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Session 1: Delinquency
W E L O O K A T T H I N G S D I F F E R E N T L Y
Session 1:
Delinquency Causes and Costs
W E L O O K A T T H I N G S D I F F E R E N T L Y
Session 1:
Delinquency Causes and Costs
W E L O O K A T T H I N G S D I F F E R E N T L Y
Flipchart
Flipchart: Open Floor: What is the CUs most important earning asset?
Its loan portfolio
Flipchart: Open floor: What is delinquency?
The situation that occurs when loan payments are past dueAlso referred to as arrears or late payments; measures the percentage of a loan portfolio-at-risk.
W E L O O K A T T H I N G S D I F F E R E N T L Y
Delinquency: Quantifying Repayment Problems
In Arrears and Portfolio at Risk (PAR)
MONTH 1Installment 1 ->
MONTH 2 Installment 2 ->
MONTH 3 Installment 3 ->
MONTH 4 Installment 4 ->
MONTH 5 Installment 5 ->
MONTH 6 Installment 6 ->
MONTH 7 Installment 7 ->
MONTH 8 Installment 8 ->
MONTH 9 Installment 9 ->
MONTH 10 Installment 10 ->
Repayment Made Repayment Past At risk of non repayment Due
On-Time Repayment In Arrears A1
Portfolio At Risk: PAR
W E L O O K A T T H I N G S D I F F E R E N T L Y
Situation in Belize Regarding DelinquencyDelinquency Statistics as of June 30, 2014
BCUL Affiliated
Delinquency Status
Loan Outstanding
Over 3 months and
under 12 months in
arrears
Over 12 months in
arrears Total
Delinquent Del. % Pledged Shares Mortgage Exposure Loan Loss Provision
TOTAL 467,645,707 53,697,457 39,503,240 93,200,696 20% 15,366,549 26,410,495 349,327,754 37,037,669
W E L O O K A T T H I N G S D I F F E R E N T L Y
Flipchart What are the costs of delinquency?
(check that the following have been covered)
• Postpones interest income,• Slower portfolio rotation, lowers productivity of assets • Can spread quickly• Costs far more to fight delinquency; prevention is cheaper• Raises Loan loss reserve• Reduces cash flow an• Affects image• Lowers morale• Increases likelihood of default• Provision for loan impairment (funds set aside for bad debts) • increases expenses and so reduces surplus.• Interest income from the loan is never received.• The CU loses a non-recoverable portion of an outstanding loan.• Written-off loans result in decapitalization
W E L O O K A T T H I N G S D I F F E R E N T L Y
How Much is delinquency costing us?
• Movement Loan Book is approx. 470M• Delinquency is approx. 20% (93M)• At just 1% per month this equates to $930,000 lost income per
month• How many new loans would it take to recoup this loss?
• If Delinquency is High the Loan portfolio Quality is Low• If Delinquency is Low the Loan Portfolio quality is High
W E L O O K A T T H I N G S D I F F E R E N T L Y
Group Exercise: Rating of Causes of DelinquencyBig
problemMedium problem
Small problem
No problem
Why? Insert comment: Proposed Action
Loan disbursement policy
Approval procedures & adequate documentation of same
Documentation procedures for loan disbursal
Loan assessment criteria
Disbursement within policy criteria
Collateral mechanisms
Collateral enforcement
Culture of late repayments / rolling over of loans / rescheduling
Payoff of loans by drawing on collateral
Follow up procedures for late repayers
W E L O O K A T T H I N G S D I F F E R E N T L Y
Mismatching Maturities: Getting the Product Wrong
• Irish Financial Crisis arguably caused by borrowing short term to Lend Long-Term
• Be Aware each product has a value over a time span
• Lending for an Asset over an inappropriately long term is Dangerous
W E L O O K A T T H I N G S D I F F E R E N T L Y
Calculating the Costs of Default: ExampleLoan Details Quantity Amount ProjectedInitial loan amount $75,000Interest (15% flat) 11,250
$86,250Loan term, weeks 25Weekly repayment of principal 3,000Weekly repayment of interest 450Total weekly repayment 3,450Payments received 15 51,750Payments lost 10 34,500
Lost interest income 4,500Lost principal 30,000Total lost income and principal 34,500
Expected revenue ($75,000 loan for 25 weeks) 11,250Administration costs per loan $7,500Net expected revenue per loan 3,750Revenue earned by week 15 on this loan 6,750Shortfall of costs to cover administration of this loan -750
W E L O O K A T T H I N G S D I F F E R E N T L Y
Calculating the Cost of Default: Formulas
Number of Loans Required to Earn Lost Principle taking into account cost of administrating loan
= Lost principle Net revenue Per Loan
Number of loans required to earn lost principle (plus interest) taking costs per loan into account
= Lost principle (plus interest)Net revenue per loan
Calculate for the above example
W E L O O K A T T H I N G S D I F F E R E N T L Y
Calculating the Costs of Default: AnswersNumber of loans Required to Earn Lost Principle(taking into account variable costs of disbursing and managing and disbursing loans)
Per $75,000 loan:$30,000/$3,750 = 8 loans of $75,000
