Controlling Delinquency
This article is available on pages 94-95 in this compilation document.
Looks at the failure to control loan delinquency, which often leads to default and is probably the largest single downfall of institutions that provide credit to microenterprise entrepreneursRecommends that in order to ensure success, the risk of delinquency and default must be continually addressed. Three measures for the quality or amount of risk of loan portfolios are widely used:
- Default rate: measures the amount the institution has declared non recoverable as a percentage of the portfolio (also referred to as loan loss rate);
- Repayment rate: measures the amount of payments received with respect to the amount due;
- Delinquency rate: measures the percentage of a loan portfolio at risk.
Argues that delinquency affects a program in both measurable and unmeasurable ways:
- Postphoned or lost income;
- Slower portfolio rotation, which lowers asset productivity;
- Lower staff morale;
- Higher costs of fighting delinquency;
- Diminished program image;
- Higher likelihood of default;
- Increased cost of loan loss reserve.
There are three critical areas that can prove to be crucial in preventing delinquency rather than curing it:
- Changing the image and philosophy;
- Methodology;
- Information systems.
Concludes that the examination of delinquency should lead to the identification of recurring delinquency trends:
- If certain activities are more delinquent than others, loan sizes and terms may be wrong for these activities;
- High delinquency rate for a certain loan officer suggests poor performance, insufficient training, or possibly fraud;
- If loans made during a specific month are more delinquent (for example, before a major holiday), the institution may consider not making loans in that month;
- New loans are not a solution to a delinquency crisis, but loans to borrowers who pay on time can continue.
Further notes rescheduling and refinancing should never be considered a cure for delinquency or a primary tool for controlling it. Rescheduling and refinancing serve only as a short-term solution and may not reduce the risk of the portfolio. In fact, they may encourage delinquency because both reward the borrower for falling behind. These methods should be used only as a last resort in justified cases when well-meaning borrowers cannot pay.
