portfolio quality maintenance

8/4/2019 Portfolio Quality Maintenance

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PORTFOLIO QUALITYMAINTENANCE Waging War on Delinquency

Waging War on DelinquencyWaging War on Delinquency

P E S OP E S O

PPORTFOLIO QUALITYORTFOLIO QUALITYMAINTENANCEMAINTENANCE

Performance Standard for All TypesPerformance Standard for All Types

of Microfinance Institutions in the Philippinesof Microfinance Institutions in the Philippines


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Module OverviewModule OverviewSection 1: What Portfolio Quality is all about?

Section 2 : Why is Portfolio Quality important?Section 3 : Some Best Practices on Portfolio

Quality Maintenance

Section 4 : Assessing MFIs current level ofportfolio quality

Section 5 : Formulating Steps and Action toImproving Portfolio Quality


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Portfolio Quality is

GOOD Deteriorated

Financial HEALTH

Controlled Risk Increased Risk

Section 1: What Portfolio Quality is all about?

MFIs Microfinance portfolio


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Loan Delinquency

Deteriorated

Increased Risk

Section 1: What Portfolio Quality all about?


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Loan Delinquency

LOAN RECOVERY


GOOD

Foundation of MFIs Operation

THE ENEMY


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What Delinquency is When the client renegeto pay the loan on

on time.



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Default is When the client failed to repay, regardless

of motive, the loan at the time when it isdue and demandable.



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Why Maintain Good PortfolioQuality?

The main source of earning for the MFI is itsloan portfolio

Reaching large number of clients cannot beachieved unless there is good portfolio quality

It is MFIs responsibility to instill credit discipline

among its clients



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Portfolio QUALITY

Section 2: Why Portfolio Quality is important for viable & sustainable

microfinance services

Poor quality of loan portfolio willlead to losses to the institutions,

making it difficult to sustainmicrofinance operations.


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Portfolio Quality indicators

Financial HEALTH

Portfolio at Risk(PAR)

Loan Loss Reserve Ratio




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Portfolio At Risk

Quickest and surefiresignal of increased risk

REFLECTS the proportion of microfinance loan

portfolio with one day missed payment to totalmicrofinance loan outstanding at a given time.



SHOWS the degree of riskiness of the totalmicrofinance portfolio.


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Portfolio At Risk

Since microfinance loans are usually small and arepayable within a short period of time, the likelihood ofdefault of the entire loan balance is high when oneamortization payment is missed.

Principal Balance of Loans with Missed Payment One Day or MoreTotal Principal Loan Balance

STANDARD: 5%STANDARD: 5%STANDARD: 5%STANDARD: 5%




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Portfolio At Risk



STANDARD: 5%STANDARD: 5%STANDARD: 5%STANDARD: 5%

Restructured or refinanced loans shall be considered non-performing and no interest income shall be accrued thereon.These loans shall be included in computing PAR

Restructured loansare loans that have been renegotiated or

modified to either lengthen or postpone the original scheduledinstallment payments or substantially alter the original terms ofthe loan

Refinanced loansare loans that have been disbursed to enablerepayment of prior loans that would not have been paid inaccordance with the original installment schedule. Refinancedloans shall be classified and treated as restructured loans


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Formidable cover against

anticipated risk

INDICATES the degree of protection against

expected losses due to delinquency.




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Total Reserves ProvidedTotal Reserves Required

STANDARD: 100% of the requiredSTANDARD: 100% of the requiredSTANDARD: 100% of the requiredSTANDARD: 100% of the required

An allowance should be provided once the microfinanceloan is considered at risk, since the likelihood of default

increases as amortization payments are missed




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The allowance for probable losses is based on

PAR. Restructured and refinanced loans areconsidered as risky and should be provided theappropriate allowance.




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Before Disbursements

After Disbursements

Balance of poweris with the MFI

Balance of poweris with the Client

Section 3: Some Best Practices


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Essentials for Portfolio Quality Enforce effective compliance to adopted

methodology and procedures Tie-up staff performance to loan portfolio

quality. Develop loan staff sensitivity to tell tale

signs of impending delinquency

Accept the fact that moral hazard workboth waysclients and loan staff



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Be conscious of the clients true intensions,

it is always concealed

Educate clients on the penalty of late

repayment.

Be constantly informed about clients evenafter credit investigation/backgroundinvestigation (CIBI).


Essentials for Portfolio Quality


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Develop an MIS that alerts management

on the status of loan portfolio on a day today basis

At the first instance of delinquency arrest itwithout delay.

Use effective delinquency follow-up

procedures.


Essentials for Portfolio Quality


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The reason why the enlightened rulerThe reason why the enlightened ruler

and the wise general are able toand the wise general are able toconquer the enemy whenever theyconquer the enemy whenever they

lead the army and can achievelead the army and can achievevictories that surpass those of othersvictories that surpass those of others

is because of foreknowledge.is because of foreknowledge.

