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Provisioning for Loans

The Central Bank of Nigeria (CBN) in its Revised Regularoty and Supervisory Guidelines for MFBs requires each Micro-finance bank (MFB) to review its loans and advances and other investment at least once every thirty days and make appropriate provision for loan losses or assets. MFB’s are in addition to the above listed, at the end of every quater make provision for loan losses. Schedule of such loan or investment with the appropriate provision for loss made must be sent to the CBN every month. Most microfinance staff does not know this and as such feel reserved about the regulatory body’s regulations

 

Culled From Revised Regulatory and Supervisory Guidelines For Microfinance Banks (MFBs) in Nigeria

Days at Risk

(Days of Missed Payment)`

Description Provisioning Requirement (%)
0 Performing 1%
1 – 30 Pass and Watch 5%
31 – 60 Substandard 20%
61 – 90 Doubtful 50%
91 – Above Lost 100%

Figure 8: Weighted Asset Classification (WAC)

 

The weighted asset classification in the table above involves the whole of an MFBs portfolio which items include; loans, investment and off balance sheet (BS) items.

 

The CBN prudential guidelines classify credits into performing and non-performing categories irrespective of whether or not the payment of principal and interest are up to date in line with the agreed terms and conditions.

 

Performing Loans:  For every loan that is given out by an MFB, a general provision of 1% is made. Having in mind that even the best of any credit can go bad at any time, the provisioning is to make up for the possibility of the loan going bad. Under description in the weighted asset classification, it is recognized as performing as it is not yet past its payment date.

 

Non-Performing Loans:  These are categorized into four categories namely;

  • Pass and Watch: Loans that are due between 1-30 days fall under this category. 5% provisioning is made on it’s non-recovery within the period. At this stage it is wise for the management of the MFI to investigate the cause of the default and seek possible ways of recovering the outstanding loan.
  • Substandard: Loans under this categories shows that there is a major problem with the loan. Usually fall within 31-60 days with 20% provisioning made for its outstanding.
  • Doubtful: At this stage the recovery is highly questionable and seems The loan fall between 61-90 days with 50% provisioning made. Management of MFB should at this point decide on what the future of this type of loan should be.
  • Loss: when a loan is 91 days and above such loan is considered irrecoverable, noncollectable and should be considered gone. Provisioning for such loan is a 100% of the total value outstanding.

 

Management of most MFBs do not want to face reality. Even we as humans know for fact that when we lend personal money to friends or relations, not all of them repay us at the required time, that is if any of them actually pay us at all. The same instance should be used to analyze how a typical loan from any MFI may end up in the hands of clients. Delinquent loan can be managed but can only be for a certain period. When it becomes totally bad the management should then inquire why such frequent bad loans keep eroding the income of the institution.

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