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

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Tracking Financial Performance Standards of Microfinance InstitutionsExample of Incorrect Aging andImplications for using PAR as a StandardConsider the following exampleF The loan term finishes on January 31, 2002F The amount overdue is 400 (part of which is overdue since December 2001)F The amount per monthly installment is 200F As per the installment method of calculation of age:Age =Overdue AmountInstallment AmountF The age as on January 31, 2002 is= 400 Divided by 200 = 2.0 MonthsThis is correct.F Now, assume that we are in end May 2002. The age as per the installment aging formula is still 2months (assuming that the client has not paid back any further amounts), which is not correctF But the actual age is 2 months till January + February + March + April + May = 6 monthsF Now, assume that PAR > 60 Days or PAR > 90 Days is used as a standard.F Thus, if the aging done by the MFI is based on the installment (incorrect) method, such loans,which are actually 6 months past due WILL never come into the fold of PAR > 60 Days or PAR> 90 Days. And if there are a large number of such loans, because of the erroneous method ofaging, the reported PAR values will also portray an incorrect picture and hence, the standard ofusing PAR based on age would also become ineffective.F In fact, after a loan is passed its scheduled loan term, if this incorrect method of aging is used, PARby Age will always be under reported. Consider that there are several loans that are actually morethan 180 days past due. While individually they may constitute a small percentage and contributeaccordingly to PAR, cumulatively, if a large number of such loans exist, their impact on PARwould become significant. And this becomes even more serious when their age is distorted andPAR by age is used as a standard. This aspect is highlighted sequentially.78
Performance Standards - Concept, Definitions, Calculation and Methodological Issues5.1.1.6 Adjusting the Portfolio at Risk MeasureAs noted earlier, PAR has a serious limitation in that it is affected by sudden and large increases in outstandingportfolio and/or decreases in the unpaid principal balance, which can be caused in any of the followingways:• Disbursement of loans (increases outstanding portfolio but will not have an impact on the unpaidprincipal balance of past due loans, especially, if the repayment schedule has not begun)• Rescheduling of past due loans (reduces the unpaid principal balance of past due loans by makingthem current; there is no impact on outstanding portfolio)• Re-financing of past due loans (reduces the unpaid principal balance of past due loans by makingthem current and also increases the outstanding portfolio)• Loan write-offs (reduces the unpaid principal balance of past due loans and also reduces the outstandingportfolio)When the outstanding portfolio increases, then the ratio appears lower and so does the risk. Likewise, whenthe unpaid principal balance of past due loans decreases, the ratio becomes smaller and the risk appears less.But actually, the risk is still high.Thus, one has to look at alternative ways of measuring PAR, to adjust for re-scheduling/re-financing /writeoffsand also recent loan disbursements, to get the true picture of default risk in the portfolioPAR (without adjustments for rescheduling) + Rescheduling Ratio = PAR (Adjusted for rescheduling). Thisis given in box belowPortfolio at risk (PAR) = Unpaid Principal Balance of Loans with Payments Past Due +(Adjusted for Rescheduling) Unpaid Principal Balance of re-scheduled loans (when Rescheduled)Outstanding PortfolioLikewise, one can adjust the PAR for re-scheduling and re-financingPortfolio at risk (PAR) = Unpaid Principal Balance of Loans with Payments Past Due +(Adjusted for Rescheduling Unpaid principal balance of re-scheduled and re-financed loansand Re-financing)Outstanding PortfolioSimilarly, one can adjust the PAR for new loan disbursements for which repayment is yet to beginPortfolio at risk (PAR) =(Adjusted for recentdisbursements)Unpaid Principal Balance of Loans with Payments Past DueOutstanding for Loans for which the repayment is yet to begin)Finally, one can also adjust for write-offs, especially, if they have been huge.Portfolio at risk (PAR) = Unpaid Principal Balance of Loans with Payments Past Due +(Adjusted for Write-Offs) Write-Off AmountsOutstanding Portfolio + Write-Off AmountsThe impact of sudden and large increases in outstanding portfolio and/or decreases in the unpaid principalbalance, on PAR is illustrated ahead with examples.79
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TECHNICAL TOOL SERIES 1TRACKING FIN
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INTRODUCTION TOMICROFINANCE STANDAR
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5. PERFORMANCE STANDARDS - CONCEPT,
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ACKNOWLEDGMENTSThe need of the oper
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Tracking Financial Performance Stan
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TermStatement of Profit and LossStr
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REFERENCESBarrel, Margaret, Michael
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