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Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
MicroSave – Market-led solutions for financial services
Offices across Africa, Asia
and Latin America
www.MicroSave.net
info@MicroSave.net
Trainer’s Manual for
Loan Portfolio Assessment of
Micro Finance Institutions
Graham A. N. Wright, Ramesh S. Arunachalam, Manoj Sharma, Madhurantika Moulick
Micro-Finance Consulting Group
August 2006
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
2
Acknowledgements
MicroSave acknowledges the contributions of Sonal Mishra and S Narayanan of MCG in preparing this
training manual.
This trainer‟s manual needs comments from trainers to provide additional training tips, examples and ideas!
Your thoughts and comments are anticipated and welcomed for the next version.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Table of Contents
Trainer‟s Manual for Loan Portfolio Assessment of Micro Finance Institutions .............................. 4
Session 1: Participants Introduction and Overview ........................................................................... 8
Session 2: Introduction to Loan Portfolio Assessment .................................................................... 11
Session 3: 7 Key Steps in Loan Portfolio Assessment .................................................................... 15
Session 4: Ageing of Loan Portfolio using the Correct Methodological Approach ........................ 28
Session 5: Ageing of Loan Portfolio using the Installment Method Approach............................... 34
Session 6: Six: Understanding the Implications of the different methods and PAR ....................... 37
Session 7: Seven: Step 4, Verification of Loan Administration and Documentation ..................... 53
Session 8: Eight: Step 5, Verification of Rollovers and Restructuring ........................................... 65
Session 9: Step 6, Review of loan portfolio management policies/procedures/system................... 67
Session 10: Step7, Verification of internal and external controls for loan portfolio management 71
Session 11: Using the Loan Portfolio Assessment Tool.................................................................. 74
Session 12: Implementing Loan Portfolio Assessment ................................................................... 76
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
Welcome to the MicroSave Loan Portfolio Assessment for MFIs Training Curriculum. This guide is
meant for those people who have taken the MicroSave Loan Portfolio Assessment training course and are
going to reproduce the training elsewhere – or are going to “live it” by undertaking a Loan Portfolio
Assessment exercise within their own organisation. The guide provides comprehensive session plans and
also offers the experiences of some of our research partners, staff members and trainers who have used the
information herein to conduct loan portfolio assessment in the microfinance context.
It is intended that the trainer delivering this course will be familiar with Loan Portfolio Assessment Toolkit
as well as being a capable trainer. However, for those who may want to brush up on their training skills,
there is an accompanying manual (or Microsoft Word file on CD) specifically discussing training skills and
training issues. There are many other training manuals which the trainer may consult, including the
“Participatory Learning & Action: A Trainer‟s Guide” of the IIED Participatory Methodology Series.1
Several of the “Ice Breakers, Refreshers, etc.” come from these manuals.
There’s already a Loan Portfolio Assessment Toolkit on the MicroSave Website. Why is there a
training manual also?
Some people will read the Loan Portfolio Assessment toolkit that is on our website and find that to be
enough for their organisation to go forward with a Loan Portfolio Assessment exercise. However, we have
had many people and organisations who asked for a training course as well. Some people feel that it is faster
and easier to train all the members of a potential Loan Portfolio Assessment team at once. This way they will
literally all be “reading from the same page”.
Who should I be training? You may choose (or be chosen) to run this course for different types of participants. Each will have different
positives and challenges.
Training an MFI’s potential Loan Portfolio Assessment team:
Training the potential members of the Loan Portfolio Assessment team in one MFI is the ideal training
situation. All exercises will be directly relevant and useful in the immediate future – they will be developing
the actual preparatory work needed for Loan Portfolio Assessment within the MFI. For the trainer, all
examples would require tailoring to directly address the needs of the one MFI. However, because the MFI
team will be using the training as also an actual worksite, it may take slightly longer than the timings given
here.
Training potential Loan Portfolio Assessment team members – multiple MFIs:
It may not be feasible (cost, time, number of requests) to train just one organisation. The trainer should
insist – as much as possible – that the MFIs must send at least three or four members of the “inner core” of
the Loan Portfolio Assessment team to the training. Training the key members of the team will show that the
MFIs are serious about the training and will allow the teams to breakout into their own organisations,
performing the exercises as relevant to their own MFIs. It may also provide for interesting and rich
discussion between MFIs as to why/how their responses to the various exercises differ. But, beware – if your
clients are in the same market, they are not likely to go into the details– it simply wouldn‟t make sense to
give your competitors such an edge!
Training individuals: It will be more difficult to provide this training to many individuals from many different organisations. If
this is the case, the training should be handled more like a Training of Trainers as these individuals should
be responsible for taking back the information to their organisation in order to train up the Loan Portfolio
Assessment team and management on how to plan and conduct the Loan Portfolio Assessment exercise
within their respective MFIs.
Training consultants:
1 They can be reached at International Institute for Environment and Development/ 3 Endsleigh Street, London, WC1H ODD, UK
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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It will be more difficult to provide this training to consultants from many different organisations. If this is
the case, the training should be handled more like a Training of Trainers as these individuals should be
responsible for taking back the information to their clients (MFIs) in order to train up the Loan Portfolio
Assessment team and management on how to plan and conduct the Loan Portfolio Assessment exercise
within their respective MFIs. Sometimes, you may also find yourself training policy makers, regulators
and/or wholesalers and much of what is said has been said for individuals and consultants applies in such
situations.
What do I need to tell my participants to bring with them? The trainer must insist –and ensure- that the participants to the course are coming to learn and “do”. They
are not coming to learn how to do it much later, after they return to their organizations. Therefore, this
course is limited to MFIs and participants who are ready – or almost ready – to do a Loan Portfolio
Assessment exercise. The amount of information “lost” in the long delay between the training course and an
actual Loan Portfolio Assessment exercise dictates that this training follows directly on an actual Loan
Portfolio Assessment exercise in the field. Thus, the participants must bring with them laptops that ideally
have been loaded with all the information that they will need to prepare for a Loan Portfolio Assessment.
The key is to have as much detailed information as the organisation is comfortable providing.
What do I need from MicroSave for the Training? This manual is intended to be utilised with several accompanying documents, all of which are located on the
MicroSave resource CD or website www.MicroSave.org :
Manuals:
Participants’ Toolkit: MicroSave’s Loan Portfolio Assessment Toolkit for MFIs. The toolkit is a step by step guide for
participants to ensure that they plan and conduct the Loan Portfolio Assessment exercise in the most
efficient and effective manner. The toolkit provides handouts, examples and checklists for various
steps in the process. The trainer should make sure that the toolkit can be downloaded to the
participant‟s laptops (or sent via email).
Handouts: An electronic folder of handouts is included. There are
two kinds of handouts:
1) Information handouts which replicate and/or add to
information in the toolkit; and
2) Exercise handouts which will require
participants to work on problems and exercises during the
workshop.
Slideshows: The slideshow folder is again separated by suggested
training sessions. This course can be trained in several
ways, as discussed herein. Ensure that you have the
slideshow in the format most useful to you. Slides can
be printed onto overhead slides and utilised with an
overhead projector. However, due to the number
of slides, the amount of text, and the “animation” of slides, it is highly recommended that the trainer
utilises an LCD projector, if one can be located (and electricity is available, etc.). Many participants
request that they are provided with a copy of the slideshows at the end of the course, which the trainer
is free to provide to them.
Practical Examples
Practical examples have been provided throughout the course based on the experience of MicroSave with its
Action Research Partners and other MFIs/Financial service providers. The trainer should review the practical
examples and where possible supplement or replace the examples given on the basis of his/her experience.
Providing examples based on experience adds considerable value to the course, especially where examples
are contextually and culturally appropriate for those being trained.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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I hate “animation”. How do I turn it
off?
Highlight all slides at once by
clicking on the bottom left icon
that shows four squares (slides).
This will give you a view of all the
slides in the show. Then press Ctrl
and A at the same time; this will
highlight all of the slides in the
show.
Now that they are all highlighted,
look on the toolbar at the top and
click on “slideshow”, then click on
“preset animation” and select
“off”. There will be no more
animation on any of the slides.
What else do I need for the training? To conduct the training you will need:
A digital projector, although an overhead projector could
be used.
Some knowledge of PowerPoint: The slideshows may
need some “customisation” – inserting the course
schedule for example, customising exercises to meet the
needs of the MFI being trained, adding local terms for
savings and credit, the names of the MFI being trained,
etc. The trainer should be very familiar with the
slideshow, running through it several times before the
training starts. This will help him/her note when to
“click” onto the next slide and to understand the kind of
“animation” that is on each slide. Generally, the
animation should NOT be too complex or distracting, but
the trainer may choose to eliminate all animation as well
(see box).
Standard Training Room items: flip chart stands, flip
charts, marker pens of various colours, hole puncher,
stapler, masking tape, etc.
Workshop materials for participants: Encourage them to
take notes in their manuals (so pads of paper may not be
needed) so they will remember the discussions better when they get back to their offices. However
folders will be helpful considering the number of handouts and exercises that there will be during the
course. It may be helpful to have pens, pencils, erasers, etc.
Computers (ideally 1 for every 3-4 participants) to run the exercises. Participants should be encouraged
to bring their own computers (laptops) to allow them to complete much of the initial planning for their
Loan Portfolio Assessment on their own machines.
How do I use this Training Guide? The training guide is, hopefully, self-explanatory.
Each session provides the Trainer with the Session Objectives, Time, Methods, Materials, Slides
Overview and Process and FAQs with illustrative examples, where appropriate:
The time that each session will take is flexible depending on the trainer, the number of participants, skill
levels of the participants and whether or not the participants are all from the same organisation or from
different ones.
The methods simply alert the trainer as to whether the session is to be conducted as, for example, a
presentation – which generally means the slideshow will be utilised, or as a breakout session and that
breakout areas may be required.
A list of all the materials that the trainer will need, above and beyond the list provided above, for the
session is also included. Flipcharts, markers, tape should be assumed, even when not listed.
The slides overview and process section provides just that – an overview of slide in the upcoming
session including the key aspects and process to be followed. Each session signs off with a list of FAQs
relevant to the session topic and where necessary illustrative examples have been provided. It is not
intended that the trainer memorises the text (then we would have added some of our standard jokes!),
but rather that the trainer feels confident discussing the issues at hand. The trainer should bring in
relevant examples from his/her own MFI experiences and encourage participants to discuss their own
experiences. Adults generally learn better from “real life” rather than theoretical discussions.
Finally, the trainer would find it very useful to become thorough with the actual toolkit and other
resources like briefing notes, as they, apart from concepts and methods, also contain extremely valuable
real world experiences, which could be very useful in conducting the training
Finally, the trainer will find the following SYMBOLS in the manual to signify different things.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
7
Idea:
The idea symbol means that you will find comments from our experienced staff and
certified trainers. More comments, questions and ideas can be directed to
MicroSave, their research partners or their trainers by using the e-mail
addresses on the front of this manual, or accessing the website.
This symbol helps the trainer find the exercises that are in each session.
Preparation for Training
You have chosen your participants for the course (or they have chosen
you!) and you have:
COSTED and CONTRACTED the training and agreed with the MFI the number of days for training and
follow-up; you have sub-contracted additional trainers and assured that all contracts and TORs are
prepared.
Sent, via e-mail or hard-copy, all the “pre-course” handout files to your participants, if there are going to
be any.
Sent via e-mail and/or hard copy, a letter requesting that the participants bring laptops, MFI Portfolio
statements and all relevant information to ensure that the training is as useful and “real-life” as possible.
Sample e mail and preparation guidelines are enclosed as annex 1 and annex 2 to this manual (end of
trainer‟s manual day 3).
Chosen an appropriate venue (steady supply of electricity, enough room for “breakout groups”, etc.) and
seating plan for the number of participants you will have (a “U” shaped seating arrangement; 6 tables
angled towards the front, etc.).
Ensured that participants are all in the process of doing a product Loan Portfolio Assessment and have
the appropriate information available to them on the laptops that they will be bringing with them.
Copied, bound and prepared all the manuals and handouts.
Practiced with the slideshow so that you are confident how to use it.
Alternative Lesson Planning
Especially if you are working with only one MFI, you may be called on to deliver this training in stages. For
example, you may want to train “Day 1” on a Monday and allow them the rest of the week to complete the
Steps covered in Day 1. The following Monday you may train “Day 2”, etc. If you do choose to train in this
way, be aware of timing issues. You will need to take some time in the morning to review the work of the
participants in the prior week. You may need to provide an hour or so to allow them to finalise the
information that they produced over the prior week. This will necessitate some changes in the timing of each
training “Day”.
It is not recommended that the training be compressed into a very short time period nor overly extended. The
“Days” have been calculated to allow the team plenty of time to work in detail on their MFI‟s own needs for
Loan Portfolio Assessment. Compressing this time may lead to confusion, and extending it may mean that
the group is spending too much time in an “academic” setting and not enough time “doing it”.
Offers training suggestions – trainer could try brainstorming, trainer
could lecture, etc.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Session 1: Participants Introduction and Overview
Session Objectives:
Get to know all participants, their organisations and their roles within their MFIs
Understand what is expected of them, and what they expect from the course
Provide an overview of the course, its outline and schedule
Time:
30 Minutes
Methods:
Presentation
Exercise for introducing participants
Materials:
Slide Show:
PowerPoint Presentation titled “Session 1” – customized by
the trainer with the course content pages.
This session consists of 12 slides
Handouts:
Handout 1.1 Session Plan Loan Portfolio Assessment Training
Exercise:
Participants introduction exercise
Overview: This session welcomes the participants to the course and gives them an idea of what to expect
over the next three days.
Opening Remarks Time: 20 minutes
Slides: 2
Welcome participants and introduce facilitators and participants through some exercise.
Introducing MicroSave and its training rules Time: 10 minutes
Slides: 10
Give a brief introduction of MicroSave and refer to the related documents and the website for
details. The trainer may choose to add/subtract ground rules from the list on the Power point show.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Course Overview:
This course will be covering the various stages in Loan Portfolio Assessment. We have broken it
into seven steps, and we have arranged the training sessions along the seven steps. We will have
exercises in each of the sessions to ensure that we all understand the concepts being discussed.
