance Sheet After Write Off Outs. Portfolio 10,000,000 Outs. Portfolio 9,000,000 Loan Loss Reserve (1,550,000) Loan Loss Reserve (550,000) Net Outs. Portfolio 8,450,000 Net Outs. Portfolio 8,450,000 Mini Case 2: Conservative MFI Step 3. Compare the Balance Sheet Before and After Write Off

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