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Understanding Delinquency: Its Causes and Costs

Understanding Delinquency: Its Causes and Costs. Questions on Delinquency. Who defines delinquency in your organization? Is the definition practiced consistently? What is the acceptable level of delinquency in your organization? What happens if the acceptable level is not achieved?.

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Understanding Delinquency: Its Causes and Costs

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  1. Understanding Delinquency: Its Causes and Costs

  2. Questions on Delinquency • Who defines delinquency in your organization? • Is the definition practiced consistently? • What is the acceptable level of delinquency in your organization? • What happens if the acceptable level is not achieved?

  3. What is Delinquency? • A delinquent loan (or loan in arrears) is a loan on which payments are past due. • Calmeadow • Delinquent loans are loans on which any payments are past due. • SEEP • Situation that occurs when loan payments are past due • Also referred to as arrears or late payments, measures the percentage of a loan portfolio at risk • USAID Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  4. Important Points to Remember • Delinquency occurs when one loan payment is missed on due date. • Zero percent delinquency is an attainable and a reasonable goal but requires the commitment of the institution. • Acceptance of a delinquency level above zero percent is the decision of the institution itself and is a decision that has its own costs. Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  5. Causes of Delinquency • Make a list of three causes of loan delinquency • Organize the causes into three categories including external, client, and MFI • Decide which category is most responsible for delinquency

  6. Causes of Delinquency • Ultimately the MFI itself is responsible for delinquency (even when the proximate cause seems external to the MFI). • There are many stakeholders in delinquency, but only the MFI can do something about it. Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  7. Causes of Delinquency • The MFI • Sets its own principles • Promotes its own repayment culture • Instills credit discipline in staff and borrowers • Must plan for events beyond its control Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  8. What is Default? • Default occurs when a borrower cannot or will not repay his or her loan and the MFI no longer expects to receive repayment1 • The MFI may continue its collection efforts • A loan is declared in default when the borrower has stopped payment for more than 90 days (Based on BSP Circular 409) 1 Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  9. Default Amount • The default amount depends on how much is outstanding when the borrower stops making payments.1 • Amounts that will have to be written off or counted as loan loss may be different from the defaulted amount depending on the ability of the MFI to collect any collateral or on a guarantee. • SEEP 1 Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  10. What are the effects of delinquency to your organization?

  11. Costs of Delinquency / Default • Delinquency is expensive for an MFI. • It affects a program by… • Postponed or lost income • Slower portfolio rotation, which lowers asset productivity • Lower staff morale • Higher costs of fighting delinquency • Diminished program image • Higher likelihood of default • Increased cost of loan loss reserve Controlling Delinquency, Microenterprise Development Brief, Number 31, September 1995, USAID

  12. Delinquency: Delayed Income • Consider a loan of 10,000 with 2% per mo. • If there were 100 clients with late interest payments = 20,000 delayed interest • Equivalent to monthly salary of 2 loan officers • 400 worth of opportunity cost for the month (20,000 x 2%) Based on Yatsco, Diana, Replacing Defaulted Customer: The Hidden Cost of Default, Credit and Financial Management Review, 2003

  13. Cost of Default Formulas Replacement Cost = Lost Principal (+ Interest) Revenue per loan (Number of Loans/Sales units needed to ‘replace’ lost principal or sales) Based on Yatsco, Diana, Replacing Defaulted Customer: The Hidden Cost of Default, Credit and Financial Management Review, 2003

  14. Financial Impact of Delinquency and Default • Loan loss provision (provision for bad debts) reduces surplus. • The institution loses non-recoverable portion of outstanding loan. • Written-off loans require de-capitalization of the institution. Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

  15. Sustainability Fit Service Delivery Risks Sustainability Costs

  16. Social Mission MFI Financial Sustainability Dual Mission of Microfinance

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