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

Performance Standards - Concept, Definitions, Calculation and Methodological Issues5.1.1.8 Loan Re-Scheduling and Re-FinancingMFI should have a clear policy on re-scheduling and re-financing, as they have the potential to decapitalise theRLF portfolio at all levels. They could also result in the ‘multiplier effect’ whereby, after re-scheduling and refinancingof some (clients’) loans, other clients also feel that they could get their loans re-scheduled/re-financed{also see section 4.3 (13), (14) and (15) in chapter 4}.In the discussion, re-scheduling stands for revision in repayment terms at a time after the terms were originallyset at time of sanction. Re-financing stands for sanctioning another loan while earlier loan is still outstanding,with inherent understanding that apportion /full amount of the second loan would be applied in full adjustmentof the earlier loan.Therefore, unless, the situation mandates, rescheduling and refinancing are better avoided as1. If they are used to reduce delinquency, they can spell disaster for the portfolio2. They make a risky portfolio appear less risky3. Can result in causing clients to develop a mind set that in the event of not making loan repayments, theirloans will also be automatically rescheduled/re-financedOnly in cases where natural factors such as earthquakes, fires, cyclones, floods, drought wreak havoc on economiesand the activities of micro-entrepreneurs, can rescheduling and/or re-financing be thought of as alternatives.Please refer Box below for impact of Rescheduling, Refinancing and Write-off on loan loss reserve. Thekey point to note here is that apart from camouflaging the level of risk in a portfolio, such actions also reducethe loan loss provisions and reserves. This particularly, is not good, as the level of risk still remains the same.The following calculations (please refer to various scenarios in section 5.1.1.7) illustrate the impact of rescheduling,re-financing and write-off on loan portfolio qualityScenario Loan Loss % change from CommentsBase Case Reserve Rate in %Base Case 12.72 Not Applicable Correct RepresentationRe-Scheduled Option 5.87 50% Decrease Further Reduction in Loan LossReserve (LLR)Write-Off Option 6.31 54 % Decrease Significant Reduction in LLR(by 50%)Re-Scheduled and 5.24 59 % Decrease Further Reduction in LLRRe-Financed Option83