Effective Supervision: Loan Portfolio Analysis MICROFINANCE MANAGEMENT DEVELOPMENT WORKSHOP.

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  • Effective Supervision:Loan Portfolio AnalysisMICROFINANCE MANAGEMENT DEVELOPMENT WORKSHOP

  • Session ObjectivesBy the end of the session, the trainees are expected to:Read and analyze the portfolio-at-risk aging report Use portfolio analysis as a tool for middle managers to better monitor and manage the microfinance clientsApply skills in loan portfolio management

  • Rationale Loan portfolio is the largest income-generating asset of the bank

    Loan portfolio has inherent risks that should be minimized

    It requires attention!

    .. Through regular portfolio analysis

  • Why do portfolio analysis?It is key to identifying, controlling and managing PARIt helps in planning the work of supervisors and BMs with every AO It helps in planning the work of the product manager with Branches

  • MIS: Essential Element in Portfolio AnalysisA good MIS should be able to provide portfolio performance information on a daily basis.All portfolio information must be broken down by branch and AO. Reports must be updated, simple, easy to access, accurate and reliable.Portfolio performance reports must be easily accessible to all AOs, supervisors and BMs.

  • MABS Recommended Essential Reports

    Loan Portfolio Data & QualityRevenue, Growth & PerformanceQuality, based on client, business & characteristics Listing of Loans Collection Due Report Delinquency Report Portfolio at Risk Report Client Status Report Interest collected by MFU Performance Report by AO Microfinance Monthly Report PAR, by aging & business activity PAR, by loans disbursed & business activity Loans profile by Gender

  • MIS Reports WeeklyPerformance Report By AODelinquency ReportPortfolio-At-Risk Aging ReportMonthlyPerformance Report By AODelinquency ReportPortfolio-At-Risk Aging ReportMonthly MF Performance Report (MF Performance Indicators plus Statement of Income and Expense)

  • Definition of TermsLoans outstanding refers to the balance of all loan releases that remain outstanding

    Loans disbursed refers to the total loans released

    Arrears refers to loan installments not paid

  • Definition of TermsPortfolio At Risk refers to the total outstanding balance (principal only) of those accounts with installments past due for one day or more

    Loan Loss refers to principal amount written off from the portfolio

  • Key Portfolio Ratios:Arrears rate = Amounts over 1 day past due X 100 Outstanding portfolioPortfolio at risk rate = Outstanding balance of loans over 1 day past due X 100 Outstanding portfolioLoan loss rate = Amount written off from the portfolio X 100 Average outstanding portfolio for the period

  • Portfolio At Risk Aging ReportA tool that allows managers, supervisors and account officers to identify and assess the quality and risk in their loan portfolios.Provides a window into the portfolio so management can see how much principal is at risk and whether risk is serious, moderate, or minor.

  • PAR Report

    RURAL BANK OF ABCPortfolio at Risk ReportAs of June 30, 2010Days OverdueNo. of Borrowers% of ClientsLoan Amount Overdue% in ArrearsOutstanding BalanceOutstanding Balance %

    Current43896.26% - 0.00% 2,945,840.57 96.37%

    1-7 days81.76% 5,302.58 0.17% 52,314.64 1.71%8-14 days30.66% 1,994.03 0.07% 14,505.39 0.47%15-30 days20.44% 8,571.44 0.28% 30,666.70 1.00%31-60 days20.44% 6,567.70 0.21% 6,820.11 0.22%61-90 days00.00% - 0.00% - 0.00%Over 90 days20.44% 6,855.02 0.22% 6,538.31 0.21%

    Subtotal173.74% 29,290.77 0.96% 110,845.15 3.63%

    Total455100.00% 29,290.77 0.96% 3,056,685.72 100.00%

  • How to Read the PAR ReportNo missed payments - (e.g. loans that are current and therefore LOW RISK) PAR 1-7 days - (e.g. loans that are MINOR RISK BUT NEED WATCHING) PAR 830 days - (e.g. MODERATE RISK) PAR 3160 days - (e.g. increasingly SERIOUS RISK) PAR 6190 days - (e.g. LOW CHANCE OF REPAYMENT, lots of collection effort) PAR over 90 days - (e.g. LOSS)

  • How to read and analyze the Portfolio at Risk Report3 questions that can help in analyzing PAR

    1. What portion of the portfolio is totally current (100% on time repayment on the exact date that the payment was due)

    2. What portion of the portfolio has missed at least one payment (this is total loan outstanding minus current loans)?

  • How to Read and Analyze the Portfolio at Risk Report3. What is the quality or aging of your delinquent portfolio like?