Sometimes, participants will also be asked to work with data from their organisation context. The
trainer should ensure that the participants realise that the lessons in this course will apply to a broad
range of microfinance institutions, not just the traditional MFIs.
It may be useful for the trainer to know those participants who have had previous experience in Loan
Portfolio Assessment, especially to form working groups for exercises. Additionally, if time permits, those
with prior experiences could be asked to briefly talk about what exactly they have done with regard to Loan
Portfolio Assessment.
Q: What are the objectives of a loan portfolio assessment?
The loan portfolio is the primary income generating asset for an MFI2 and it is most commonly subject to
material misstatements. Most MFI failures stem from the deterioration in the quality of the loan portfolio.
An assessment of the risks and inadequacies inherent in an MFI‟s portfolio therefore assumes tremendous
importance and this is the most important objective of a „loan portfolio assessment‟.
Q: How to derive full benefits from Loan Portfolio Assessment?
Loan Portfolio Assessment is a skill that can be learned fairly easily, given proper instruction and sufficient
time. Deriving the full benefits of Loan Portfolio Assessment, however, is a discipline, in the same way that
accounting, and lending are disciplines. Provided that MFI management is willing to implement the changes
proposed, an assessor‟s ability to analyse a portfolio and recommend institutional improvements can result
in enormous gains in portfolio quality, efficiency and profitability. If Loan Portfolio Assessment can have
such a profound effect on an organisation, it seems only logical that it should become an integral part of the
organisation‟s methodologies.
Q: What does a Loan Portfolio Assessment Entail? The loan portfolio assessment would include an assessment of the loan assets (an MFI‟s portfolio) and
assessment of the systems and procedures and associated lending internal controls as well. Thus, it will not
only provide essential feedback with a view to safeguard the MFI‟s primary asset - the loans to its members
– but more importantly, it should also enable stakeholders to understand the risks inherent in the MFI‟s loan
portfolio and systems/ procedures used to mitigate this risk. This information could prove useful in two
ways: (1) facilitate prudent decisions regarding investing in the MFI (either directly or indirectly); and more
importantly, (2) help isolate specific areas for capacity building and technical assistance for enhancing the
portfolio management by the MFI.
Q: What are essentials of effective Loan Portfolio Assessment training
in MFIs?
The keys to good Loan Portfolio Assessment training are not dramatically different from those for any kind
of training. As we often saw in the days of TQM (Total Quality Management) training, however, these
lessons tend to be ignored in the rush to get people's quality "ticket punched." TQM training tended to be
dry, uninspiring, and irrelevant to people's everyday jobs. It also left people with an awareness-level
understanding of concepts and tools, but without the depth of knowledge to actually use them. The following
are some of the essentials you should keep in mind when planning your Loan Portfolio Assessment training,
especially using MicroSave’s approach:
2 The term MFI is broadly used and includes traditional Microfinance Institutions, Commercial Banks, Non Banking Finance Companies /
Institutions, Cooperatives/Credit Unions and other such entities involved in delivering financial services to low income people
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Emphasize "hands-on" learning: From leaders to experts to practitioners, people learn best when they can
put concepts and skills into immediate practice. Ideally, such "hands-on" work will include efforts directed
at assessing on the ground.
Provide relevant examples and links to the "real world': If your people are going to internalize how Loan
Portfolio Assessment will work in your organization, the examples and exercises you provide will have to
reflect the business and its specific challenges. Generally, a Service business (like micro-finance) needs to
use related examples; Even if you haven't done Loan Portfolio Assessment yet, a good training provider who
knows the methodologies should be able to come up with some good examples that will work in your
environment.
Build knowledge. With so much material to cover, it's easy to fall into the "data dump" trap. The concepts
of Loan Portfolio Assessment can be interesting and exciting, but starting with advanced ideas and jargon
will turn people off. Establishing a foundation of key principles and ideas stated in common terms sets the
stage for more sophisticated skills and methods. It's also important to put tools into a context so that their
application and relevance is clear.
Cater to a variety of learning styles - visual, games, exercise, so on should be varied and, for most
audiences, include some fun.
Make training something more than learning. Training is a key element in your Loan Portfolio
Assessment “marketing plan”. It represents a golden opportunity to gain buy-in, to deputize change agents,
and to clarify the themes of the effort and its value to the business. Look for ways to reinforce those
messages during the training. Make training an ongoing effort. One of the comments we most often hear
from participants in Loan Portfolio Assessment training is the suggestion that they get "refreshers" on a
regular basis. Businesses, however, tend to offer only "hit-and-run" training. We give kids (ages 5 through
21) about 16 years to absorb an education, but people in the working world are expected to learn and master
major new concepts and tools in (if they're lucky) three days! Learning organizations will almost certainly
have to adopt a practice of continuous education and training, just as their business processes themselves are
in need of continuous renewal and improvement considering the speed of change today, occasional once-off
cutter training won't make it in the 21st century.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Session 2: Introduction to Loan Portfolio Assessment
Session Objectives:
To understand the uniqueness of an MFIs loan portfolio
To list what an assessment entails
To see the varied uses of loan portfolio assessment report
Time:
45 Minutes
Methods:
Presentation
Materials:
Slide Show:
PowerPoint Presentation titled “Session 2”
This session consists of 16 slides
Handouts: None
Exercise :
None
Overview: This session gives a basic idea of what a loan portfolio assessment entails and initiates
discussion on the first three of the seven steps of assessment.
What are the unique characteristics of loan portfolio assessment? Time: 30 minutes
Slides: 8
Discuss with the participants the uniqueness of the loan portfolio, its critical role in an MFI and thus why a
detailed review of it becomes important.
What are the key questions to be asked during a loan portfolio assessment? Time: 5 minutes
Slides: 5
A loan portfolio assessment makes an institution question its basic assumptions, even though they might
have been followed for a long time. Every activity needs to be questioned and discussed in details.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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What are the uses of a loan portfolio assessment? Time: 10 minutes
Slides: 3
A loan portfolio assessment report can be used in the institution in varied ways. It can be used for taking
management decisions, improving efficiency, redefining policies, restructuring human resources etc.
Q: What are the unique characteristics associated with micro-
finance loans that portfolio assessors must understand?
MFI credit (lending) operations have unique characteristics that portfolio assessors must first understand.
Several aspects that need attention include:
Difficulty in maintaining portfolio information - MFIs grant a large number of small loans, and
process a very large number of (repetitive) tiny payments. Their operations are often tend to be dispersed
over a wide geographic area. As a result, MFIs utilize streamlined and decentralized operating structures
in order to be efficient. These factors make it a challenge to maintain effective portfolio information and
management systems. Lack of portfolio information is a serious aspect which could result in lower
portfolio quality - „bad‟ loans not being identified and followed up.
Decentralization could cause deviation from prescribed credit policy and result in fraud, error or
manipulation - Decentralization implies that relatively few staff members are involved in approving,
disbursing, monitoring, and collecting each loan. This structure increases the opportunity for deviation
from approved policies, and for fraud, as well as increases the risk of error or manipulation when
branches transfer information to headquarters.
Mandate of efficiency may result in lesser controls/procedures/information/supervision - To handle
small and repetitive transactions efficiently, MFIs come under great pressure to cut costs, sometimes,
even at the expense of adequate portfolio controls and information, as well as sufficient supervision of
clients and loan officers, which, in turn, could affect portfolio quality.
Burgeoning growth of portfolio could result in failures of established systems - Many MFI
portfolios are growing rapidly. First, this growth puts pressure on systems and can camouflage
repayment problems – this can happen especially when growth exceeds the administrative capacity to
manage that growth. Second, a rapidly growing portfolio has a larger percentage of loans in the early
stages of repayment. Delinquency problems often occur in the later stages of the repayment cycle.
Receiving large grants, and the pressure from donor agencies to report impact places pressure on
managers to disburse loans quickly and sometimes, even without demand – this is clearly a recipe for
disaster. This pressure has created an environment for fraud in several cases as well.
Restructuring (rescheduling and refinancing) of delinquent loans is an often-used strategy to
camouflage portfolio quality - MFIs generally dislike provisioning for problem loans or writing them
off. They want to maintain a good image in the eyes of outsiders, especially donors. This sometimes
leads to restructuring or refinancing as a tool to hide delinquency. Other strategies for shrouding
delinquency include write-offs and repeated fresh loan disbursements.
Weak information systems may not even permit MFIs to recognize delinquency - MFI information
systems are often weak and thus systems for operational loan tracking are seldom integrated with their
accounting systems. The lack of appropriate systems may mean that MFIs may not even recognize
delinquency in their portfolio, which can be tackled in the first place only if MFIs are aware of it.
These issues, among others, make the loan portfolio assessment a very crucial but rather complicated and
time consuming exercise. Assessors will need to allocate significant effort in the review of the loan portfolio
and to carry out field visits. This tool kit is designed to help portfolio assessors in their efforts of conducting
an effective assessment of an MFI‟s loan portfolio.
Q: Where can Loan Portfolio Assessment be used?
Loan Portfolio Assessment is not restricted in its usage. In fact, it has broad applicability as outlined below:
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Specific Use Area
Develop risk management strategies for Loan Portfolio Management Risk Management and
Reduction
Orient and train new employees in Loan Portfolio Management. Training/HRD
Identify improvement opportunities, with regard to Loan Portfolio
Management.
Quality and improvement
Evaluate, establish, and/or strengthen performance measures. Performance/HR
Establish and document best practices for Loan Portfolio
Management.
Best practices
Create training and reference manuals especially for internal audits. Development of training /
reference manuals and
Internal Audit Systems
Policies and procedures for Loan Portfolio Management. Systems, Policies and
Procedure Improvement
Ensure effective integration of business operations, including
formation of common business practices and understanding of
system platforms – especially, those for Loan Portfolio Management.
Systems Integration
Reduce many types of risk, including: reputation risk, fraud,
operating errors, human-resource-related risk, and systems failure.
Institutional Risk
Management
Benchmark and standardise for staff incentive schemes, performance
analysis etc.
Benchmarking and
standardisation
Q: What can be learned from Loan Portfolio Assessment?
Loan Portfolio Assessment is the most important step in assessing an MFI‟s portfolio. It uses tools that
enable an MFI to assess, analyse, improve and streamline its loan portfolio management and related systems.
Armed with the loan portfolio assessment, an MFI can:
Q: How long does Loan Portfolio Assessment take?
Understand the real risks in its portfolio and try to mitigate these risks
Locate process and systems flaws that are creating portfolio quality problems
Identify systems flaws that subject the MFI‟s portfolio to unnecessary risk
that could be avoided at a reasonable cost
Identify internal controls that could serve as risk mitigating mechanisms to
protect the loan portfolio.
Increase efficiency by streamlining and improving portfolio monitoring to
protect the loan portfolio
Identify processes/systems that need to be strengthened and/or reengineered
for better/effective portfolio management
Improve customer satisfaction
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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The time taken to assess an MFIs portfolio varies depending upon several factors:
Experience: The level of experience of the Loan Portfolio Assessment team. A more
experienced team will be quicker than a less experienced team.
Nature of the portfolio being assessed: The more complex a portfolio is in terms of higher
diversity of products and markets, the longer the time spent on a loan portfolio assessment.
The level of systems in the MFI: MIS is very important and the more organized the MIS, the
quicker the assessment.
However, assessing an MFIs loan portfolio will typically take between Fourteen/Twenty One days,
using a team of 2/3 people.
Q: Why is composition of the loan portfolio assessment team crucial?
Careful composition of the team is important – they must have skills, knowledge, experience, willingness,
time and positions to positively influence the entire exercise. The team should preferably include people
directly involved in the operation at both the lowest and highest levels of the organisation (for example, the
operations manager, branch manager, branch supervisor, and teller). The team must be empowered to
recommend significant changes if required; it must be given not only responsibility, but also authority and
flexibility. If front-line workers have not typically been included in decision-making, they may exhibit some
scepticism or reluctance. In such a case, the manager should appoint someone trusted by both management
and workers to lead the team, while assuring team members that their contributions will be rewarded and
taken very seriously.
Q: What else needs to be done with the team? Choose an appropriate team leader and outline responsibilities
Define task to team - clearly spell out what is expected of them
Communication about the team and its Loan Portfolio Assessment assignment within the organization
Provide the team the authority and flexibility along with the responsibility required for carrying out the
tasks
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Session 3: 7 Key Steps in Loan Portfolio Assessment
Session Objectives To facilitate understanding with regard to the 7 Key steps in Loan Portfolio Assessment
To understand why the sequence of 7 steps is as has been suggested
Review and analyse each of the possibilities of Steps 1, 2 and 3 of a Loan Portfolio Assessment
Time:
315 Minutes
Methods:
Presentation
Puzzle exercise in mixed groups
PRA exercise in mixed groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 3” . This
session consists of 74 slides
PRA Cards
Handouts: None
Exercise: Exercise 3.1: Seven steps of Loan Portfolio Assessment
(60 minutes for exercise, 30 minutes for discussion)
Exercise 3.2: Review of steps 1, 2 and 3. (180 minutes)
Overview: This session gives a basic idea of what a loan portfolio Assessment entails and the initiates
discussion on the first three of the seven steps of assessment.
What are the key steps to be undertaken to do a loan portfolio assessment? Time: 30 minutes, after 60 minutes of exercise
Slides: 3
Participants answer this though exercise 3.1, by arranging the steps and sub processes of a loan portfolio
assessment. The exercise ends with a discussion on why the steps are so sequenced and other lead questions
that are listed on the slide.
What do Steps 1, 2 and 3 of loan portfolio assessment entail? Time: 45 minutes + 120 minutes of exercise + 60 minutes of discussion
Slides: 71
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This is best done by the PRA exercise as it enables participants to go through each of the different scenarios.
The participants are given instructions and cards for Steps 1, 2 and 3 and on completion of the exercise the
facilitator summarises by highlighting the key issues that are likely to emerge in these three steps.
The slides listing all the different cases/aspects have been provided as hidden slides. The trainer
may choose to use them to discuss the scenarios.
