DELINQUENCY MANAGEMENT

IN MICRO-FINANCE
 DELINQUENCY DEFINED

Example # 1
• A doctor told a couple that they could expect their
child to be born on November 7th, 2001. As
November 7th happened to be the wife’s birthday,
the scheduled date of child birth given by the
DOCTOR was indeed a source of joy for the couple
 DELINQUENCY DEFINED

Example # 1
• The child, however, had its own agenda and plan and
it was born only on November 18th, 2001. The
couple named the baby as “Richard Delinquent”, as
it did not keep up its scheduled date of arrival into
this world
 DELINQUENCY DEFINED

Example # 2
• The Grand Trunk (GT) Express, which connects
the Indian Capital of New Delhi to Chennai is a very
prestigious train. One day in Chennai, the station
master was seen rushing to Platform # 3, where the
GT Express was just about to arrive, five minutes
past nine (its scheduled time).
 DELINQUENCY DEFINED

Example # 2
• The station master was heard remarking, “ The engine
driver should really be congratulated for being on-
time and that is why I have a garland for him”. A
bystander sarcastically replied, “Mr Station Master,
please remember that the GT Express coming in
now is a delinquent train that it is exactly 24 hours
late”
 DELINQUENCY DEFINED

• Delinquency is a condition,
• that arises when an
• activity or situation
• does not occur at its scheduled (or expected) date
• i.e., it occurs later than expected
 DELINQUENCY DEFINED

Let us look at the earlier Examples

• Non-arrival of a train at the scheduled time

• No birth of a baby at the scheduled date (9 Months
and 7 days)
• No loan payments by a client as per the scheduled
date
 DELINQUENCY DEFINED

What is happening here?

• Obligations have not been discharged or

activities have not occurred as per the
scheduled date or time
 DELINQUENCY DEFINED

All of the above have one major aspect in

common

• All activities talk of a scheduled date and without this

scheduled or expected date, it would not be possible to
classify any of these activities as DELINQUENT
• Hence, a major condition for defining delinquency
is the presence of a pre-agreed schedule
 DELINQUENCY DEFINED

All of the above have one major aspect in

common (Cont…)

• Therefore, in micro-finance too, irrespective of the

type of activity (credit, savings, insurance etc), it is
very important that there is a pre-agreed schedule
concerning these activities. Otherwise, it would be
impossible to even identify delinquency
 CREDIT RELATED DELINQUENCY

• The outstanding portfolio or the principal amount of

loan outstanding is the most important and largest asset
for an MFI as it generates Income (Interest and Fees).
• In other words, it is the main product of the business
demanded by clients and it is the reason for an MFI
being in existence.
• Hence, ensuring that this asset is safeguarded (from
delinquency) is very crucial for any micro-finance
institution.
CREDIT RELATED DELINQUENCY

COSTS AND CONSEQUENCES OF

DELINQUENCY

1) Postpones/reduces Interest Income

2) Affects Cash Flow Negatively, Prevents Loan
Disbursement on time and hence, impact outreach
3) De-capitalize the Portfolio (or revolving loan fund)
4) Creates a negative image about the program
CREDIT RELATED DELINQUENCY

COSTS AND CONSEQUENCES OF

DELINQUENCY (Cont…)

4) Lowers morale of staff

5) Creates a bad precedent for other clients who could
join the bandwagon
6) Ultimately, affects program sustainability
DEFINITION OF DELINQUENCY

• Delinquency is a situation that occurs when loan

payments are past due
• Delinquent loans are loans in which any payment is
past due
• Delinquent loans are also called as loans in arrears
• Delinquent payments are also called as payments in
arrears
 DEFINITION OF DELINQUENCY

• In other words, a borrower who does not make the

scheduled repayment on the due date is considered to
be in arrears.
• Even if a part payment has been made, the borrower is
still considered to be in arrears.
• At any one time, if the actual outstanding balance is
greater than the scheduled outstanding balance then the
participant is deemed to be in arrears (or delinquent).
DEFINITION OF DELINQUENCY

• For example, If 10 installments of Rs 100 each were

due as of yesterday and 9 installments of Rs 100
have been paid back as of today (by the borrower),
then, as per today, the loan is delinquent loan which
has one installment that has not been paid back.
 DEFINITION OF DELINQUENCY

• Similarly, if an installment is due on the 5th of May,

1999 and if it is not paid on that date (by the
borrower), then on the 6th of May, the loan should be
classified as a past due loan.
 DEFINITION OF DELINQUENCY

DEFAULT

• Likewise, a clear definition of default is also required.

• In best practices parlance, a borrower who has not
made three consecutive payments is considered as a
defaulting borrower.
• Even, if the participant is making interest payments but
3 principle repayments remain overdue (either partially
or fully), then the loan is still classified as a default
loan.
DEFINITION OF DELINQUENCY

DEFAULT (Cont…)

• ANOTHER DEFINITION OF DEFAULT IS AS

FOLLOWS - A SITUATION THAT ARISES
WHEN THE BORROWER WILL NOT MAKE
HIS/HER PAYMENT AND THE MFI NO
LONGER EXPECTS TO RECEIVE THIS
PAYMENT.
MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

Delinquency can be measured by using two

generic measures

1. Portfolio based measures and

2. Repayment based measures
MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

Portfolio based measures

• There are two basic formulas that are used to

quantify delinquency:

Unpaid Principal Balance of Loans

Portfolio at
with Payments Past Due
risk (PAR) =
Outstanding Portfolio
 MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

Portfolio based measures (Cont…)

• PAR attempts to measure the default risk in a

portfolio by using past as well as future data.
• Its estimation is based on the key question that, if all
delinquent borrowers are to completely default, then
how much do we stand to loose?
MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

Portfolio based measures (Cont…)

• From this perspective, Portfolio at Risk (PAR)

provides a pessimistic estimate of the default risk
in a portfolio.

Portfolio in Arrears Amount Past Due

= Outstanding Portfolio
 MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

Portfolio based measures (Cont…)

• This is also called as arrears rate or amount past due

formula.
• It estimates default risk in a portfolio by taking into
account the actual past dues in a portfolio
• In many ways, Portfolio in Arrears is an optimistic
estimate of the default risk – Its limitation stems from
the fact that it assumes that the world of tomorrow
will be the same as today
MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

Differences between PAR and Arrears Rate

• The key differences between the two portfolio
quality measures given below
Differences between PAR and Arrears Rate
S No Portfolio at Risk
1 Provides a measure of the default risk
based on the Future (Outstanding of all
borrowers with over dues)
2 Tells us how much money (or % of
outstanding portfolio) will the MFI lose,
if each and every borrower were to
default in the future
Arrears Rate
Provides a measure of the default risk based
on the past (just over dues of delinquent
borrowers)
Tells us just how much money (or % of
outstanding portfolio) will the MFI lose, if
the current over dues are not settled