    CHECK FOR TRENDS!

  • PAR AnalysisWho has the best performance?

    AO 1: JoelanAO 2: MarlonFeb 20062.0%2.0%

  • PAR 1 TrendsWho has the best performance?

    AO 1: JoelanAO 2: MarlonOct 20050.61%7.00%Nov 20050.90%5.00%Dec 20051.00%4.50%Jan 20061.75%3.00%Feb 20062.00%2.00%

  • PAR by AGEWho has the best performance?

    AOs1-78-1516-3031-6060-9090+Luis2%Jose2%Ben2%Marlon2%Joelan2%

  • PAR by AGEWho has the best performance?

    AOsPAR11-78-1516-3031-6060-9090+Luis6%Jose3%Ben3%Marlon7%Joelan4%

  • PAR by AGEWho has the best performance?

    AOsPAR11-78-1516-3031-6060-9090+Luis6%4.92%1.08%Jose3%3%Ben3%2.67%0.33%Marlon7%2.52%1.39%3.09%Joelan4%1.07%2.93%

  • Loan Loss RateWho has the best performance?

    AOsCurrent1-78-1516-3031-6060-9090+Luis2%Jose0%Ben2%Marlon2%Joelan2%

  • Identifying Sources of PARExample:

    PARStatus Summary

    PAR STATUS SUMMARY

    ABC BankPAR7

  • Identifying Sources of PAR

  • Identifying Sources of PARBefore any bank wide PAR fighting is undertaken, Managers must isolate/ identify what are the main sources of PAR.

    The first step is looking at the PAR by branch in order to identify if the problem is endemic to all branches or affecting one branch (or a few) only.

  • What branch is the PAR source?ABC BankPAR30= 10%

  • Identifying Sources of PARSan Isidro Branch with PAR30 = 20% is the main sourceBefore any action is taken against San Isidro Branch, Managers must isolate/ identify which AOs within the Branch are the main sources of PAR The next step is looking at the PAR by AO in order to identify if the problem is endemic to all AOs or one AO (or a few) only

  • Which AO is the PAR source?

  • Identifying Sources of PARAO Mary with PAR30 = 36% is the main source

    Before any action is taken against AO Mary, Managers must isolate/ identify in her portfolio what are the main causes of PAR

  • Identifying Sources of PARA break down of her PAR will further isolate PAR sources

    First vs. Repeat Loans

    Concentration on Cycle III and IV

  • Identifying Sources of PARBecause her PAR rate is so high (relative to the rest of the bank and the AOs within the same branch) the Branch Manager must first look into the possibility of FRAUD.

  • Identifying Sources of PARA break down of her PAR will further isolate PAR sources into

    First vs. Repeat LoansRepeat Loans III and IVLoans with Increases above 30%Loans granted under exceptional casesA particular economic activity

  • Identifying Sources of PARIsolating/identifying the source of PAR, will enable Branch Managers and Supervisors to:

    Implement measures tailored specifically to the cause identified with the AO identifiedImprove productivity Improve portfolio qualityImprove time management

  • Thank you!End of Presentation

    We now look at one of the essential tools in effective supervision, loan portfolio analysis.

    Click to next slide

    **Click and read bullets one by one.

    Click to next slide.*Click and read 1st bullet.Being the largest income generating asset of the bank, it is imperative that we give due attention to this asset.

    Click and read next bullet. When money is lent out, there is always a risk that collection may be delayed and in worst case, the money may not be collected at all. As Supervisors or BMs, it is therefore important that we are aware of the risks and we analyze of our loan portfolio periodically. But why do we have to do this?

    Click next sentences and read.

    *The following are the reasons why we need to analyze our portfolio:

    Click and read each bullet one by one.Portfolio analysis is a tool that aids you in maintaining good portfolio quality in an organized manner without having to leave your office. It is a time saving tool. You dont need to go crazy visiting all your branches to know whats going on. Take one or two hours to review and analyze your numbers.

    As we proceed with this presentation, we will learn why portfolio analysis is a powerful tool in controlling delinquency as well as a tool in identifying and preventing PAR.