Exercise 3.1
Given in the envelope are slips of paper that relate to procedures for conducting a loan portfolio assessment.
Please arrange them in an order in which you think a loan portfolio assessment needs to be sequenced and
explain the reasons for the same.
Objective: Understand the steps for conducting a loan portfolio assessment
Group Formation: Buzz groups of 4/5 people
Resources: Cut pieces of paper in an envelope, paper and pen/pencils, tape, charts
Time: 60 minutes of group exercise plus 30 minutes of discussion
Tasks: 1. Use the cut pieces of paper and please order the seven steps (required for
conducting a loan portfolio assessment) in sequence and explain the same
2. Please discuss and understand each of the 7 steps before beginning to order
them.
3. Please choose and present the one ordering of the seven steps that best
represents views of the group as a whole. Please do not present many
alternatives ways of ordering the steps.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the ordering
of the steps. (S)/he must ensure that all group members are vocal and participate
in the exercise.
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Q: What are the Seven Steps in a Loan Portfolio Assessment exercise?
These steps complement each other in a comprehensive manner: By following these steps, you will
be able to assess an MFIs loan portfolio and assess its quality.
Methodology for Conducting a Loan Portfolio Assessment
Step 1 Tracing Individual Loans:
Head Office to Borrower
Step 2
Step 3
Tracing Individual Loans:
Borrower to Head Office
Cross-verification with other
accounting records like
cashbook, receipts, vouchers
and reconciliation of these with
loan ledgers and the like
Step 4
Step 5
Step 6
Verification of loan
administration/documentation
Verification of loan accounts for
rollovers/restructuring/write-offs
Review of portfolio
management
policies/systems/procedures
Review of internal and external
controls for loan portfolio
management at MFI
Step 7
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Q: What is the basic methodology for conducting a loan portfolio
assessment?
Step 1. Tracing Individual Loans: Head Office to Borrower3
1.1 Select 50-100 borrowers with outstanding (and some closed) loans and specific loan numbers from
the Head Office records at random.
1.2 Selection of borrowers/loans should be done such that there is enough of a sample in the different
loan types provided by the MFI. Also, at least 75% of the loans should be outstanding while the
remaining 25% should include properly closed/written-off loans in sufficient quantity.
1.3 Trace the loan status (with outstanding/closure/written-off amounts) of these 50-100
borrowers/loans down to the Branch Office records.
1.4 Trace the loan status (with outstanding/closure/written-off amounts) of these 50-100
borrowers/loans down to the borrowers own passbooks.
1.5 Trace regular and overdue repayments and reconcile into the MFI‟s PAR analysis including method
of assessment of age of overdue, sequence of appropriation of client repayments and the like.
1.6 If differences exist in the loan outstanding/closure/write-offs for a client across various levels of
analysis, then all concerned transactions need to be reviewed and reconciled.
Step 2. Tracing Individual Loans: Borrower to Head Office
2.1 Select 50-100 borrowers with outstanding (and some closed) loans and specific loan numbers at
random from a series of 10-20 randomly selected group meetings.
2.2 Selection of borrowers/loans should be done such that there is enough of a sample in the different
loan types provided by the MFI. Also, at least 75% of the loans should be outstanding while the
remaining 25% should include properly closed/written-off loans in sufficient quantity.
2.3 Trace the loan status (with outstanding/closure/written-off amounts) of these 50–100 borrowers
from their passbooks up to the Branch Office records.
2.4 Trace the loan status (with outstanding/closure/written-off amounts) of these 50-100 borrowers up
from the Branch Office records to the Head Office records.
2.5 Trace regular and overdue repayments and reconcile into the MFI‟s PAR analysis including method
of assessment of age of overdue, sequence of appropriation of client repayments and the like.
2.6 If differences exist in the loan outstanding/closure/write-offs for a client across various levels of
analysis, then all concerned transactions need to be reviewed and reconciled.
Step 3. Cross-verification with other accounting records like cashbook, receipts, vouchers and
reconciliation of these with loan ledgers and the like
3.1 Take 25-50 cash and/or cheque/draft (preferably loan related) transactions from and/or to Branch
Offices and trace these transactions from/to Head Office cashbook and/or Branch Office cashbook
and reconcile with bank statements and receipts/vouchers at both Head Office and branch levels.
3.2 Take 25-50 cash and/or cheque/draft (preferably loan related) transactions from/to Branch Offices
and trace these transactions from/to Branch Office cashbook to client passbooks and reconcile
receipts/vouchers at Branch Office and other levels.
3.3 To save time as well as enhance efficiency and effectiveness, this can be done for the selection of
the 50-100 clients given in Steps 1/2.
Step 4. Verification of loan administration and documentation (primarily on the basis of the loans and
accounting records reviewed in Step 1-3)
4.1 Verify whether loan administration is in accordance with policies and procedures
4.2 Ascertain whether the loan documentation in accordance with approved policies and procedures
4.2.1 Is loan size in accordance with the MFI‟s policies and procedures?
4.2.2 Has the collateral/group guarantee been appropriately documented and communicated to the
borrowers?
3 Note: For SHG institutions, the above references to “Head Office” should be taken to refer to the bank/MFI that finances the SHGs and the
references to “Branch” should be taken to refer to the SHG.
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4.2.3 Are the nominal and effective interest rates/fees the same as is stated in the loan policy and
documentation?
4.2.4 Are other loan terms and conditions the same as is stated in the loan policy and
documentation?
Step 5. Verification of loan accounts for rollovers and restructuring (This step is designed to ascertain
whether the client really proved willingness and ability to satisfy the loan obligation or is the apparent
loan repayment affected by a follow-up fresh loan disbursement?)
5.1 Review loan ledgers in 3 randomly selected branches for lump-sum repayments at the end of the
loan period and immediate disbursement of follow-on loans over the last 12 months
5.2 Review the loan ledgers in 3 randomly selected branches for re-scheduling/re-financing/write-off of
loans over the last 12 months:
5.2.1 Are re-scheduling/re-financing/write-offs are in accordance with policies and procedures?
5.2.2 Are re-scheduling/re-financing/write-offs are appropriately captured in the PAR analysis?
Step 6. Review of loan portfolio management policies/procedures/systems
6. See detailed checklist below for detailed review steps.
6.1 Review loan (credit) policy including all terms and conditions for various types of loans
6.2 Review delinquency measurement and management policy
6.3 Review loan loss provisioning and write-off policy
6.4 Review other policies for loan portfolio management
Step 7. Verification of internal and external controls for loan portfolio management
Q: How to assess loan disbursements?
Steps to follow…
1. For given loan number and client, check the client loan application and corresponding loan contract for
amount approved
2. Compare with loan ledger and look at amounts and dates of disbursement
3. Compare with cash book/bank records to see actual disbursements – amounts and dates
4. Compare with DPN (Demand Promissory Note) if applicable and verify all aspects including client
signature, amounts and date. Please note the disbursing officer and if necessary, the place and time of
disbursement
5. If disbursal is into client savings/current account, then compare with amount credited into account and
the date on which this has happened
6. If amounts, dates and other aspects in 3 or 4 or 5 (which must be consistent with one another) are
different than those in 1 or 2 (which must also be internally consistent with each other), then there is a
problem with loan disbursement clearly
Records to Peruse…
1. Cash/bank books/records including client savings/current accounts
2. Loan ledgers
3. Demand promissory notes (DPNs)
4. Proof of receipt of loan by clients (voucher etc)
5. Client loan utilisation check records (if applicable)
6. Client records (if applicable)
7. MIS records of loan disbursement (cash payments reports on a daily basis for the period concerned)
8. Reconciliation of dates and amounts among the above
Special Aspects to Consider…
Apart from perusal of records, also need to interview clients and staff
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Cross checking with clients can be really useful here and if the model permits clients to have copies of
records, please verify that and also talk to them.
In some models, there is a loan utilisation check and these records could be looked at as well.
In models with many levels/layers of staff between headquarters and client, reconciliation of records is
very critical to ensure physical transfer of cash from headquarters to client
Depending on the context, a time lag of a maximum of 1 week between disbursal at HQs and receipt of
client money could be acceptable – the key is to track flow of the loan money and ensure that it indeed
reached the client in the said amounts and said dates (with a maximum variance of 1 week)
Q: How to assess repayment schedules? Steps to follow…
1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Installment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Analyse whether the pattern in 3 and 4 are different from that stated in 1 and 2
6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4
(which must be internally consistent with one another and also same as stated in 1 and 2) are different
from each other, then there is a problem with loan repayment schedules
Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
2. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable)
3. MIS records of client transactions
Special Aspects to Consider…
Comparison of these records for changes in repayment pattern would help isolate any changes in
repayment schedules
Q: How to assess principal amounts collected from clients?
Steps to follow…
1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Installment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over
dues along with age and the appropriation of client repayments towards these in the correct sequence.
This would require the creation of a loan repayment table consistent with the terms of the loan and best
practices principles of ageing a loan using the correct sequence for appropriation of client repayments
(penalties first followed by interest overdue, interest due, principal over due and finally principal)
6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4
(which must be internally consistent with one another and also same as stated in 1 and 2) are different
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from each other and the calculations in 5 above, then there is a problem with the principal amount
collected and the actual loan repayment
Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
2. MIS records of client transactions (both principal and interest, over dues etc)
3. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable)
4. Loan closure reports from MIS
Special Aspects to Consider…
Comparison of these records for principal repayment would help isolate if any of these aspects with
principal repayment exist.
Sequence of appropriation of client repayments is very critical as is the definition of over dues
Method of appropriation of client repayments is very fundamental to understanding this aspect as also
the calculation of over dues and the age of the past due loan
In models with many levels/layers of staff between headquarters and client, reconciliation of records is
very critical to ensure physical transfer of cash from client to headquarters
Sometimes, flexible Installments and grace periods could affect (distort) the calculation of over dues and
their age. Appropriate adjustments would have to be made for these aspects
Q: How to assess interest, service, and other charges actually charged
from/refunded to clients?
Steps to follow…
1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Installment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over
dues along with age and the appropriation of client repayments towards these in the correct sequence.
This would require the creation of a loan repayment table consistent with the terms of the loan and best
practices principles of ageing a loan using the correct sequence for appropriation of client repayments
(penalties first followed by interest overdue, interest due, principal over due and finally principal)
6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4
(which must be internally consistent with one another and also same as stated in 1 and 2) are different
from each other and the calculations in 5 above, then there is a problem with the interest amount
collected and also the actual loan repayment
Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
2. MIS records of client transactions (both principal and interest, over dues etc)
3. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable)
4. Loan closure reports from MIS
Special Aspects to Consider…
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Comparison of these records for interest repayment would help isolate if any of these aspects with
interest repayment exist
Sequence of appropriation of client repayments is very critical as is the definition of over dues
Method of appropriation of client repayments is very fundamental to understanding this aspect as also
the calculation of over dues and the age of the past due loan
In models with many levels/layers of staff between headquarters and client, reconciliation of records is
very critical to ensure physical transfer of cash from client to headquarters
Sometimes, flexible Installments and grace periods could affect (distort) the calculation of over dues and
their age. Appropriate adjustments would have to be made for these aspects
Please make sure that interest charges are appropriately calculated. For example, when flat rates of
interest are used in some models and the total number of Installments have passed and if the institution
collects interest first, then principal amounts may remain overdue beyond loan term and credit policy
may not stipulate what interest should be levied on the over due principal beyond loan term (as interest
was collected on a flat basis)
Q: How to assess the calculation of over due amounts?
Steps to follow…
1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Installment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over
dues along with age and the appropriation of client repayments towards these in the correct sequence.
This would require the creation of a loan repayment table consistent with the terms of the loan and best
practices principles of ageing a loan using the correct sequence for appropriation of client repayments
(penalties first followed by interest overdue, interest due, principal over due and finally principal)
6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4
(which must be internally consistent with one another and also same as stated in 1 and 2) are different
from each other and the calculations in 5 above, then there is a problem with the over due amount
calculation and also the actual loan repayment
Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
2. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable)
3. MIS records of client transactions
4. MIS records of past dues loans and portfolio report of all loans
Special Aspects to Consider…
Comparison of these records would help isolate whether any of these aspects is present or absent
Sequence of appropriation of client repayments is very critical as is the definition of over dues
Q: How to assess the appropriation of client repayments?
Steps to follow…
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1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Installment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over
dues along with age and the appropriation of client repayments towards these in the correct sequence.
This would require the creation of a loan repayment table consistent with the terms of the loan and best
practices principles of ageing a loan using the correct sequence for appropriation of client repayments
(penalties first followed by interest overdue, interest due, principal over due and finally principal)
6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4
(which must be internally consistent with one another and also same as stated in 1 and 2) are different
from each other and the calculations in 5 above, then there is a problem with the appropriation of client
repayments and also the actual loan repayment
Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
2. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable)
3. MIS records of client transactions
4. Methods (along with rationale) used for appropriating client repayments towards principal, interest, over
dues – sequence and amount calculations
Special Aspects to Consider…
Comparison of these records would help isolate whether any of these aspects is present or absent
The definition of over dues is very critical and here, it may be useful to take into account grace and
moratorium periods afforded to clients ex ante (or even a priori)
Sequence of appropriation should be as per best practices
Q: How to assess loan repayments from clients?
Steps to follow…
1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Installment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over
dues along with age and the appropriation of client repayments towards these in the correct sequence.
This would require the creation of a loan repayment table consistent with the terms of the loan and best
practices principles of ageing a loan using the correct sequence for appropriation of client repayments
(penalties first followed by interest overdue, interest due, principal over due and finally principal)
6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4
(which must be internally consistent with one another and also same as stated in 1 and 2) are different
from each other and the calculations in 5 above, then there is a problem with the actual loan repayment
Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
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2. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable)
3. MIS records of client transactions
4. Methods (along with rationale) used for appropriating client repayments towards principal, interest, over
dues – sequence and amount calculations
Special Aspects to Consider…
Check for client names. This can particularly be a problem in some cultures where same names exist for
several clients including initials. Photo or other identification could be crucial here
If appropriation is correct, then this can be spotted. So, first make sure that there is correct appropriation
and then check on average loan outstanding done at least on a monthly basis. A 10-20% variance is
permissible here
Sequence of appropriation of client repayments is very critical as is the definition of over dues
Q: How to assess loans for delinquency?
