DELINQUENCY DEFINED Example # 1 • A doctor told a couple that they could expect their child to be born on November 7th, 2001. As November 7thhappened 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
CREDIT RELATED DELINQUENCY COSTS AND CONSEQUENCES OF DELINQUENCY (Cont…)
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 • Portfolio based measures and • Repayment based measures Delinquency can be measured by using two generic measures
MEASURING DELINQUENCY – KEY BEST PRACTICES INDICATORS Portfolio based measures • There are two basic formulas that are used to quantify delinquency:
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.
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
Differences between PAR and Arrears Rate S No Portfolio at Risk Arrears Rate 1 Provides a measure of the default risk based on the Future (Outstanding of all borrowers with over dues) Provides a measure of the default risk based on the past (just over dues of delinquent borrowers) 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 Tells us just how much money (or % of outstanding portfolio) will the MFI lose, if the current over dues are not settled MEASURING DELINQUENCY – KEY BEST PRACTICES INDICATORS Differences between PAR and Arrears Rate • The key differences between the two portfolio quality measures given below