    Click to the next slide.*Click and read 1st bullet.The faster you can have the information the faster you can react to any situation that may arise, thus your MIS must be able to give information on a daily basis. If you receive information one month later, many things could have already happened and your decision may no longer be the appropriate for the situation.

    Click and read 2nd bullet.For you to have good information, data must be available down to the lowest level. Getting the big picture is good, but to get the best overall picture requires that you also have detailed information. The bank-wide PAR maybe at acceptable levels and everything may seem alright, yet one branch or one AO may be doing horribly, but is masked by the performance of the other branches. You may not be aware of this unless your data are broken down by branch and by AO.

    Click and read 3rd bullet.The data should be easy to comprehend and not look too complicated. Access to it must be easy to avoid among other things waste of time and effort just to get information. Above all, the data must be accurate, the decision made is only as good as the information given. As they say garbage in, garbage out.

    Click and read 4th bullet.Information should be available to all concerned as this is the means by which to gauge AO or branch performance and serves as a guide into what areas need improvement

    Click to next slide.

    *Each of the recommended 11 essential reports serve particular purposes.

    Click to show table.If you want to look at loan portfolio data and quality these are the reports to look into. (Read list of reports under the first column)If you want to look at revenue, growth and performance, review the following reports. (Read list of reports under the 2nd column)When looking at quality based on client, business, and characteristics, these are the reports you should read. (Read list of reports under 3rd column)

    Click to next slide*It is not necessary to print or review all the 11 reports all at the same time. There are reports that need to be read more frequently than others.There are the reports that should be read at least on a weekly basis since they are essential in close monitoring.

    Click to show weekly bullet and succeeding bullets under the said heading.The performance report by AO will tell you how AOs are doing and you can immediately pinpoint which AOs need assistance and more supervision. The delinquency report will give you in detail the accounts that have become PAR. The Portfolio At Risk aging report will give you a picture on how long, how many, and how much of the accounts are PAR. It gives a good picture of the seriousness of the PAR problem that may be occurring. The PAR report also shows the number of account and portfolio balance that are current.

    Click to show bullet and succeeding bullets under the monthly heading.To get a clearer picture over time, the three reports mentioned earlier should also be reviewed on a monthly basis. We will also know how the MF unit is doing income-wise by looking at the Monthly MF Performance report. At the end of the day, we can see if a unit is doing well, if it can produce an acceptable return for the bank.

    Click to next slide.

    *There are common terminologies used in the financial sector. Yet people may be using them with different meanings. To make sure that we are speaking in the same terms, it is best to define them properly to avoid confusion.

    Click first bullet and read. An example is a loan of P10,000 of which P6,000 of the principal has already been paid. The loan outstanding is therefore P4,000. Loans outstanding (plural) would be all these types of loan added up.

    Click 2nd bullet and read.Loans disbursed refers to the original loan amount lent. If the loan released is P10,000 this is the loan disbursed. Adding up all the loans released gives you the loans (plural) disbursed.

    Click 3nd bullet and read.In this case the installments or the amortization due for the day, week, month, etc. which is/are not paid is known as the arrears.

    Click to next slide.

    *Click and read 1st bullet.In microfinance this is a most used term and is very important. Even if just one installment falls past due for one day, the whole outstanding balance of the loan is already considered at risk.

    Click and read 2nd bullet. When loans are already consider uncollectible it is best to write it off. Per our BSP regulation loans over 90 days PAR should already have 100% provisioning. These loans are already candidates for write-off.

    Click to next slide*There are key ratios whose formula we should know. To make sure we are doing the same computations, here are their formulas:

    Click for 1st bulletAs of 9/30/2000Example: P29,290.77 X 100 = 0.96% P3,056,685.72

    Click for 2nd bulletExample: P110,845.15 X 100 = 3.63% P3,056,685.72

    Click for 3rd bulletJanuary 1, 2006 to September 30, 2006Example: P56,345.25 X 100 = 2.23% P2,000,045.32* + P3,056,685.72 2 *Beginning balance of January 1,2006 or ending balance of December 31, 2005.Click to next slide.

    *Click and read each bullet one by one

    Significance of PAR Report

    It makes the non-current portion of the loan portfolio transparent and allows management to see changes from month to month and quarter to quarter.Changes over time reveal TRENDS which help senior and middle management ask the RIGHT QUESTIONS about the bank/branch portfolio.A good understanding of trends allows senior and middle management to be PROACTIVE in managing future potential losses.