Steps to follow…
1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Installment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over
dues along with age and the appropriation of client repayments towards these in the correct sequence.
This would require the creation of a loan repayment table consistent with the terms of the loan and best
practices principles of ageing a loan using the correct sequence for appropriation of client repayments
(penalties first followed by interest overdue, interest due, principal over due and finally principal)
6. If amounts, dates and other aspects in 1 and 2 (which must be consistent with one another) and 3 and 4
(which must be internally consistent with one another and also same as stated in 1 and 2) are different
from each other and the calculations in 5 above, then there is a problem with the actual loan repayment
in terms of delinquency
Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
2. MIS records of client transactions (both principal and interest, over dues etc)
3. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable) and other client records (if available)
4. MIS records of receipts and payments reports on a daily basis for the period concerned
5. Comparison of these records would help isolate if any of these aspects are present or absent
Special Aspects to Consider…
1. Sequence of appropriation of client repayments is very critical as is the definition of over dues, method
of ageing past due loans, adjustments for grace periods and other such factors
2. Interviews with clients and talking to staff would also be useful
Q: How to assess loan write-offs?
Steps to follow…
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1. For given loan number and client, check the client loan application and corresponding loan contract for
amount/date of disbursement approved and proposed schedule of repayments (at time of contract) along
with other terms and conditions including treatment of over dues and penalties (if any)
2. Compare with loan ledger and look at amounts and dates of disbursement and schedule of repayments
including periodicity along with Instalment due amounts/dates – both principal and interest
3. Compare with cash book/bank records to see actual disbursement and repayment – amounts and dates
4. Compare with client records to see actual disbursement and repayment – amounts and dates
5. Check to see if the method of appropriation of client repayments is correct as also the calculation of over
dues along with age and the appropriation of client repayments towards these in the correct sequence.
This would require the creation of a loan repayment table consistent with the terms of the loan and best
practices principles of ageing a loan using the correct sequence for appropriation of client repayments
(penalties first followed by interest overdue, interest due, principal over due and finally principal)
6. Using the result from 5 above, check to see whether the loan is still outstanding or overdue or both (in
case the loan is beyond the loan term).
7. This can be verified using the formula, Date of Assess - Date of Disbursement.
8. If this is > Loan Term, then loan is past the loan term; otherwise not. Here adjustments will have to be
made for any rescheduling that may have occurred and this requires computation of the following:
Checking the Date of Disbursement + Loan Term and this should not be greater than Date of
Assessment.
If it is the case (or loan is passed the loan term) and there are outstanding loan amounts (as per the
original loan contract) but loan is not shown as an over due loan, then rescheduling is said to have
occurred
9. Using data from steps 6, 7 and 8, check with other client records to see if the client money (savings,
shares etc) have been adjusted to the loan outstanding (which could be over due) and the balance written
off
10. Check the loan write-off records in MIS for the specific client
11. If amounts, dates and other aspects in 10 are different from the calculations in 5, 6, 7, 8 and 9 above,
then there is a problem with the loan write-off
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Records to Peruse…
1. Loan contract, letter of offer, and loan ledger and client records if any (like loan sheet/pass book etc)
2. MIS records of client transactions (both principal and interest, over dues etc)
3. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable) and other client records (if available)
4. Loan closure reports from MIS
5. MIS records of receipts and payments reports on a daily basis for the period concerned
6. Comparison of these records would help isolate if any of these aspects are present or absent
Special Aspects to Consider…
Sequence of appropriation of client repayments is very critical as is the definition of over dues
Interviews with clients whose loans have been written off are essential to determine if collections were
made.
Talking to staff would also be useful
Exercise 3.2
Facilitator gives each group a set of cards with one specific items printed on each of them.
Objective: Understand the steps for conducting a loan portfolio assessment
Group Formation: Buzz groups of 4/5 people
Time: 120 + 60 minutes (for discussion)
Tasks: 1. Please look at each card and rank the relevance (or importance) of that
specific item while doing a loan portfolio assessment, using the 3-point
scale given below.
i. Most important
ii. Important
iii. Not important
2. One-way to assess/rank the relevance (or importance) of an item is to first
ask the following questions: (1) Can the item provide information on likely
(hidden) risks in the MFI‟s portfolio? (2) Can the item help discern the real
quality of the MFI‟s portfolio? (3) Can the item facilitate knowledge with
regard to the strengths and weaknesses with regard to an MFI‟s portfolio
management?
3. Next, please attempt to outline what records need to be perused to
determine the presence or absence of the specific item during a loan
portfolio assessment. This again needs to be done only for items with a
relevance (or importance) ranking of 1 or 2
4. Finally, outline, what specific steps could be employed and in what
sequence to detect the presence (or absence) of the specific item during a
loan portfolioassessment. This again needs to be done only for items with a
relevance (or importance) ranking of 1 or 2
5. Please note the numbers as shown below
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the ordering
of the steps. (S)/he must ensure that all group members are vocal and participate
in the exercise.
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PRA INDEX CARD with BLANK SPACE
Relevance of Item
ONLY 1
RESPONSE as they
are mutually
exclusive
Please provide one,
two or three reasons
for the level of
relevance accorded
to the item
Multiple Responses
To determine the
presence or absence of
the specific item, what
records need to be
perused and why?
Multiple Responses
What specific steps
could be employed
and in what sequence?
Multiple Responses
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
28
Session 4: Ageing of Loan Portfolio using the Correct Methodological Approach
Session Objectives: To facilitate participants to understand what is ageing of loans and the key steps of ageing
To learn the best practices process of creating a loan repayment table and ageing past due loans
through two examples
Time:
180 Minutes
Methods:
Presentation
Puzzle exercise in mixed groups
Exercise in small groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 4”. This session
consists of approximately 44 slides
Handouts: None
Exercise: Exercise 4.1: Key steps of Ageing Past Dues Loans (30 minutes)
Exercise 4.2: Ageing of Loans, using the Correct
Methodological Approach – 1st Example (30 minutes)
Exercise 4.3: Ageing of Loans, using the Correct
Methodological Approach – 2nd Example (30 minutes)
Overview: This session introduces participants to ageing of loan portfolio, sequence the steps of aging and
to prepare a ageing table.
What is ageing? Time: 10 minutes
Slides: 2
Participants answer this though exercise 3.1, by arranging the steps and sub processes of a loan portfolio
assessment. The exercise ends with a discussion on why the steps are so sequenced and other lead questions
that are listed on the slide.
What are the key steps of ageing loan portfolio?
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
29
Time: 30 minutes + 30 minutes of exercise
Slides: 11
Participants learn the steps of ageing a loan portfolio by matching the pieces given. The facilitator
summarises with the help of the slides detailing the steps of ageing a loan portfolio.
How do you prepare an ageing table? Time: 50 minutes + two exercises of 30 minutes each
Slides: 31
Participants construct and ageing table with the help of two examples.
Exercise 4.1
Given in the envelope are slips of paper that relate to procedures for conducting a loan portfolio
assessment. Please assemble the same into meaningful steps (diagram) and explain the same
Objective: Understand the key steps for aging past due loans
Group Formation: Buzz groups of 4/5 people
Resources: Cut pieces of paper in an envelope, paper and pen/pencils, tape, charts
Time: 30 minutes of group exercise
Tasks: 1. Use the cut pieces of paper and please order the steps for aging of past
due loans in sequence and explain the same
2. Please discuss and understand each of the steps before beginning to
order them.
3. Please choose and present the one ordering of the steps that best
represents views of the group as a whole. Please do not present many
alternatives ways of ordering the steps.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the
ordering of the steps. (S)/he must ensure that all group members are vocal
and participate in the exercise
Q: How to age a loan portfolio and calculate portfolio quality
indicators? Step 1 Using the loan policy and business rules please clearly identify the following for each and
every (outstanding) loan:
Loan Amount Disbursed
Number of Installments
Frequency of Installments
Interest Rate (Annual)
Interest Computation Method
Repayment Assumptions (including grace/moratorium period, whether equal installments for principal
are there etc)
Step 2 Using the above fill out the Principal and Interest Amounts Due with Dates Due for each
installment of every loan.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Step 3 Write down the total amounts paid by clients along with dates of payments (these are
transactions of repayments made by clients)
Step 4 Calculate interest due as per payment date for each installment. If due date of installment and
payment date are one and the same then interest due as per payment date will be the same as
interest due as per schedule. Otherwise it will differ. This is a very crucial aspect that should
not be ignored
Step 5 Once the transaction amounts are available allocate or distribute these total amounts as per the
following norms
1st towards Fines/penalties (1st),
2nd towards Interest Overdue (2nd)
3rd towards Interest Due if it is actually due on the date of payment (3rd)
4th towards Principal Overdue (4th)
5th towards Principal (5th)
If there are no fines, it will first go towards Interest Overdue, then Interest Due if it is actually due on
that date, then Principal Overdue and Last towards Principal
Step 6 Now at end of each installment check whether total amount paid = Fines Paid + Interest O/D
Paid + Interest Paid + Principle O/D Paid + Principle Paid
Step 7 At end of each installment also get the following totals
Principle Outstanding,
Principle Overdue,
Interest Overdue
Principle Paid
Interest Paid
Fines Paid, and
Prepayments
Prepayments will occur when a client makes payment in excess of principal + interest due (including over
dues) plus fines to be paid till that installment
Step 8 Check if Principle or Interest O/D > 0 and if so then determine age of the over
due loan as of a particular date or installment.
7 Step 9 To calculate age as at end of any installment check for unpaid over dues
(principle or interest) and also ascertain when they occurred.
Step 10 Age at end of installment can be calculated as follows
Age of Overdue Loan
= Date at which Age is being Calculated (i.e., today or date at end of installment)
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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– (Minus)
Date at which earliest UNPAID Overdue occurred
= “Y” Days.
Here unpaid is as of the reference date of calculating the age.
Step 11 Then categorize loans as per age as given below. This would lead to a loan loss
provision table given later
Current Loans (Loans with No Over Dues)
Loans < = 30 Days Past Due
Loans between 31-60 Days Past Due
Loans between 61-90 Days Past Due
Loans between 91-120 Days Past Due
Loans between 121-180 Days Past Due
Loans between 181- 365 Days Past Due
Loans > 365 Days Past Due
Step 12 Calculating Portfolio Quality Indicators
Calculate Portfolio at Risk (PAR), Portfolio in Arrears (PIA) and Aged Portfolio at Risk
(Aged PAR) using the loan loss provision table or aggregated loan repayment format.
Cumulative Repayment Rate (CRR) and On-Time Repayment Rate (OTRR) can be
calculated for each loan from the individual loan repayment formats or for the entire
portfolio from the aggregated loan repayment format
Q: What are the key steps and critical issues to consider for ageing
past due loans? This annex briefly highlights the distorting impact of using the instalment method of ageing in portfolio
management. Many other technical issues are equally important for loan portfolio management in micro-finance
and some of these are identified below. The MIS analyst must be careful of such aspects when making the reports
and keep these issues in mind.
1. What happens when MFIs use a different sequence for client repayments? Some MFIs first adjust a
client’s repayment towards principal and then towards interest. When this happens and there is
delinquency this triggers a reduced portfolio yield (as compared to effective interest rates) rather than a
higher portfolio at risk.
2 Likewise when clients make prepayments there is a strong possibility that Prin. Overdue could be „0‟
while interest overdue could still be there. Take the case of a client making equal instalment payments of
100 (Prin.) on reducing interest (18%) for a 10 month period Let us assume that on the due date for the
1st instalment the client pays 215 (units of currency) towards the following - 15 towards interest for 1
st
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
32
installment100 towards prin for 1st instalment and 100 towards prin for 2
nd instalment
4 (prepayment
made for 2nd
instalment during 1st instalment).
Assume that the client who has prepaid the prin for the 2nd
instalment (at the 1st instalment itself) does
not come to pay the interest for the 2nd
instalment (which is due only on the actual due date (of the 2nd
instalment).
When this happens, the client will not have any prin overdue (as prin was prepaid) but will most
certainly have interest overdue. Any ageing report will find it difficult to track this because most often
loan ageing is based on the prin amounts rather than interest amounts. The key question is how should
MFIs treat this issue and what should portfolio managers do?
3 Likewise, there are many other aspects like adjusting the portfolio at risk measure for rescheduling,
refinancing, write offs, fresh loan disbursements for which repayment is yet to begin and the like.
Unless aspects like these are followed according to technical best practices norms, managing an MFI‟s
portfolio, will, at best, be inaccurate and inefficient just like when the instalment method of ageing is
used to classify and manage an MFI‟s loan portfolio.
Exercise 4.2
Objective: To understand the best practices approach to ageing of past due loans
and also construction of the loan repayment schedule
Group Formation: Buzz groups of 4/5 people
Time: 30 minutes
Tasks: 1. Please discuss the process of how to create a best practices based loan
repayment schedule using correct method of ageing, proper sequence of
appropriating client repayments and the like
2. Please create a loan repayment schedule for the loan given in example
3. Individuals in groups should do the calculations themselves. They could
consult other group members/facilitator, when they require
help/assistance
4. Group should discuss the solution and have one final solution to the
whole exercise
Please be prepared to share your results with the larger group (plenary),
and turn in your calculations to the facilitators.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the
calculations. He/she should also receive a copy of the calculations from each
participant, prior to wrapping up the course
Exercise 4.3
Objective: To understand the best practices approach to ageing of past due loans
and also construction of the loan repayment schedule
Group Formation: Buzz groups of 4/5 people
Time: 30 minutes
4 This is because interest for the 2nd instalment cannot be collected at the time of the 1st instalment as it is not due then and is due
only at the time of the 2nd instalment.
