DQ5-O1 Financial Shields to Delinquency

DQ5-O2 Financial Shields Loan Loss Reserve –represents the amount of the outstanding principal that is not expected to be recovered –recorded as a negative asset on the balance sheet –could also be recorded as liability Loan Loss Provision –amount expensed on the income statement as a result of establishing the loan loss reserve –increases the loan loss reserve Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

DQ5-O3 Financial Shields Loan Losses or Write-Offs –occurs as an accounting entry –amount deducted from the loan loss reserve when a delinquent account is removed from the outstanding portfolio –loan recovery should still be PURSUED –decreases the outstanding portfolio and loan loss reserve, not the net outstanding portfolio Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

DQ5-O4 How often should writing off be practiced?

DQ5-O5 Which MFI is Better? MFI AMFI B Loan Portfolio100,000,000 Loan Loss Reserve(10,000,000)(1,000,000) Net Loan Portfolio90,000,00099,000,000 Amount Written Off09,000,000

DQ5-O6 BSP Circular 409 # Days MissedLoan Loss Provision Current1% PAR 1-302% PAR and/or Restructured Once 20% PAR % PAR >90 and or Restructured > Once 100%

DQ5-O7 Loan Loss Provision - Bolivia # Days MissedLoan Loss Provision Current up to 5 days late1% PAR 6-305% PAR % PAR % PAR >90100% Measuring Microcredit Delinquency: Ratios Can Be harmful to Your Health, June 1999

DQ5-O8 Loan Loss Provision - CGAP # Days MissedLoan Loss Provision Current1% PAR 1-30 or Renegotiated current-30 days late 25% PAR % PAR >90 or Renegotiated > 30 days late 100% Disclosure Guidelines for Financial Reporting by Microfinance Institutions, CGAP, January 2001

DQ5-O9 Mini Case 1: Conservative MFI Missed PaymentsPortfolio Amount LLP RateLLP Expense Current5M1%50K PAR M2%50K PAR and/or Restructured Once 1M20%200K PAR K50%250K PAR >90 and or Restructured > Once 1M100%1M Total10M1,550K

DQ5-O10 Mini Case 1: Conservative MFI Net Income1,000,000 Loan Loss Provision Expense(1,550,000) New (Adjusted) Net Income(550,000)

DQ5-O11 Loan Loss Provision One-Time Loan Loss Provision –May cause loss of investor confidence –May cause bad image of the organization –Shows the real picture of the portfolio Amortized Loan Loss Provision –Unnecessarily distribute dividends to stockholders –May preserve image of the organization –Shown as Non-Performing Asset in the Balance Sheet –Still reflects the true picture Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

DQ5-O12 Loan Loss Provision An MFI should diligently account or adjust for loan loss reserve as it happens Accounting Entry (Debit) LLProvision 1550K(Exp.) (Credit) LLReserve1550K(B.S.) Participant Course Materials, Delinquency Management and Control and Interest rate Calculation and Setting, Consultative Group to Assist the Poor

DQ5-O13 Loan Loss Provision Balance Sheet Before Provision Outstanding Loans: 10,000,000 Balance Sheet After Provision Outstanding Loans:10,000,000 (Loan Loss Res.)(1,550,000) Net Loans Outs. 8,450,000

DQ5-O14 Mini Case 2: Conservative MFI Step 1. Determine the New Loan Loss Reserve Loan Loss Reserve1,550,000 Write Off1,000,000 New Loan Loss Reserve550,000

DQ5-O15 Mini Case 2: Conservative MFI Step 2. Determine the New Outstanding Balance Outstanding Balance10,000,000 Write Off1,000,000 New Outstanding Balance9,000,000

DQ5-O16 Mini Case 2: Conservative MFI Step 3. Compare the Balance Sheet Before and After Write Off Balance Sheet Before Write OffBalance Sheet After Write Off Outs. Portfolio10,000,000Outs. Portfolio9,000,000 Loan Loss Reserve (1,550,000)Loan Loss Reserve (550,000) Net Outs. Portfolio 8,450,000Net Outs. Portfolio 8,450,000