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 due Also 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 1 Install ment 1 -> MONTH 2 Install ment 2 -> MONTH 3 Install ment 3 -> MONTH 4 Install ment 4 -> MONTH 5 Install ment 5 -> MONTH 6 Install ment 6 -> MONTH 7 Install ment 7 -> MONTH 8 Install ment 8 -> MONTH 9 Install ment 9 -> MONTH 10 Install ment 10 -> Repayment MadeRepayment Past At risk of non repayment Due On-Time RepaymentIn 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 Delinquency Delinquency 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 93,200,69620% 15,366,549 26,410, ,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 Delinquency Big problem Medium 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: 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 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: Answers Number 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 Due Gross 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 Members Today Past PaymentsFuture Payments Member AXXX Member BXO Member CXOO Member DXX Key: X = paymentFour members in the loan book O = delinquent installmentEach 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 ARREARS A1: 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 payments b. 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 South Portfolio$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 Discussion Borrowers 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 Discussion Borrowers 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 Delinquency Big problem Medium 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 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