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
33
Tasks: 1. Please discuss the process of how to create a best practices based loan
repayment schedule using correct method of ageing, proper sequence of
appropriating client repayments and the like
2. Please create a loan repayment schedule for the loan given in exercise
4.2 (handout)
3. Individuals in groups should do the calculations themselves. They could
consult other group members/facilitator, when they require
help/assistance
4. Group should discuss the solution and have one final solution to the
whole exercise
Please be prepared to share your results with the larger group (plenary),
and turn in your calculations to the facilitators.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the
calculations. He/she should also receive a copy of the calculations from each
participant, prior to wrapping up the course
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Session 5: Ageing of Loan Portfolio using the Installment Method Approach
Session Objectives: To undertake ageing using the instalment method
To verify why is the instalment method incorrect
To compare the results of both methods and understand the implication on Loan Portfolio
Time:
70 Minutes
Methods:
Presentation
Exercise in small groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 5”. This session
consists of approximately 12 slides
Handouts: Handout 5.1 Why should the Instalment Method of Ageing not be
used
Handout 5.2 Summary Impact of Using Incorrect Instalment
Method of Ageing
Exercise:
Exercise 5.1: Ageing of Loan Portfolio using
the Instalment Method (30 minutes)
Exercise 5.2: Implications when using the Installment Method of
Ageing of Loan Portfolio (15 minutes)
Overview: This session teaches participants the alternative method of ageing – ageing by instalments. The
focus of the session is to show participants why the instalment method of aging is wrong. The
implication of the same is discussed as participants learn through an exercise based session.
Why should ageing not be done using the instalment method? Time: 25 minutes
Slides: 10
The session details step by step how to age a loan by the instalment method.
What are differences in the results of ageing by the correct method and by the instalment
method?
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
35
Time: 45 minutes + exercise of 30 minutes and 15 minutes
Slides: 2
Participants do ageing through the instalment method for the previous example. This now gives different
answers. The facilitator asks participants to briefly analyse the difference in the results and the implications
of the same. This is discussed in detail in the next session.
Q: Why the Instalment Method of Ageing should not be used?
Instalment Method of Ageing,
if used…
When all Loans are past the
Loan term
When all Loans are within the
Loan term
1. Understates age of past due loans
2. Shrouds the risk in an MFI‟s
portfolio while it is actually higher
3. Results in lower than prudentially
required provisioning
4. Causes interest to be accrued when
it should not
5. Prevents write-offs of loans that
need to be written off
6. Portrays higher than actual
profitability and sustainability
7. Causes severe income (or loss)
recognition and de-recognition
problems
8. Presents inaccurate financial
situation of an MFI
9. Leads to inaccurate assessments
with regard to credit risk
1. Overstates age of past due loans
2. Overstates the risk in an MFI‟s
portfolio while it is actually lower
3. Results in higher than prudentially
required provisioning
4. Could result in accrued interest
being reversed when not necessary
5. Could result in write-offs of loans
that need not be written off
6. Portrays lower than actual
profitability and sustainability
7. Causes severe income (or loss)
recognition and de-recognition
problems
8. Presents inaccurate financial
situation of an MFI
9. Leads to inaccurate assessments
with regard to credit risk
Has the
following Impact …
Has the
following Impact …
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
36
Exercise 5.1
Objective:
To age overdue portfolio as per the installment method and contrast it
with best practices. Only principal repayments have been tracked to
keep the example simple.
Group Formation: Buzz groups of 4/5 people
Time: 30 minutes for the exercise
Tasks: 1. Please discuss the process of how to calculate age of overdues with the
installment method and contrast with best practices aging solution.
2. Please specially observe the difference between the two methods in
terms of age of overdue for loans within loan term and those beyond
loan term.
3. Individuals in groups should do the calculations themselves. They could
consult other group members/facilitator, when they require
help/assistance
4. Group should discuss the solution and have one final solution to the
whole exercise
Please be prepared to share your results with the larger group (plenary),
and turn in your calculations to the facilitators.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the
calculations. He/she should also receive a copy of the calculations from each
participant, prior to wrapping up the course
Exercise 5.2
Objective:
To briefly discuss in plenary the differences between the results of the
calculation of ageing by the correct method and the installment
methods, the reasons for variation and the implications if the variation
on the loan portfolio.
Group Formation: Buzz groups of 4/5 people
Time: 15 minutes for the exercise
Tasks: 1. Please discuss the process of how to calculate age of overdues with the
installment method and contrast with best practices aging solution.
2. Please specially observe the difference between the two methods in
terms of age of overdue for loans within loan term and those beyond
loan term.
3. Individuals in groups should do the calculations themselves. They could
consult other group members/facilitator, when they require
help/assistance
4. Group should discuss the solution and have one final solution to the
whole exercise
Please be prepared to share your results with the larger group (plenary),
and turn in your calculations to the facilitators.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the
calculations. He/she should also receive a copy of the calculations from each
participant, prior to wrapping up the course
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Session 6: Six: Understanding the Implications of the different methods and
PAR
Session Objectives: To understand what is PAR and how is it calculated
To review the implications of aged PAR
Time:
150 Minutes
Methods:
Presentation
Exercise in small groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 6”. This session
consists of approximately 62 slides.
Handouts: Handout 6.1: Flow Chart for Generating and Comparing Portfolio
Report
Exercise: Exercise 6.1: Understanding the Implications of the different
methods and calculating PAR
(60 minutes)
Overview: Session 6 explains the implication of aged PAR on provisioning for loan loss, sustainability of
the MFI and loan write offs.
What the implications of aged PAR? Time: 45 minutes
Slides: 44
The facilitator discusses in details the implications of aged PAR by running through the steps of ageing by
using an apt example as given in the slides.
What are the asset quality indicators? Time: 20 minutes
Slides: 5
The facilitator lists the four indicators to assess asset quality. Of the four, PAR is taken as the key indicator
and explained in details.
What is PAR? How is it calculated?
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38
Time: 25 minutes + 60 minutes of exercise
Slides: 13
Participants understand PAR by calculating it for the example given to them. This is a new example for
which the participants first age the sample loan portfolio in the correct method and then the instalment
method, calculate aged APR for both the cases and then compare the results and analyse reasons for
differences and its implications on the institution.
Q: What is Portfolio at Risk5 and how to calculate and interpret it?
Step 1 Use the formula given below
Unpaid Principal Balance of Past Due Loans (1 to 365 days and more past due)
Total Gross Outstanding Loan Portfolio
Description 2000 2001 2002
Unpaid Principal Balance of Past Due Loans (A) 40000 40000 36000
Step 2 Take the Unpaid Principal Balance of Past Due Loans for Year 2000 – it is 40000
(Please refer to Portfolio Report, Row 9, Column IV for Unpaid Principal Balance of
Past Due Loans for Year 2000)
Description 2000 2001 2002
Total Gross Outstanding Loan Portfolio (B) 104000 140000 168000
Step 3 Take the Total Gross Outstanding Loan Portfolio for Year 2000 – it is 104000
(Please refer to Portfolio Report, Row 6, Column IV for total gross outstanding loan
portfolio for Year 2000)
Step 4 Divide Unpaid Principal Balance of Past Due Loans by Total Gross Outstanding
Loan Portfolio and as shown below, we get Portfolio at Risk as 38.46% for year
2000
Portfolio at Risk 2000 2001 2002
Unpaid Principal Balance of Past Due Loans (A) 40000 40000 36000
Total Gross Outstanding Loan Portfolio (B) 104000 140000 168000
Portfolio at Risk Value = A / B 38.46% 28.57% 21.43%
Step 5 Likewise, as given above, the portfolio at risk for Years 2001 and 2002 are
respectively 28.57% and 21.43%
Step 6 - The trend in portfolio at risk, as depicted by the graph next page, is decreasing, which
5 The sample portfolio report can be found at the end of this annex – Table 4.1
Numerator of Formula
Denominator of Formula
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
39
is positive. PAR has come down by nearly 17.03% during the period 2000-2002.
While the Total Outstanding Loan Portfolio has grown by 20.23% during 2000-2002,
the unpaid principal balance of past due loans has come down by just 10%. However,
there have been loan write-offs as well during this period. Hence, reduction in PAR
appears to be due to some collection of arrears, increase in total outstanding loan
portfolio and loan write-offs.
Step 7 Calculation of Portfolio at Risk by Age
Table1.1 Ageing Analysis of Loans - Year 2002
I II III IV V VI VII VIII IX X
PR 17 Type of Loans Number
of Loans
Arrears
Amount
Unpaid
Principal
Balance
% of Loan
Outstanding
Portfolio
at Risk
Provisioning
%
Provision
amount
PR 18 Current Loans 2,880 0 132,000 78.57% 0.00% 0% 0
PR 19 Less than 30 Days past due 400 7,000 17,500 10.42% 10.42% 10% 1750
PR 20 31- 60 Days past due 150 3,000 10,000 5.95% 5.95% 50% 5000
PR 21 61- 90 Days past due 120 2,000 5,000 2.98% 2.98% 75% 3750
PR 22 > 90 Days past due 50 2,000 3,500 2.08% 2.08% 100% 3500
PR 23 Total 3,600 14,000 168,000 100.00% 21.43% na 14000
PAR > =1 day (past due) is
Sum of
PAR < 30 days (past due) – 10.42% (Portfolio Report, Row – 19, Column – VIII) +
PAR > 31 – 60 days (past due) – 5.95% (Portfolio Report, Row – 20, Column – VIII) +
PAR > 61 – 90 days (past due) – 2.98% (Portfolio Report, Row – 21, Column – VIII) +
PAR > 90 days (past due) – 2.08% (Portfolio Report, Row – 22, Column – VIII)
= 21.43% for year 2002 (Portfolio Report, Ageing Table, Row – 23, Column – VIII)
Similarly,
PAR > 30 days (past due) is
Sum of
PAR > 31 – 60 days (past due) – 5.95% (Portfolio Report, Row – 20, Column – VIII) +
PAR > 61 – 90 days (past due) – 2.98% (Portfolio Report, Row – 21, Column – VIII) +
PAR > 90 days (past due) – 2.08% (Portfolio Report, Row – 22, Column – VIII)
= 5.95% + 2.98% + 2.08% = 11.01%
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
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Likewise,
PAR > 60 days (past due) is
Sum of
PAR > 61 – 90 days (past due) (Portfolio Report, Row – 21, Column – VIII) +
PAR > 90 days (past due) (Portfolio Report, Row – 22, Column – VIII)
= 2.98% + 2.08% = 5.06%
Similarly,
PAR > 90 days (past due) is 2.08%
This, way portfolio at risk by age can be calculated. The detailed procedure is given in annex 3, which
outlines the technically correct procedure for ageing past due loans.
Graph – 1
38.46%
28.57%
21.43%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2000 2001 2002
Trends in Portfolio at Risk
Q: What is Arrears Rate and How to Calculate and Interpret it?
Step 1 Use the formula given below
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
41
Arrears Amounts (or Principal Overdue / Past Due)
Total Gross Outstanding Loan Portfolio
Description 2000 2001 2002
Arrears Amount (A) 20000 18000 14000
Step 2 Take the arrears amount for Year 2000 – it is 20000 (Please refer to Portfolio
Report, Row 8, Column IV for arrears amount for Year 2000)
Description 2000 2001 2002
Total Gross Outstanding Loan Portfolio (B) 104000 140000 168000
Step 3 Take the Total Gross Outstanding Loan Portfolio for Year 2000 – it is 104000
(Please refer to Portfolio Report, Row 6, Column IV for total gross outstanding loan
portfolio for Year 2000)
Step 4 Divide arrears amount by Total Gross Outstanding Loan Portfolio and as shown
below, we get arrears rate as 19.23% for year 2000
Arrears Rate 2000 2001 2002
Arrears Amount (A) 20000 18000 14000
Total Gross Outstanding Loan Portfolio (B) 104000 140000 168000
Arrears Rate Value = A / B = 19.23% 12.86% 8.33%
Numerator of Formula
Denominator of Formula
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
42
Step 5 Likewise, as given above, the arrears rate for Years 2001 and 2002 are respectively
12.86% and 8.33%
Step 6 The trend in arrears rate, as depicted by the graph below, is decreasing, which is
positive. Arrears Rate has come down by nearly 10.90% over the 3 year period, while
the Total Outstanding Loan Portfolio has grown by 20.23%
during the same period
Graph – 2
19.23%
12.86%
8.33%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
2000 2001 2002
Trends in Arrears Rate
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
43
Q: What is Loan Loss Reserve Ratio and how to calculate and
Interpret it?
Step 1 Use the formula given below
Loan Loss Reserve Amount
Total Outstanding Loan Portfolio
Description 2000 2001 2002
Loan Loss Reserve Amount (A) 10000 10000 14000
Step 2 Take the Loan Loss Reserve Amount for Year 2000 – it is 10000 (Please refer to
Balance Sheet Adjusted 2, Row 10, Column IV for Loan Loss Reserve Amount for
Year 2000)
Description 2000 2001 2002
Total Outstanding Loan Portfolio (B) 104000 140000 168000
Step 3 Take the Total Outstanding Loan Portfolio for Year 2000 – it is 104000 (Please
refer to Portfolio Report, Row 6, Column IV for total gross outstanding loan portfolio
for Year 2000)
Step 4 Divide Loan Loss Reserve Amount by Total Outstanding Loan Portfolio and as
shown below, we get Loan Loss Reserve Ratio as 9.62% for year 2000
Loan Loss Reserve Ratio 2000 2001 2002
Loan Loss Reserve Amount (A) 10000 10000 14000
Total Outstanding Loan Portfolio (B) 104000 140000 168000
Loan Loss Reserve Ratio Value = A/B = 9.62% 7.14% 8.33%
Step 5 Likewise, as given above, the loan loss reserve ratio for Years 2001 and 2002 are
respectively 7.14% and 8.33%
Step 6 The overall trend in loan loss reserve ratio, as depicted by the graph below, is
decreasing6. Please note that the loan loss reserve ratio decreases (in year 2001) and
6 Whether this is positive or not, actually depends on the specific situation and overall portfolio quality – i.e., whether a portfolio is under reserved or
over reserved.
Numerator of Formula
Denominator of Formula
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
44
again increases (in year 2002). The reason for this is that there has been a substantial
write-off in year 2001. Please note that the loan loss reserve amount of 14000 is
derived from the Portfolio Report, based on an ageing analysis of all loans.
