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Portfolio aging is a useful tool use by MFIs to determine if the introduced risk management strategies are effective or not. It also helps provide allowances for potential losses based on the number of days such loan has been in arrears and payment missed.

Portfolio aging is usually regulated by legal banking standards of different countries, with each country having its own incremental range and multiplying the category of portfolio at risk by the prescribed percentage. Summation of the whole categories takes us to the actual provision to be made for the period in question.

 

Sample: Summary Loan Portfolio and aging Report

Portfolio Data 2015 2014
Total Value of Loan Disbursed 31st Dec 209,000,000 220,000,000
Total Number of Loan Disbursed 31st Dec 402,000 450,000
Gross loan portfolio on 31st Dec 153,000,000 164,000,000
Active Borrowers 31st Dec 307,225 372,250
Active Male Borrower on 31st Dec 127,542 125,441
Active Female Borrower on 31st Dec 179,683 246809
New Borrower during the year 65 42
Non-Performing Loan (PAR) on 31 Dec 11,229,417 4,798,297
No of Active Borrowers in Arrear 31st Dec 125 104
Bad Debt Write-off during the year 121,487
Number of Loan Officers 31st Dec 852 1,121
Average Loan term (Monthly) 12 12
Aged arrears analysis
S/n Classification (A) Number of Loans in Arrears (B) Outstanding Loan Balance (Gross Loan) (C) Provisioning Requirement (%) (D) Allowance for Loan Losses (Value)
1 0 Days 0 109,500,000 0 0
2 Loan due for the day 10 12,700,000 1 127,000
3 1 – 30 Days Past due 5 11,250,000 5 562,500
4 31 – 60 Days Past due 35 2,340,000 20 468,000
5 61 – 90 Days Past due 25 14,850,000 50 7,425,000
6 91 – Above 50 2,360,000 100 2,360,000
7 Total 125 153,000,000   10,942,500

 

Analysis for the table above shows;

The MFB in year 2015 gave out a total loan of 209, 000,000. The outstanding loan balance is 153,000,000 with number of active borrowers to be 125. The total value for loan losses allowance amounts to 10,942,500. This provisioning goes into the appropriate books of account which is further discuss in bullet four of preparing for write-offs

 

Note

Re-scheduled loans that have expired need no extra provisioning if they had earlier been made. This usually fall within loan that is above certain number of days.

 

Microfinance bank managers need to know how much of their portfolios  are delinquent and for how long such loans have been in such status. When a loan is in arrears/overdue for a long time, the risk of recovering such loan becomes slim and at the same time having no hope for future payments. Non-payment of these loans gives birth to what is known as portfolio at risk (PAR).

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