Number of Loans Required to Earn Lost Interest and Principle (taking into account variable costs of disbursing and managing and disbursing loans)
Lost interest and principle / net revenue per loan:
Per $75,000 loan: $34,500/$3,750 = 9 loans of $75,000
W E L O O K A T T H I N G S D I F F E R E N T L Y
Why write off loans in default?MATCH THE FIRST HALF OF THESE STATEMENTS WITH…
A. The loan is worth nothing
B. Refusing to write off bad debts
C. Writing off is a positive exercise
D. The ratios that are positively affected by writing of bad debts
E. Your liabilities are
F. Even if a loan is written off in the accounts
…THE OTHER HALF
1. it should still be pursued and incorporated as income if it is paid off
2. relate in particular to asset quality, e.g. A1
3. if it is not performing for a long time
4. under-estimated by not writing off bad debts
5. provides a false picture of your accounts
6. of being prudent, proactive and provides a true picture
Session 2: Measuring & Managing
Delinquency
W E L O O K A T T H I N G S D I F F E R E N T L Y
Session 2:
Delinquency Measurement & Management
W E L O O K A T T H I N G S D I F F E R E N T L Y
Session 2:
Delinquency Measurement & Management
W E L O O K A T T H I N G S D I F F E R E N T L Y
Standard Ratios: A1 & PAR
Arrears Rate (Past Due also knows as A1) = Amount Past DueGross Loan Portfolio Outstanding
Portfolio at Risk (known as PAR) = Unpaid Principle Balance
of all loans with late payment plus re-negotiated loans Gross Loan Portfolio Outstanding
W E L O O K A T T H I N G S D I F F E R E N T L Y
Sample Loan Book of Four MembersToday
Past Payments Future Payments
Member A X X X
Member B X O
Member C X O O
Member D X X
Key:X = payment Four members in the loan bookO = delinquent installment Each box represents $10
W E L O O K A T T H I N G S D I F F E R E N T L Y
A1. GROSS LOANS IN ARREARSA1: GROSS LOANS IN ARREARS 10 WEEKS+/ TOTAL LOANS Purpose: To measure arrears in the loan portfolio.
The standard definition for loan arrears are loans in arrears for 10 weeks or more.
Accounts: a. Gross loans in arrears 10 weeks or more b. Total Gross Loans
Formula: (a÷b)*100
Goal: Less than <5% (PEARLS)
W E L O O K A T T H I N G S D I F F E R E N T L Y
Portfolio at Risk: PAR
PAR: UNPAID PRINCIPLE BALANCE OF ALL LOANS WITH LATE PAYMENTS OVER X DAYS / TOTAL LOANS OUTSTANDING Purpose: To measure the loan portfolio that is at risk of non-repayment
Accounts: a. Unpaid principle balance of all loans with late paymentsb. Total Loans Outstanding
Formula: (a÷b)*100 Goal: Less than <10%
W E L O O K A T T H I N G S D I F F E R E N T L Y
Work out Arrears (A1) & Portfolio at Risk (PAR)
Carry out the following exercise in groups of 2
CU North CU SouthPortfolio $100,000 $150,000
Amount Past Due $10,000 $15,000
Portfolio in Arrears? ________ ________
Balance of Loans Past Due $ 25,000 $ 25,000
Portfolio at Risk ________ _________
W E L O O K A T T H I N G S D I F F E R E N T L Y
Answers: A1 & PAR
Portfolio in Arrears
Payments in Arrears 7,000 = 8.3%Value of Loans Outstanding 84,000
Portfolio at Risk Balance of Loans in Arrears 18,000 = 21.4%Value of Loans Outstanding 84,000
W E L O O K A T T H I N G S D I F F E R E N T L Y
Open Floor DiscussionBorrowers Perceptions of Costs
On-Time Payments
What do you think these are?
Late or No Payments
What do you think these are?
W E L O O K A T T H I N G S D I F F E R E N T L Y
Open Floor DiscussionBorrowers Perceptions of Benefits
On-Time Payments
What do you think these are?
Late or No Payments
What do you think these are?
W E L O O K A T T H I N G S D I F F E R E N T L Y
Open Floor Discussion
What is the link between measuring and managing delinquency?
What are the specific data needs?
How should these be used to control delinquency?
What changes need to happen to bring the data requirements up to the appropriate standard?
W E L O O K A T T H I N G S D I F F E R E N T L Y
Handout: Group Exercise: Mitigating DelinquencyBig
problemMedium problem
Small problem
No problem
Why? Insert comment: Proposed Action
Loan disbursement policyApproval procedures & adequate documentation of same
Documentation procedures for loan disbursal
Loan assessment criteria
Disbursement within policy criteria
Collateral mechanisms
Collateral enforcement
Culture of late repayments / rolling over of loans / rescheduling
Payoff of loans by drawing on collateral
Follow up procedures for late repayers
W E L O O K A T T H I N G S D I F F E R E N T L Y
Delinquency Prevention CU’s Image and Philosophy
Methodology• Borrower Selection • Loan size and term • Incentives
Information Systems• Reliable, accurate and timely data• Relevant detail for level of use (Board, management, staff)• Relevant and timely dissemination • Cost effective
W E L O O K A T T H I N G S D I F F E R E N T L Y
How are these issues related?
Stabilisation
Provisioning
Delinquency