Graph – 3
9.62%
7.14%
8.33%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
2000 2001 2002
Trends in Loan Loss Reserve Ratio
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
45
Q: What is Loan Loss Ratio and How to Calculate and Interpret it?
Step 1 Use the formula given below
Amount Written-Off
Average Outstanding Loan Portfolio
Description 2000 2001 2002
Amount Written-Off (A) 0 6000 1000
Step 2 Take the Amount Written-Off for Year 2000 – it is 0 (Please refer to Portfolio
Report, Row 10, Column IV for Amount Written-Off for Year 2000)
Description 2000 2001 2002
Average Outstanding Loan Portfolio (B) 90000 122000 150000
Step 3 Take the Average Outstanding Loan Portfolio for Year 2000 – it is 90000 (Please
refer to Portfolio Report, Row 7, Column IV for average outstanding loan portfolio for
Year 2000)
Step 4 Divide Amount Written-Off by Average Outstanding Loan Portfolio and as shown
below, we get Loan Loss Ratio as 0.00% for year 2000
Loan Loss Ratio 2000 2001 2002
Amount Written-Off (A) 0 6000 1000
Average Outstanding Loan Portfolio (B) 90000 122000 150000
Loan Loss Ratio Value = A/B = 0.00% 4.92% 0.67%
Step 5 Likewise, as given above, the loan loss ratio for Years 2001 and 2002 are respectively
4.92% and 0.67%
Numerator of Formula
Denominator of Formula
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
46
Step 6 The overall trend in loan loss ratio, as depicted by the graph below, is decreasing,
which is positive. As noted earlier, in 2001, 6000 worth loans were written-off, which
is why the ratio increases and then again decreases in 2002.
Applying the same for year 2001, we have the following:
which is 10000 + 6000 – 10000 = 6000
(Portfolio Report, Row = 10, Column = V)
How to find out if write-offs have been made in a particular year?
Loan Loss Reserve (Opening Balance)
+
Loan Loss Provision (during year)
-
Loan Write-offs (during year)
=
Loan Loss Reserve (Closing Balance)
Loan Loss Reserve (Opening Balance) = 10000
(Balance Sheet, Adjusted 2, Row =10, Column = IV)
+
Loan Loss Provision Created (during 2001) = 6000
(Income Statement, Adjusted 2, Row = 14, Column = V)
-
Loan Reserve (Closing Balance) = 10000
(Balance Sheet, Adjusted 2, Row = 10, Column = V
=
Loan Write-off during year 2001 = 6000
Trainer’s Manual for Loan Portfolio Assessment of Micro Finance Institutions
47
Graph – 4
0.00%
4.92%
0.67%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
2000 2001 2002
Trends in Loan Loss Ratio
Exercise 6.1
Objective: To understand the impact of using alternative methods of ageing on
portfolio quality assessment, provisioning and sustainability
Group Formation: Buzz groups of 4/5 people
Time: 30 minutes
Tasks: 1. Using data given in the Exercise, please compare and contrast the results
obtained by using the accurate best practices ageing method versus the
erroneous installment method of ageing
2. Please discuss and recap the process of how to create a best practices
based loan repayment schedule using correct method of ageing, proper
sequence of appropriating client repayments and the like
3. Individuals in groups should do the calculations themselves. They could
consult other group members/facilitator, when they require
help/assistance
4. Group should discuss the solution and have one final solution to the
whole exercise
Please be prepared to share your results with the larger group (plenary),
and turn in your calculations to the facilitators.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the
calculations. He/she should also receive a copy of the calculations from each
participant, prior to wrapping up the course
Q: What are asset quality indicators?
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48
1. This group of ratios are very crucial because the “portfolio" is the primary income generating asset of a
micro-finance institution (MFI or CDFI)
2. The risk that some of the loans will not earn revenue and may not be paid back (at all) is very real and
must be anticipated
3. Hence, management of this risk is critical because it impacts the very viability of the micro-credit
operation
4. Therefore, timely and periodic monitoring of this group of ratios should enable MFIs to detect
delinquency, which, in the long-term, could de-capitalise the revolving loan fund of the MFI and put
the entire micro-finance operations in jeopardy
Portfolio at Risk/Aged Portfolio at Risk (Pessimistic Measure of Delinquency)
Arrears Rate7 (Optimistic Measure of Delinquency)
Loan Loss Provision Ratio
Loan Loss Ratio
Apart from the above asset quality ratios, there are the traditionally used Repayment Rates (On-Time
Repayment Rate, Cumulative Repayment Rate, and Current Repayment Rate). They are not genuine
measures of portfolio quality.
Q: What statements/reports are required for calculating asset quality
indicators?
Statement/
Reports/Records
Requirements
Portfolio Report
with Ageing
Analysis
Yes, this alone is required and sufficient. But, the ageing of loans must
be done in an accurate manner.
Balance Sheet Could be used if appropriately structured, especially to include
information on past due and restructured loans
Income Statement Some information is useful, especially with regard to loan loss provisions
Loan Ledger
(Individual)
Yes, required and very important
Statement/Reports / Records
Requirements
7 This is not a healthy indicator but is often required for statutory reporting
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1 PAR - Portfolio at Risk CRR - Cumulative Repayment Rate
PIA - Portfolio in Arrears OTRR – On-Time Repayment Rate
Step 1 Prepare Basic Loan Repayment
Format
For Each Loan
Step 2
Step 3
Complete Loan Repayment
Format For Each Loan
Calculate Accurate Age for Each
Individual loan
Prepare Aggregated Loan
Repayment Format
For All Loans
Categorize Loans
According To Age and Risk
Prepare Loan Loss Provision
Table
Calculate PAR, PIA,
CRR, OTRR
Step 4
Step 5
Step 6
Step 7
FIGURE 6.1 - CALCULATING PORTFOLIO QUALITY INDICATORS
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Q: What is the best practices format for generating the Portfolio
Report?
Step 1 Prepare the Basic Loan Repayment Format for each Loan.
Step 2 Complete Loan Repayment Format for each Loan
Step 3 Calculate Accurate Age for each Individual Loan
Step 4 Prepare Aggregated Loan Repayment format for all Loans
Step 5 Categorize Loans according to Age and Risk
Step 6 Prepare Loan Loss Provision Table
Step 7 Calculate PAR, PIA, CRR, OTRR and Aged PAR indicators
Step 8 Fill out other basic information required as per Column’s given
above in the portfolio report
Step 9 Interpret the individual Portfolio Report formats
Step 10 Compare portfolio report formats on 2 pre-specified dates.
Step 11 Interpret the comparative Portfolio Report formats
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Q: What is the best practices format for the Portfolio Report?
Loan (Principal) Amounts, Key Parameters as on... Date 1/04/2004
Total value of loans disbursed (End of period) 445,000
Total number of loans disbursed (End of period) 48
Value of loans outstanding (End of period) 200,996
Number of loans outstanding (End of period) 31
Average outstanding balance of loans (End of period) 6,484
Value of payments in arrears (End of period) 3,426
Value of outstanding balance of loans in arrears (End of period) 48,969
Value of loans re-scheduled (End of period) 0.00
Value of loans re-financed (End of period) 0.00
Value of loans written-off (End of period) 0.00
Value of cumulative principal due (End of Period) 247,430
Value of cumulative principal paid (End of Period) 244,004
Value of cumulative principal paid on-time (End of Period) 210,637
Value of principal prepaid (End of Period) 2,190
Average loan size (End of period) 9,271
Average loan term (months) (End of period) 10
Loan Loss Provision Table
Description Loans
days in Past Due
No. of
Loans
Amount in
Arrears (US $)
Unpaid
Principal
Balance (US $)
Portfolio at
Risk
Provision
Rate
Loan Loss
Provision (US $)
Current Loans 26 0 152,027 0.0 % 0 % 0
1 – 30 Days Past Due (PD) 2 488 13,305 6.62 % 10 % 1,330
31 – 60 Days PD 1 1,406 33,291 16.56 % 25 % 8,322
61 – 90 Days PD 0 0 0 0.00 % 50 % 0
91 – 180 Days PD 1 902 1,743 0.87 % 75 % 1,307
181 – 365 Days PD 0 0 0 0.00 % 90 % 0
above 365 Days PD 1 630 630 0.31 % 100 % 630
Total 31 3,426 200,996 24.36 % 11,590
Total Outstanding Portfolio (US $.) : 200,996
Loan Loss Provision Ratio : 5.77%
Key Indicators
Arrears
Rate
Portfolio at Risk (PAR)
>= 1 Day
PAR > = 1 Day, PAR Adjusted for Rescheduling, Refinancing,
Write-offs and Fresh Loan Disbursements
1.70% 24.36% 24.36%
Aged Portfolio At Risk (PAR) and Repayment Rates (RR)
PAR > 30 (Days) PAR > 60 (D) PAR > 90 (D) PAR > 180 (D) On-Time RR Cumulative RR
17.74% 1.18% 1.18% 0.31% 85.13% 97.73%
Ageing done as per best practices method and prepayments are subtracted for repayment rates
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Q: What is the best practices format for the Comparative Portfolio
Report?
Loan, (Principal) Amounts
Key Indicators as on...
Report
Date -
1/04/2003
Comparison
Date -
1/04/2002
Change in
Indicator
Direction of
Change
Remarks
Portfolio at Risk (PAR) > = 1 Day 24.36% 3.40% 20.96% Increased Negative
PAR Adjusted for Rescheduling,
Refinancing and Write-offs
24.36% 3.40%
20.96% Increased Negative
PAR > 30 Days 17.74% 3.40% 14.34% Increased Negative
PAR > 60 Days 1.18% 3.40% -2.22% Decreased Positive
PAR > 90 Days 1.18% 3.40% -2.22% Decreased Positive
PAR > 180 Days 0.31% 0.79% -0.48% Decreased Positive
Loan Loss Provision Ratio 5.77% 2.67% 3.10% Increased Negative
On-Time Repayment Rate 85.13% 79.25% 5.88% Decreased Negative
Cumulative Repayment Rate 97.73% 97.81% -0.08% Decreased Negative
Arrears Rate 1.70% 1.38% 0.32% Increased Negative
Loan (Principal) Amounts,
Key Parameters as on...
Report
Date -
1/04/2003
Comparison
Date -
1/04/2002
Change in
Parameter
Direction of
Change
Remarks
Total value of loans disbursed
(End of period) 445000.00 250000.00 195000.00 Increased Positive
Total number of loans disbursed
(End of period) 48 28 20 Increased Positive
Value of loans outstanding (End of
period) 200996.00 131242.00 69754.00 Increased Positive
Number of loans outstanding
(End of period) 31 25 6 Increased Positive
Average outstanding balance of loans
(End of period) 6483.74 5249.68 1234.06 Increased Positive
Value of payments in arrears
(End of period) 3426.00 1814.00 1612.00 Increased Negative
Value of outstanding balance of
loans in arrears (End of period) 48969.00 4458.00 44511.00 Increased Negative
Value of loans re-scheduled (End of
period) 0.00 0.00 0.00 No Change Status Quo
Value of loans re-financed (End of
period) 0.00 0.00 0.00 No Change Status Quo
Value of loans written-off (End of
period) 0.00 0.00 0.00 No Change Status Quo
Average loan size (End of period) 9270.83 8928.57 342.26 Increased Positive
Average loan term (months)
(End of period) 10 10 0 No Change Status Quo
Loan Loss Provision Amount 11590.50 3498.30 8092.30 Increased Negative
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Session 7: Seven: Step 4, Verification of Loan Administration and
Documentation
Session Objectives: To facilitate participants to understand the need to verify documents related to loan
Time:
140 Minutes
Methods:
Presentation
PRA exercise in mixed groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 7”. This session
consists of approximately 143 slides.
PRA Cards
Handouts: None
Exercise: Exercise 7.1: Review of step 4 (75 minutes)
Overview: This session explains step 4 of loan portfolio assessment, which deals with verification of
documents relating to loans.
What is step 4 of the loan portfolio assessment? Time: 15 minutes + 60 minutes for exercise
Slides: 3
The facilitator briefly describes step 4 and introduces participants to the PRA exercise to help them go
through the different cases possible.
What are key issues to be addressed while verifying loan documents? Time: 65 minutes
Slides: 5
The facilitator uses the remarks slides to highlighting the key issues that are likely to emerge in step 4. The
slides listing all the different cases/aspects have been provided as hidden slides. The trainer may
choose to use them to discuss the possibilities.
This session also has slides hidden for cases of individual lending. They are to be used if relevant
for any participating MFI.
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Q: How to assess loan administration and credit policy?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
2. Letter of offer/contract/application, repayment schedule and client records
3. Borrower‟s loan file and all related documents like DPN‟s
4. MIS records of borrower‟s past credit history including transactions
5. Comparison with list of overdue loans and the associated conditions
6. MIS records of client transactions (both principal and interest, over dues etc)
7. Loan ledger
8. Cash/bank books/records including client savings/current accounts, receipts and their
reconciliation, deposit slips (if applicable) and other client records (if available)
9. Best practices construction of loan repayment by clients using correct method of ageing past
due loans, appropriation of loan repayments and other aspects – this would have been
calculated in steps 1- 3 and compiled.
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55
Special Aspects to Consider…
Sometimes, policy may be silent on these aspects and that needs to be noted. For example, when
flat rates of interest are used in some models and the total number of Installments have passed and if
the institution collects interest first, then principal amounts may remain overdue beyond loan term and
credit policy may not stipulate what interest should be levied on the over due principal beyond loan
term (as interest was collected on a flat basis)
Must check for large lump sum payments by clients for previous loans, which could be followed
immediately by disbursement of a fresh loan.