- - - - Sun Tzu

The Art of War


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Why Measure Portfolio Quality?To know your current levelof performance.

Risk in the portfoliochanges as loans are

disbursed and paymentsare made.

Compare branch

performance in terms ofportfolio quality.

Section 4: Assessing the MFIs current level of Portfolio Quality


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Portfolio Quality indicators

1. Portfolio at Risk

Section 4: Assessing MFIs current Level of Portfolio Quality

2. Loan Loss Reserve Ratio

Total Reserves Provided

Total Reserves Required

Principal Balance of Loans with At Least One Day Missed PaymentTotal Principal Loan Balance


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How good is my MFI in managing our most important

assetthe loan portfolio?

Why measure your Portfolio Quality?

How much of my MFIs outstanding loan is at risk of notbeing paid due to late payments?

How well prepared is my MFI in case of loan losses due tonon-payments of loan?

Have we made enough provision in relation to our MFIsportfolio at risk?

S Q


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1. Portfolio at Risk(PAR)

Provides a picture of the loan portfolio which is at risk of

not being paid.

Why measure PAR?

Measures how much you could lose if all borrowers withlate payments default.

Major risk in your portfolio is not the payments that are pastdue but the outstanding balance of loans with past due.

Establishes the percentage of loan portfolio which is at riskin relation to the total portfolio

A decreasing PAR signals a healthy loan portfolio


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To compute PAR, Age the Loan Portfolio.To compute PAR, Age the Loan Portfolio.

The Age (degree of lateness) of the missed payment is expressed in days

Total Principal Balance

Principal Balance of Loanswith Missed Payment

>91**

Days

61-90

Days

31-60*

Days

1-30

Days

Total

Bal.



*includes loans restructured once

**includes loans restructured twice

The principal balance of loans with missed payment is computedas to number of days late

S ti 4 A i MFI t L l f P tf li Q lit


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Loan Recovery based on No. of days late

0%

20%

40%

60%

80%

100%

30 days 60 days 90 days 120 days 240 days 360 days

DAYS

Probability

ofCollecti

on




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Total Principal Balance

Principal Balance of Loans with

Missed Payment

2005

SCORE- Portfolio at Risk

1. Portfolio at Risk(PAR)

Principal Balance of Loans with At Least One Day Missed Payment

Total Principal Loan Balance


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Why measure Loan Loss Reserve Ratio?

Provides a picture of the level of MFI coverage against

anticipated losses in the loan portfolio due to non-payment.

Determines if the level of provision is enough compared tothe actual risk in the loan outstanding.

Provides a picture of the level of MFI coverage againstanticipated losses in the loan portfolio due to non-payment.

A well covered loan portfolio(100% of the required) is amust.

S ti 4 A i th MFI t l l f P tf li Q lit


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The allowance for probable losses is based on PAR.The allowance for probable losses is based on PAR.



As a general provision, all current microfinance loans shall besubject to a 1% loan loss provisioning. The following shall be thebasis in computing for loan loss reserves:

100%PAR 91 & above and/or loans restructured twice

50%PAR 61 to 90

20%PAR 31 to 60 and/or loans restructured once

2%PAR 1 to 30

1%Current

RequiredReserves



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Total Reserves Provided

Total Reserves Required

SCORE- Loan Loss Reserve Ratio


T O T A L

100%

50%

20%

2%

1%

Required

Reserves

Required

Reserves

Amt.

Principal

BalanceAmt.

PAR 91 & above and/or

loans restructured twice

PAR 61 to 90

PAR 31 to 60 and/or loansrestructured once

PAR 1 to 30

Current

Reserves

ProvidedAmt.

Section 5: Steps and Actions to improve Portfolio Quality


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5%StandardActual Performance

2005

EQUIVALENT POINTS




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What are the factors affecting your currentlevel of PORTFOLIO at RISK?

ENABLINGHINDERING



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ResourcesRequired

TimeFrame

Review system forassessing client repaymentcapacity

Review clientincentive/penalty system

Review delinquent clientfollow-up mechanism

Assess product design(loan amt.)

Review loan approval

process

PersonsResponsible

Review client

screening/selection

ExpectedOutput

ACTIONS





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100% of the requiredStandardActual Performance

2005

EQUIVALENT POINTS




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What are the factors affecting your current levelof LOAN LOSS RESERVE?

ENABLINGHINDERING



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ResourcesRequired

TimeFrame

Adopt PESO loan lossreserve computation basedon PAR

Review client

incentive/penalty system

Review system for Aging ofLoan Portfolio

Adopt effective MIS to trackPAR aging

PersonsResponsible

Review/Develop loan loss

reserve policy

ExpectedOutput

ACTIONS

portfolio quality maintenance

Documents