RURAL HOUSING LOAN FUND Annual Workshop 2013

Transcription

1 Annual Workshop 2013 LOAN LOSS IMPAIRMENTS/ALLOWANCES BEST PRACTICE POLICIES FOR UNSECURED MICROLOANS

2 TOPICS Loan Loss Impairments; Recommended Policies Sample of Policies for SA Microlenders Write-offs / Charge for Bad Debt Three Primary Loan Loss Ratios

3 LOAN LOSS IMPAIRMENTS / ALLOWANCES A loan loss allowance is an accounting entry which represents the amount of principal outstanding that is not expected to be recovered by a microfinance organization. This figure is revealed on the balance sheet or in the notes to the balance sheet.

4 CAPITEC BANK HOLDINGS LIMITED Year to February (R Millions) Gross loans 30,658 18,408 10,916 (Impairment) (2,723) (1,545) (845) Net loans 27,935 16,863 10,071 Annual Growth in Gross loans 67% 69% 95%

5 LOAN LOSS IMPAIRMENTS WHY? Conservatism Principle: Assets should not be overstated on the balance sheet Income and Expense Recognition Principle: Expenses related to generating income should be recognized in the same period that the income is recognized. Indicator of Credit Risk Management: If done consistently, can measure long run loss rates.

6 LOAN LOSS IMPAIRMENTS WHAT VALUE? Common policies for setting an allowance: 1. General Provisions as Percentage of Total Portfolio 2. General Provisions as Percentage of Total Disbursements 3. Specific Provisions related to an Arrears Aging Schedule 4. Specific Provisions related to a Portfolio Aging Schedule

7 RECOMMENDED SPECIFIC PROVISIONS RELATED TO PORTFOLIO AGING Days Past Due RHLF CGAP/The Mix CBDA 1-30 days 5% 10% 0% days 10% 30% 35% days 25% 30% 35% days 50% 60% 35% days 75% 60% 35% days 100% 60% 35% days Write-off 100% & Write-off 50% >365 days 100% Total loans 2% Rescheduled loans 100%

8 HOW IS PORTFOLIO AGING DIFFERENT FROM ARREARS AGING? Compare the two tables on Page 3 how are they different?

9 EXAMPLE ALLOWANCE CALCULATION CGAP POLICY Days Past Due Balances Allowance 1-30 days 3,000 10% days 5,000 30% 1, days 1,500 30% days 0 60% days 4, % 4,800 >365 days 5, % 5,000 19,300 12,050

10 SAMPLE OF POLICIES FOR SA MICROLENDERS Days Past Due Capitec Sample 1 Sample 2 Current Loans 2% 0% 0% Renegotiated Loans 10% 1-30 days approx. 50% 0% 0% days 50% 5% 0% days 50% 10% 0% days Write-off 20% 0% days 30% 100% days 40% Write-off at 5 years days 55% to 85% >270 days 100% & Write-off

11 Discussion Which policies are most appropriate for unsecured incremental housing loans? What other factors need to be considered?

12 LOAN LOSS WRITE-OFFS Done periodically monthly, quarterly, annually Alternative Policies: 1. Based on period overdue ( from over 180 days to over 360 days), or 2. Based on loan by loan review An accounting entry which does not mean collections will stop Reduces both the loan portfolio and the allowance balance on the balance sheet Does not affect the income statement

13 MOVEMENT IN IMPAIRMENT ALLOWANCE - CAPITEC BANK Year to February (R Millions) Opening Balance 1, Bad debts (write-offs) (1,754) (1,079) (626) Bad debts recovered Net Impairment Charge 2,659 1, Closing Balance 2,723 1,

14 FOUR STEPS TO CREATE AN ALLOWANCE AT PERIOD END 1. Start with the Opening Balance of the Reserve 2. Reduce the Allowance by the Amount of the net Write-Off for the period 3. Determine what Allowance is needed for the End of Period 4. Create an Impairment Charge (Provision) to bring the Allowance Balance up to the level required.

15 THREE PRIMARY LOSS RATIOS Loan Loss Allowance = Ratio Total Allowance Gross Portfolio Outstanding Loan Loss Ratio = Amount Written Off in Period Average Portfolio Outstanding Provision Ratio = Impairment charge for Period Average Portfolio Outstanding

16 THREE PRIMARY LOSS RATIOS CAPITEC BANK Average Gross Loans (R mlns) 24,533 14,662 8,262 Allowance Ratio 8.9% 8.4% 7.7% Loan Loss Ratio 8.3% 8.6% 8.8% Provision Ratio 10.8% 10.9% 12.0%

17 THE END THANK YOU