The key is to isolate the number of Installments that were overdue in a previous loan along with the
average time taken to settle the over dues. Merely looking at whether the total loan has been repaid can
be misleading
Must check whether loans with „0‟ principal overdue and interest overdue are classified as overdue
loans. The converse is also true
Look for informal grace or moratorium periods. For example, sometimes, policy may stipulate that
clients could pay back in 46 weekly Installments over a 52 week loan period and as a result,
sometimes, a loan whose Installment has not been paid for 6 weeks could still be called a current loan
while in reality it is not
Other aspects would have been examined in Steps 1 – 3
Q: How to verify the loan application?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
2. Letter of offer/contract/application, repayment schedule and client records
3. Borrower‟s loan file and all related documents like DPN‟s
4. MIS records of borrower‟s past credit history including transactions
5. Comparison with list of overdue loans and the associated conditions
6. MIS records of client transactions (both principal and interest, over dues etc)
7. Loan ledger
8. Cash/bank books/records including client savings/current accounts, receipts and their
reconciliation, deposit slips (if applicable) and other client records (if available)
9. Best practices construction of loan repayment by clients using correct method of ageing past due loans,
appropriation of loan repayments and other aspects – this would have been calculated in steps 1- 3 and
compiled.
Special Aspects to Consider…
Signatures and verification are critical and must be examined for
Exceptions typically occur when signatures and verification are not present
Legal enforcement of loan contract could become problematic when such conditions exist
Borrower past data must be checked thoroughly – it could be incomplete or inaccurate
Q: How to verify the loan terms?
Steps to follow…
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1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
2. Letter of offer/contract/application, repayment schedule and client records
3. Borrower‟s loan file and all related documents like DPN‟s
4. MIS records of borrower‟s past credit history including transactions
5. Comparison with list of overdue loans and the associated conditions
6. MIS records of client transactions (both principal and interest, over dues etc)
7. Loan ledger
8. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable) and other client records (if available)
9. Best practices construction of loan repayment by clients using correct method of ageing past due loans,
appropriation of loan repayments and other aspects – this would have been calculated in steps 1- 3 and
compiled.
Special Aspects to Consider…
Comparison of loan policy document with data from steps 1-3 (especially, best practices construction
of loan repayment by client) is very critical and it will highlight whether any of the aspects are present
Q: How to assess loan authorization and approval?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
2. Letter of offer/contract/application, repayment schedule and client records
3. Borrower‟s loan file and all related documents like DPN‟s
4. MIS records of borrower‟s past credit history including transactions
5. Comparison with list of overdue loans and the associated conditions
6. MIS records of client transactions (both principal and interest, over dues etc)
7. Loan ledger
8. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable) and other client records (if available)
9. Best practices construction of loan repayment by clients using correct method of ageing past due loans,
appropriation of loan repayments and other aspects – this would have been calculated in steps 1- 3 and
compiled.
10. Credit committee minutes and files at various levels and the respective notes
Special Aspects to Consider…
Comparison of loan policy document with credit committee decisions and notes along with data from
steps 1-3 (especially, best practices construction of loan repayment by client) is very critical and it will
highlight whether any of the aspects are present
Q: How to verify the letter of offer (loan contract)?
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Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
2. Letter of offer/contract/application, repayment schedule and client records
3. Borrower‟s loan file and all related documents like DPN‟s
4. MIS records of borrower‟s past credit history including transactions
5. Comparison with list of overdue loans and the associated conditions
6. MIS records of client transactions (both principal and interest, over dues etc)
7. Loan ledger
8. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable) and other client records (if available)
9. Best practices construction of loan repayment by clients using correct method of ageing past due loans,
appropriation of loan repayments and other aspects – this would have been calculated in steps 1- 3 and
compiled.
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Signatures and
verification are critical and must be examined for
Client account names, number and loan number and borrower name must be matched
Exceptions typically occur when signatures and verification are not present
Legal enforcement of loan contract could become problematic when loan contract is incomplete
Borrower past data must be checked thoroughly – it could be incomplete or inaccurate
Q: How to verify chattels mortgage – borrower?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Instrument (affidavit) and all details therein including date, place and process of creation
2. Supporting documents for the instrument if any
3. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
4. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Signatures and
verification are critical and must be examined for
Client account names, number and loan number and borrower name must be matched
Exceptions typically occur when signatures and verification are not present
Legal enforcement of loan contract could become problematic when loan contract is incomplete
Assets details including serial numbers must be noted
Any encumbrance on the asset must also be ascertained
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58
Clear evidence of whether process adopted is transparent and witnesses require to be checked
Q: How to verify chattels mortgage – guarantor?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Instrument (affidavit) and all details therein including date, place and process of creation
2. Supporting documents for the instrument if any including asset documents
3. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
4. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Signatures and
verification are critical and must be examined for
Client account names, number and loan number and borrower name must be matched
Exceptions typically occur when signatures and verification are not present
Legal enforcement of loan contract could become problematic when loan contract is incomplete
Assets details including serial numbers must be noted
Any encumbrance on the asset must also be ascertained
Clear evidence of process adopted and guarantor‟s/witnesses to it and their guarantee/witness to the
process require to be checked
Q: How to verify chattels/goods – borrower?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Instrument (affidavit) and all details therein including date, place and process of creation
2. Supporting documents for the instrument if any including asset documents
3. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
4. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Signatures and
verification are critical and must be examined for
Client account names, number and loan number and borrower name must be matched
Exceptions typically occur when signatures and verification are not present
Legal enforcement of loan contract could become problematic when loan contract is incomplete
Assets details including serial numbers must be noted and matched with original approvals
Any encumbrance on the asset must also be ascertained
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Clear evidence of process adopted and guarantor‟s/witnesses and their guarantee/witness to the process
require to be checked
Q: How to verify chattels/goods – guarantor?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Instrument (affidavit) and all details therein including date, place and process of creation
2. Supporting documents for the instrument if any including asset documents
3. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
4. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Signatures and
verification are critical and must be examined for
Client account names, number and loan number and borrower name must be matched
Exceptions typically occur when signatures and verification are not present
Legal enforcement of loan contract could become problematic when loan contract is incomplete
Assets details including serial numbers must be noted and matched with original approvals
Any encumbrance on the asset must also be ascertained
Clear evidence of process adopted and guarantor‟s/witnesses and their guarantee/witness to the process
require to be checked
Q: How to verify vehicles as collateral?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to Peruse…
1. Documents and all details therein including those with regard to ownership, insurance and other
aspects
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication etc
3. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Ownership and insurance
documentation is critical as also transfer forms etc
Legal enforcement of loan contract could become problematic when these aspects are incomplete
Assets details including serial numbers must be noted and matched with original approvals
Any encumbrance on the asset must also be ascertained
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Q: How to verify property (land) as collateral?
Steps to follow…
1. Examination of documents given in next column with data gathered in steps above will automatically
reveal whether any of the aspects are present or absent
Records to Peruse…
1. Property documents and all details therein including those with regard to ownership, title, insurance
and other aspects
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication etc
3. Letter of offer/contract/application, repayment schedule and client records
Credit committee minutes and files at various levels and the respective notes Ownership, title, and
insurance documentation is critical
Legal enforcement of loan contract could become problematic when these aspects are incomplete
Assets details including registration/survey numbers must be noted and matched with original
approvals
Any encumbrance on the asset must also be ascertained
Q: How to verify references?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Reference forms and all details therein including signatures
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication etc
3. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Completed forms are
critical as also signatures
Legal enforcement of loan contract could become problematic when these aspects are incomplete
Q: How to verify guarantee?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Guarantee documents and all details therein for completeness
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication etc
3. Letter of offer/contract/application, repayment schedule and client records
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61
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Clear intention to
guarantee must be ascertained
Presence of signatures and their verification is also very critical including the that of the witness
Q: How to verify other documents?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. All necessary documents including Memorandum and Articles of Association, evidence of
incorporation, insurance certificates and all details therein for completeness
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication etc
3. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Look for notes or
remarks on whether originals had been verified as copies can be fabricated
Notarised copies are useful here
Cross-checking with notary may be required in some cases
Q: How to verify original title documents for vehicles?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Documents and all details therein including those with regard to ownership, insurance and other
aspects
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication etc
3. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Ownership and insurance
documentation is critical as also transfer forms etc
Legal enforcement of loan contract could become problematic when these aspects are incomplete
Assets details including serial numbers must be noted and matched with original approvals
Any encumbrance on the asset must also be ascertained
Storage of originals in a safe and fire proof place is very critical
Q: How to verify original title documents for property (land)?
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62
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Property documents and all details therein including those with regard to ownership, title, insurance
and other aspects
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication, margins etc
3. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Ownership, title, and
insurance documentation is critical
Legal enforcement of loan contract could become problematic when these aspects are incomplete
Assets details including registration/survey numbers must be noted and matched with original
approvals
Any encumbrance on the asset must also be ascertained
Storage of originals in a safe and fire proof place is very critical
Q: How to verify securities?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Security documents and all details therein including those with regard to ownership, title, insurance
and other aspects
2. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues like hypothetication, margins etc
3. Letter of offer/contract/application, repayment schedule and client records
Special Aspects to Consider…
Storage of original securities in a safe and fire proof place is very critical
Any encumbrance on the security must also be ascertained
Ownership, title, and insurance documentation is critical
Legal enforcement of loan contract could become problematic when these aspects are incomplete
Valuation of security provided must be appropriately done through a transparent process as also any
substitution of the security
Q: How to verify general records with regard to loans/other
products?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
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Records to peruse…
1. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
2. Letter of offer/contract/application, repayment schedule and client records
3. Borrower‟s loan file and all related documents like DPN‟s
4. MIS records of borrower‟s past credit history including transactions
5. Comparison with list of overdue loans and the associated conditions
6. MIS records of client transactions (both principal and interest, over dues etc)
7. Loan ledger
8. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable) and other client records (if available)
9. Best practices construction of loan repayment by clients using correct method of ageing past due loans,
appropriation of loan repayments and other aspects – this would have been calculated in steps 1- 3 and
compiled.
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes Basically, data from steps
above would indicate whether any of these conditions are present or absent
The key is look for deviations (or exceptions) from authorisations and check whether they have
approved or not
In case discrepancies exist, specific interviews with clients, staff and credit committee concerned is a
must to bring transparency to the whole process and the associated data and records
Q: How to verify loan documentation?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Loan/credit policy document and its examination for various aspects like definition of delinquency,
loan terms and other issues
2. Letter of offer/contract/application, repayment schedule and client records
3. Borrower‟s loan file and all related documents like DPN‟s
4. MIS records of borrower‟s past credit history including transactions
5. Comparison with list of overdue loans and the associated conditions
6. MIS records of client transactions (both principal and interest, over dues etc)
7. Loan ledger
8. Cash/bank books/records including client savings/current accounts, receipts and their reconciliation,
deposit slips (if applicable) and other client records (if available)
9. Best practices construction of loan repayment by clients using correct method of ageing past due loans,
appropriation of loan repayments and other aspects – this would have been calculated in steps 1- 3 and
compiled.
Special Aspects to Consider…
Credit committee minutes and files at various levels and the respective notes The key is look for
deviations (or exceptions) from authorisations and check whether they have approved or not
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In case discrepancies exist, specific interviews with clients, staff and credit committee concerned is a
must to bring transparency to the whole process and the associated data and records
Perusal of records as on the dates of the assessment are very critical to ascertain whether they are
regularly updated and complete
Judgements about accuracy will come from the steps given earlier including construction of the loan
repayment schedule as per best practices, after making the necessary adjustments
Exercise 7.1 Instructions same as Exercise 3.2
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Session 8: Eight: Step 5, Verification of Rollovers and Restructuring
Session Objectives: To understand the need to review cases relating to refinancing of loans
To understand the need to review cases relating to rescheduling of loans
To understand the implication of refinancing or rescheduling of loans on the overall
performance of the loan portfolio
Time:
60 Minutes
Methods:
Presentation
Exercise in small groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 8”. This session
consists of approximately 18 slides.
PRA Cards
Handouts: None
Exercise:
Exercise 8.1: Review of Step 5
(30 minutes)
Overview: Session 8 deals with step 5 of loan portfolio assessment– special loan cases where the
loan has be refinanced or rescheduled for different reasons.
What is step 5 of loan portfolio assessment process? Time: 10 minutes + 30 minutes for exercise
Slides: 5
The facilitator briefly describes step 5 and introduces participants to the PRA exercise to help them go
through the different cases possible.
What are key issues to be addressed while dealing with refinanced or restructured loans? Time: 20 minutes
Slides: 13
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The facilitator uses the remarks slides to highlighting the key issues that are likely to emerge in step 5. The
slides listing all the different cases/aspects have been provided as hidden slides. The trainer may
choose to use them to discuss the possibilities.
Q: How to verify for loan rescheduling/refinancing etc?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. MIS design documents including database design, loan ledger and tracking system (if manual),
delinquency, credit and write-off policy documents, portfolio report for last three years (at least) and
data from all other records given in steps above
Special Aspects to Consider…
Most critical thing to look for is the date of original disbursement
Add loan term to this to see if the loan is passed the loan term
If on the dates of the assessment, the loan is passed the original loan term and the loan is outstanding
and not been classified as overdue, then rescheduling has occurred
Please also look for any lump sum payments made for overdue amounts, followed by immediate
disbursal of fresh loans. This again is a symptom of rescheduling/re-financing
A review of the receipts and their reconciliation at various levels coupled with construction of the
correct best practices ageing based repayment schedule (given in steps 1 –3) above will ensure one to
ascertain whether there has been re-scheduling etc
Q: How to verify loan write-offs?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Credit, delinquency and write-off policies and procedures and data from all other records given in steps
above
Special Aspects to Consider…
Written approvals for write-offs and corresponding dates to ensure that there is no write-off using a
back dated procedure
Check the corresponding accounting records
In case a reserve exists, the typical write-off is processed as follows: Decrease loan outstanding (credit
of asset) and Decrease of loan loss reserve (debit of negative asset)
MIS (computerised) systems need to be validated for this as well
Exercise 8.1 Instructions same as Exercise 3.2
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Session 9: Step 6, Review of loan portfolio management
policies/procedures/system
Session Objectives: To understand the need for defined policies and procedures
To review various cases and analyse the implications of variations from prescribed norms
Overview: Step 6 is introduced in this session. Participants understand the need to document policies,
how to review polices to identify risks, contradictions, identify variations and analyse the reasons for
variation.