    If the PAR report is done on a weekly and monthly basis and broken down into smaller units (by branch or by account officer), it will be one of the most useful management tools for senior and middle management.

    Click to next slide.*Click for 1st bulletNo missed payments or the accounts are current. This is the category which ideally all accounts should be in. Since the account is being paid on time the risk of default is low.Chick for 2nd bullet.PAR 1-7 days. Loans under this category may have missed payment for a number of reasons like clients who simply forgot to pay where chances of updating the payment are still high. In the case of weekly payments there is one installment unpaid and the probability that the account can be updated is high.Click for 3rd bullet.PAR 8-30 days. The risk is already considered moderate for weekly payment where there is already more than one missed amortization and the probability that the client can catch up in paying the installments is becoming lower.Click for 4th bullet PAR 31-60 days. Here, 4 or more payments may have already been missed and there is already increasingly serious risk of complete default on payment.Click for 5th bullet.PAR 61-90 days. With 8 or more payments already missed, chances of repayment are considered very low, much effort has to be spent in collecting the account.Click for 6th bullet.PAR over 91 days. Accounts that fall under this should be considered loss. In fact per BSP regulation this accounts already require 100% provisioning for loss. Click to next slide.*There are 3 main indicators that can help in analyzing PAR.

    Click for 1st indicator and read.We ask this question (read the question first). It will tell us how much of our portfolio is current both in amount of portfolio and number of accounts.

    Click for 2nd indicator and read.On the other hand, we will also know the portion of the portfolio the is not current, again both in amount and number of accounts. Hence we get both sides of the picture when looking at the Portfolio at Risk Report.

    Click for next slide.*Click for 3rd indicator and read.Using this report, we can see how old the accounts are. Perhaps, total PAR is all in the 1-7 days category. This tells us that a problem is occurring and should immediately be addressed. It also tells us that the chances of collection are high. On the other hand, if total PAR is in the 91 days and above category, this tells us that the chances for collecting these accounts are quite low and perhaps another approach should be used to remedy this, like having a specialized unit do the collection or the accounts should already be written off (but collection effort should continue).

    Click and read Check for Trends!

    Click to next slide.*Now let us see some examples of analyzing reports.

    Read the table and the question. Solicit answers for the participants.

    Click to next slide.

    *This example illustrates the importance of analyzing trends or how the portfolio is performing over a period of time. Looking at the PAR of both AOs in February 2006, one would conclude that both AOs are doing well. A 2% PAR over 1 day has high collection probability. However, by looking at trends, we see that Marlon is actually performing better since he is bringing down his total PAR. In October it stood at 7% and in November it has gone down to 5%. At the rate it is going, it will probably be less than 2% in March 2006.

    Joelan on the other hand is a different story; his total PAR or PAR 1 is rising. From 0.61% in October it increased to 0.91% in November and continues to increase. At the rate it is going, it will be over 2% in March 2006. This kind of trend should give the supervisor an idea that something negative is happening to the AOs accounts. Questions should be asked as to why this is happening. It also signals the need for closer AO supervision.

    Click to next slide.*Read the question and solicit answers from the participants.

    We see here that Luis and Joelan have PAR in the 1-7 days category. As mentioned in an earlier slide this is the low risk category and chance for collection is still high. As the PAR becomes older the chances of collection decrease. Marlon therefore is not performing as well as Luis and Joelan. Bens performance is even worse than Marlons. The worst performer is Jose with PAR in the over 90 days category. Here write off should already be considered.

    This example shows us the importance of looking at the PAR aging of the portfolio. It tells us the degree of risk of non-payment or the seriousness of the PAR problem the AO is having; it is also a gauge of his performance.

    Click to next slide.*Read the question and solicit answers for the participants.

    Looking at PAR 1 or total PAR we see that Jose and Ben have the best performance because they have the lowest PAR at 3%. This is followed by Joelan at 4%, Luis at 6% and the worst performer is Marlon at 7%; but all is not what it seems. We should analyze deeper and see the aging of the PAR.

