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

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