What is step 6 of loan portfolio assessment process? Time: 10 minutes + 30 minutes for exercise
Slides: 5
The facilitator briefly describes step 6 and introduces participants to the PRA exercise to help them go
through the different cases possible.
What are key issues to be addressed while reviewing the loan policies and cases related to
loan policy? Time: 10 minutes
Time:
60 Minutes
Methods:
Presentation
PRA exercise in small groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 9”. This session
consists of approximately 42 slides.
PRA Cards
Handouts: None
Exercise: Exercise 9.1: Review of step 6 (30 minutes)
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68
Slides: 37
The facilitator uses the remarks slides to highlighting the key issues that are likely to emerge in step 6. The
slides listing all the different cases/aspects have been provided as hidden slides. The trainer may
choose to use them to discuss the possibilities.
Q: How to assess policies with regard to loan portfolio management?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Credit, delinquency and write-off policies and procedures and data from all other records given in steps
above
Special Aspects to Consider…
Look for written down policies
Look for evidence with regard to use of these policies
Look for evidence of violation of these policies
In case of write-offs, there are mere accounting entries and see how the institution handles these
written off loans, after the actual write-off. Pursuing recovery until the economic cost of recovery is
greater than the written-off amount is necessary
Please check for how collections from written-off loans are to be handled and how they are actually
handled. Some internal control failures are possible here
Q: How to verify definition of delinquency (past or over due) and
default?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. MIS design documents including database design, loan ledger and tracking system (if manual),
delinquency, credit and write-off policy documents, portfolio report for last three years (at least) and
data from all other records given in steps above
Special Aspects to Consider…
Grace periods need to be spotted and adjusted for as noted earlier
Irrespective of the date of disbursement, some models keep the 1st repayment date as the last of the
succeeding month. This aspect needs to be noted
Another way grace period can affect portfolio quality is through the definition of delinquency. For
example, sometimes, policy may stipulate that clients could pay back in 46 weekly Installments over a
52 week loan period and as a result, sometimes, a loan whose Installment has not been paid for 6
weeks could still be called a current loan
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Q: How to ascertain portfolio quality and repayment?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. MIS design documents including database design, loan ledger and tracking system (if manual),
portfolio report for last three years (at least) and data from all other records given in steps above
Special Aspects to Consider…
Standard definitions of indicators, standard method of calculation and standard ways of interpretation
are very critical
Adjustments for rescheduling, refinancing, write-offs and/or fresh loan disbursements are very critical
Portfolio quality indicators are better than repayment indicators but they suffer limitations, especially
with aspects that increase the denominator and/or decrease the numerator
Sometimes, institutions show good portfolio quality indicators but because they use a wrong method of
appropriation. A simultaneous look at the interest yield should reveal whether this is the case or not –
lower yield coupled with good portfolio quality indicators suggests serious delinquency
In many models, there are many levels and there may be silent delinquency in that at the lowest
(individual client) level, there is delinquency but the group manages it at its level using savings/other
cash resources. This cannot go on for long and hence, it is important to get a good understanding of the
portfolio quality indicators at various and all levels rather than just the superficial and uppermost levels
Q: How to assess loan-tracking systems?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. MIS design documents including database design, loan ledger and tracking system (if manual),
portfolio report for last three years (at least) and data from all other records given in steps above
Special Aspects to Consider…
Method of appropriation, ageing method and method of generation of loan loss provision table etc need
to be carefully ascertained.
Sometimes, as from a computerised system, it may be difficult to isolate this and hence, an assessment
of the MIS is very essential using MIS experts
Q: How to verify age calculation for overdue loans?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
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1. Portfolio report for last three years (at least) and data from all other records given in steps above
Special Aspects to Consider…
Method of ageing is very critical and that must be as per best practices
Correct age of a past due loan on a specific date = Date of age calculation – date of earliest unpaid
overdue
Method of appropriation is very critical and must be as per best practices sequence
Loan rescheduling, loan refinancing and other aspects must be taken into account
All over dues (principal, interest and fines etc) must be included while generating list of past due loans
Provisioning must be based on actual age and must match age which is a surrogate for the risk with
regard to a loan
Q: How to verify loan loss provisioning and write-offs?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Portfolio report for last three years (at least) and data from all other records given in steps above
Special Aspects to Consider…
Understanding how provisioning is done is critical – what is the basis for provisioning? Is it historical
data or ageing or some mere percentage of loan outstanding (with no rationale what-so-ever)
It is critical to check the ageing of past due loans at point of verification and compare provisioning
percentage after ageing with actual
Method of appropriation of client repayments, definition of delinquency, levy of penalties and other
fines have an impact on provisioning and must be understood
Whether all overdues are used as a basis for generation of the loan loss provision table also needs
clarity as one can have impact if only principal overdue is used to generate a list of overdue loans – in
such cases, those loans with „0‟ principal overdue and some interest overdue may be left out and would
distort the true picture and camouflage the true risk in the portfolio
Sometimes, best practices and regulatory requirements may differ and if the institution is adopting
more stringent norms because of adoption of best practices while being different from that prescribed
by regulation, the institution need not be penalised. The converse may also be true and needs to be
ascertained whether by keeping the provisioning to the regulatory requirements, the institution is at
perceived risk because the regulatory requirements are less stringent than best practices
Sometimes, institutions say that they have a 15% loan loss provision ratio, which actually means
nothing by itself. Institutions could have provisioned 15% when their ageing suggests that they may
actually require 30% (case of under provisioning) whereas some organisations could have provisioned
just 5% whereas as per the ageing they may require just 3% (case of over provisioning)
Exercise 9.1 Instructions same as Exercise 3.2
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Session 10: Step7, Verification of internal and external controls for loan
portfolio management
Session Objectives: To review the internal controls designed in the MFI
To understand the role of financial statements in Loan Portfolio Assessment
Time:
60 Minutes
Methods:
Presentation
PRA exercise in small groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 10”. This session
consists of approximately 30 slides
PRA cards
Handouts: Handout 10.1: Micro Finance Transaction Summary for Loan
Portfolio Assessment
Exercise: Exercise 10.1: Review of step 7 (30 minutes)
Overview: Step 7 is introduced in this session. Participants understand the need to review internal and
external controls that are in place.
What is step 7 of loan portfolio assessment process? Time: 10 minutes + 30 minutes for exercise
Slides: 4
The facilitator briefly describes step 6 and introduces participants to the PRA exercise to help them go
through the different cases possible.
What are key issues to be addressed while reviewing the internal and external control
systems? Time: 20 minutes
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Slides: 26
The facilitator uses the remarks slides to highlighting the key issues that are likely to emerge in step 7. The
slides listing all the different cases/aspects have been provided as hidden slides. The trainer may
choose to use them to discuss the possibilities.
Q: How to assess the internal control systems?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Internal audited reports for last three years (at least) and data from all other records given in steps
above
Special Aspects to Consider…
Walking through the internal audit process is very critical
Ensuring independence of reporting of internal auditors is also very important
Action taken reports of internal audits must also be closely evaluated and cross-checked with
successive internal audit reports
Reconciliation of receipts and payments and their associated records is very crucial to determining this
Timing of recognition of income and expenses also critical
Income recognition norms and rules for reversal of recognised income also important
Method of accounting employed is also critical
Segregation of duties is very important for delivery of financial services and this must be ascertained at
various levels
Security of MIS (especially, computerised) must be evaluated in terms of various aspects
It is important to check for use of delinquency lists and action plans with regard to these. Action taken
report with regard to delinquency action plans will help understand the proactiveness of the institution
in tackling delinquency
Ability of institution to spot delinquency through use of correct method of ageing, appropriation of
client repayments, classification of loan delinquency and other aspects are also critical
Action on deviant behaviour with regard to internal control failures is also critical to provide the
demonstration effect and serve as a safeguard or control mechanism in the future. In other words,
please check whether the organisation has taken action on staff for reported and identified internal
control failures – failure to take action relegates the control to a dummy control often
Q: How to compare loan portfolio data and financial
statements/external audit data?
Steps to follow…
1. Examination of documents given below with data gathered in steps above will automatically reveal
whether any of the aspects are present or absent
Records to peruse…
1. Audited Statements for last three years (at least) and data from all other records given in steps above
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Special Aspects to Consider…
Vertical and horizontal analysis of the financial statements is critical
Method of ageing, appropriation of client repayments, classification of loan delinquency and other
aspects are critical to matching portfolio records and financial statements
Reconciliation of receipts and payments and their associated records is very crucial to determining this
Timing of recognition of income and expenses also critical
Income recognition norms and rules for reversal of recognised income also important
Method of accounting employed is also critical
Exercise 10.1 Instructions same as Exercise 3.2
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Session 11: Using the Loan Portfolio Assessment Tool
Session Objectives: To introduce participants to the Loan Portfolio Tool
To help participants use the Loan Portfolio Tool through a case study
Overview: Having understood the seven steps of loan portfolio assessment in details, the participants
are introduced to the excel tool which summarises the findings of a loan portfolio assessment.
Participants are given a case study and they use the tool for assessing the MFI given in the
case study.
Analysing case study Time: 80 minutes
Slides: 3
Facilitator should give soft copy of the loan portfolio assessment tool to the participants and explain the
scoring of the tool with the help of the handout. Participants will fill the tool for MFI READ of the case
study.
Time:
80 Minutes
Methods:
Presentation
Exercise in small groups
Excel tool
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 11”. This session
consists of approximately 3 slides
Laptops
Handouts: Handout 11.1 Instruction for Using Excel Tool
Exercise: Exercise 11.1: Case Study of MFI READ (45 minutes)
Exercise 11.1b Loan Portfolio Assessment Tool
(30 minutes)
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Q: How to Use the Excel Sheet for Loan Portfolio Assessment?
Using the Branch Rating Sheet
Step 1 Record whether condition is absent (1) or present (0). Other options include: Not applicable marked as
NA
Step 2 Count the number of responses in a column and list under the three categories given above:
a) Not Applicable; b) Present; and c) Absent
Step 3 Total the number of responses across the three categories given above
Step 4
Determine the percentage of responses of Absent to Total and this gives the Branch Credit Score. The
higher the percentage score, the better are the loan portfolio controls and compliance within the
branch.
All of this has been linked in the excel sheet given earlier, which also lists common and
critical issues for head office attention as well as highlights above average, below average and
critical branches
Exercise 11.1
Objective: Applying the loan portfolio assessment tools to a real life situation
Group Formation: Groups of 4/5 people
Time: 75 minutes and open ended, if required
Tasks: 1. The portfolio assessment of Branch # 1 of a large multi branch MFI
READ revealed the prevailing situation with regard to the MFI‟s loan
portfolio. Please use the loan portfolio assessment tool provided and
rank the branch in the excel sheet.
2. For items that seem irrelevant to the MFI and its model, please feel free
to use the “Not Applicable” (NA) option.
3. In case you make any assumptions because of lack of sufficient
information (on these specific items) in the case study, please state them
and rank the branch accordingly.
4. Please also point out any contradictions in the auditor‟s observations (if
any) and correct these while ranking the branch.
5. Please read through the entire case study first and fill in the required
pieces of information (to be calculated) and then rank the branch
Please be prepared to share your results with the larger group (plenary),
and turn in your analysis to the facilitators.
Facilitator’s Role: Facilitator should help the participants in groups work and finalise the
ranking/analysis. He/she should also receive a copy of the analysis from the
group, prior to wrapping up the course
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Session 12: Implementing Loan Portfolio Assessment
Session Objectives: To learn the steps of pilot testing the recommendations of a loan portfolio assessment
To understand the benefits of institutionalising Loan Portfolio Assessment
To prepare individual/institutional follow up plan of the training
Overview: The concluding session of the loan portfolio assessment training lists the activities to be
undertaken after the assessment has been done. It gives an opportunity to participants also to
develop an action plan which they want to implement as a follow up activity.
What follows a loan portfolio assessment? Time: 20 minutes
Slides: 12
After the assessment is completed, it is important that the assessment report is shared with relevant
personnel in the MFI, to ensure that action is taken for the areas of risk that get identified. If changes are to
be implemented, they should ideally be pilot tested, reviewed and then rolled out only if the results of the
pilot test approve so. The long term goal is to institutionalise loan portfolio assessments which then need to
be done at regular intervals.
How do we know that we have completed the loan portfolio assessment successfully? Time: 10 minutes
Time:
60 Minutes
Methods:
Presentation
Action plan in institutional groups
Materials:
Slide Show:
PowerPoint Presentation entitled “Session 12”. This session
consists of approximately 18 slides
Handouts: Handout 12.1 Critical Issues for Loan Portfolio Assessment and
Summary Checklist
Handout 12.2 Course Evaluation Form
Exercise: Exercise 12.1: Action Plan (30 minutes)
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Slides: 4
The facilitator ends the training with a checklist which summarises the key items that are assessed. This list
also works as a check list to ensure that the assessment is complete in all respects.
Action Plan and course evaluation Time: 30 minutes for developing action plan
Slides: 1
The participants work individually (if consultants) or in institutional groups to identify the key initiatives
they could take as a follow up of this training on return to their base and share it with the facilitator.
Participants can be encouraged to work on this from the second day of the training itself and discuss with
the facilitator when time permits. Participants complete the course evaluation before leaving the training.
Exercise 12.1
Objective: Action Planning
Group Formation: Institutional groups of 4/5 people
Time: 30 minutes and open ended, if required
Tasks: 1. In light of your experience in the last three days, draft a preliminary
memo to the senior management in your organisation stating the
advantages of conducting a loan portfolio assessment
2. Please also highlight specific reasons as to why it may be desirable to
undertake a loan portfolio assessment within the organisation at this
juncture
3. Additionally, please also identify the specific locations (within the
organisation) where such an assessment could be conducted and also
highlight potential team members
Please be prepared to share your results with the larger group (plenary),
and turn in your analysis to the facilitators.
Facilitator’s Role: Facilitator should help the participants in institutional groups work and
finalise the memo. He/she should also receive a copy of the memo from each
institution prior to wrapping up the course
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