    Click to next slide.*So by looking at the aging of the accounts, who now has the best performance?As we mentioned earlier, the older the PAR the higher the risk of default. Luis actually has the less older accounts. Most of his PAR is concentrated in the 1-7 days category. While we mentioned earlier that Jose and Ben were the best performers we now see that they are actually the worst since their PAR is concentrated in the much older categories. Between Jose and Ben, Jose is the worse performer since all of his PAR is in the oldest category of over 90 days (or 91 days and above).

    So we must go beyond analyzing simply the total PAR of the AOs. As shown by this example when we look at the aging of the accounts, the story is quite different, the best performers were actually the worst performers.

    Click to next slide.

    *Read the question and solicit answers from the participants.

    In this table, we see that among all the AOs, it is Jose who has zero PAR. It is safe to say then that he is the best performing AO? Not yet Because you dont know, that in this case, Jose has zero PAR because his PAR over 90 days were written-off. He was not able to collect those accounts and the accounts were written off. In this example, he would have the highest loan loss rate because he was the only one with written-off accounts. At first Jose seems to be the best performing AO, but when we factor in his loan loss rate, he is actually the worst performing AO.In analyzing AOs performance, we also have to consider other parameters such as his loan loss rate.*This is an example of a PAR Summary. This summary is very easy to do, and requires very limited time. This will help you identify easily which branch or AO to focus on. In this case, the banks overall PAR is between 5.1% to 10%. This is a bad picture. Look at the branches, Branch 3s PAR is more than 10% and the highest. The trend shows that currently, only one AO has a decreasing PAR compared with previous months. Either PAR is the same with last month, or PAR is increasing. This result is very alarming. Out of the 12 account officers, four have PAR between 5.1% to 10% and another two have PAR more than 10.1%. The column in red shows that PAR of 11 account officers have increased and if not corrected right away, will most likely continue to increase.With this table we can easily see the banks portfolio quality and at the same time immediately capture details down to the performance of the AOs.

    Click to next slide.

    *We see here ABC bank with a very high PAR 30 of 10%. So do we now go crazy visiting all the branches to know why PAR is so high?

    Click to next slide.*Click and read each bullet.

    Click to next slide.*With MIS data on hand we can see which branch is having the highest PAR. In this case we see that the high PAR is actually coming from only one branch. This is San Isidro branch with a PAR 30 of 20%. All the other three branches have PAR 30 of 3% or below.

    Click to next slide.

    *Click and read each bullet.

    Click to next slide.*Looking at PAR 30 of the AOs in San Isidro branch, we immediately note that AO Mary has the highest PAR 30 at 36%. In fact she is the only AO with very high PAR. This not to say though that AO Joel is not in need of closer supervision.

    Click to next slide.*Click and read each slide.

    Click to next slide.*Click and read bulletClick and read 1st topic. We want to see if the problem is in the first loan which would indicate that she is not doing the initial evaluation well; such as the conduct of CIBI. In repeat loans her monitoring or collection skills may need improvement or she may not be doing any client visits at all.

    Click and read 2nd topic. It is usually in the 3rd and 4th cycle where problems are encountered. At this stage clients may have been granted loan sizes that are beyond their repayment capacities.

    Click to next slide.*Click and read bullet.

    While the banks seeks to improve any skills deficiencies which the AO may have, there is always the possibility that the issue is the AOs moral character. Thus the fraud angle must always be taken into consideration.

    Click to next slide.

    *Click and read bullet.

    Click and read 1st and 2nd topics.

    Aside for these topics mentioned earlier we also have to look at:

    Click and read 3rd topic. It has been noted that if loan increase is beyond 30%, there is a strong chance that the loan being granted is already over the repaying capacity of the client. Since the bank is dealing with microentrepreneurs ,and with short loan cycles of like say, 3 months, it is unlikely that the microentrepreneurs can increase their business sizes to a level where they can be granted loans of amounts higher than 30% of the previous loan.

    Click and read 4th topic.Loans granted under exceptional cases should also be looked into, for example: restructured loans, accommodations by BMs.

    Click and read 5th topic.This may reveal to us that PAR is coming from one activity e.g. fresh meat vendors. We should investigate why this is happening and perhaps there is a need to avoid this sector for the time being.

    Click to next slide.*Click and read each topic.

    We now see the usefulness and power of loan portfolio analysis. We can address and more importantly prevent problems that may occur with the loans portfolio, by using data at hand. We can then address the problem in an organized manner without necessarily having to go immediately out in the field.

    End of slides.

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