It is crucial for microfinance practitioners to understand the loan loss provisioning concept as regards to loan portfolio reports. If some loans are not paid by clients, it affects some of the gross loan portfolio causing it to be at risk. We cannot envisage the outcome of the loans that have not yet been paid; the best thing to do is to arrange for a loan loss provision so as to prepare for the possibility of the loan going bad. Loan loss provisioning can also be called reserve or impairment loss allowance which when deducted from the gross loan portfolio gives us the net loan portfolio. Loan write-off for some MFB is usually an annual exercise and provisioning done once cannot be expensed for again until such provisioning has been fully removed from the books of the MFB. The good thing is that once provision has been made on a loan, they are not totally forgotten. Since they are only taken out of the gross loan portfolio of the MFB, it can still be recovered and when it is recovered it comes in as income.
Facts of Loan Loss Provisioning
- Loan loss provisioning is a non-cash expense treated as direct expenses
- Provisioning is expensed periodically to the loan loss reserve to cover expected default that may arise in the loan portfolio.
- Accounting entries are made when increasing or decreasing provision for loan loss.
- In some cases MFI combine loan loss provisioning with their operating cost, while some separate them for clarity.
- It shows the true position of the MFBs financial status though reduces the capital status.