Tracking Financial Performance Standards of ... - Sa-Dhan

Constructing Loan Repayment Schedule Aging Schedule and Loan Portfolio Report for an MFIThe Provision Rate = Column V Total = 14,350 x 100 = 10.789 % = 11% (approx.)Column II Total 133,000Let us assume that this is provision rate for the most recent years and also consider that the provision rates forthe previous two years (before this year) are 10 percent and 11 percent respectively. Now, using the data ofthree consecutive years, average provision rate could be calculated that can be applied for the next year (forprojection or otherwise)Average Provision Rate = 11% + 10% + 9% = 30% = 10%.3 (years) 3In other words, a reference provision rate is now available based on a historical analysis of the data over a threeyearperiod. While one may want to question, the appropriate number of years to choose for calculating theprovision rate, it must be clarified that there is really no concrete scientific guideline. However, one may arguethat the last 3 years (being most representative of the current situation) are perhaps best used in calculating theaverage.The provision rate increases as loans have been overdue for a longer period – the farther a loan is from theoriginally scheduled repayment, the likelihood or probability of the loan being repaid (or recovered) is lower.Therefore, as the age of the loan, in terms of its overdue status increases, the provision rate (or risk factor) alsoincreases. Obviously, such a risk is minimal in loans that are regular – i.e., they have no overdue. Therefore, theprovision rate is listed as 0 percent. However, MFIs following more prudent norms also make provision forregular loans (in the range of 1% - 3%).While the above are intuitively appealing arguments, several key aspects need to be considered while establishingthe provision rate on historical data:a) Take for the example an MFI, where during a particular season (monsoons or otherwise), repayments maynot come in for 3 months or so – this is true of weaving and fishing (where clients go to sea). Under suchcircumstances, < 90 days overdue loans would not be at great risk because of the seasonality aspect. Clientsnormally repay the entire amount when they get back to work, often over 2/3 installments, as both examplesgiven above are high value (low volume) trades.b) Likewise, for crop loans, the same is true as crops are harvested after 90 days or so (many a time) and theargument that repayment will occur from the household income or other livelihoods has often not happened.In such cases, the very nature of livelihoods sometimes causes over dues in payment but the riskmay not be high after all. Therefore, it seems prudent to tailor the risk rates to the context and change it,if there is enough justification.c) If there is insurance for calamities and other aspects, the provision (risk) rate again could be lowered butthis must be justified.4.2.3 Accounting Entries for Loan Loss Provision, Loan Loss Reserve and Write-offsIn the previous section, we learnt to calculate Loan Loss Provision, now the next step would be to makeappropriate accounting entries for the provision In this section, we will try to learn the relevant accountingtreatment of loan loss provision and its bearing on loan loss reserve.Before we move to accounting entries, let’s take a quick re-look at the key concepts related to loan loss provisionand reserve and write-off.61