What is delinquency?
It is a condition that arises when an activity or situation doesn’t occur at its scheduled or expected date i.e. it occurs later than expected. The pre-agreed schedule is not followed as expected. It implies an obligation has not been discharged per the scheduled date or time.
What is delinquency in Lending?
It is a situation in which the borrower misses its due date for a single scheduled payment for a form of financing. A lender is responsible of taking action against delinquency like:
- Setting of policies and procedures
- Promote a repayment culture
- Instill discipline to both staff and borrowers
- Plan for events beyond the control
Why delinquency?
There are two reasons why customers fail to make repayment:
- Ability: Lack of money to make repayment.
- Willingness: Money available but the customer fail out repayment.
Cost of Delinquency
- Slows rotation of the portfolio
- Delays earnings
- Increased collection costs (visits, calls, legal costs)
- Increased provisioning for bad debts
- Lose of credibility
- Increased repayment problems
- Threatening long-term institutional viability
- Provision for defaults have direct effects on income and assets
Measuring Delinquency
Measuring Delinquency can be complicated but key measures revolve around three broad indicators which are:
- Collections Rates :Measures amounts actually paid against amounts that have fallen due.
Amounts collected/ Amounts fallen Due
- The numerator is actual cash collections of principal and whose denominator is the principal amount that was due to be paid.
2. Arrears Rates: Measures overdue amount against total loan amounts
Late Payments/ Total Loans
•The rate focuses on the amount of late payments, dividing this number by some measure of total loan activity – The outstanding portfolio.
3.Portfolio at Risk: Measure outstanding balance of loans not being paid on time against outstanding balance of total loans.
Outstanding Balance of loans with Overdue payments/Total Outstanding Balance
–Both the numerator and denominator of the ratio are outstanding balances. The numerator is the unpaid balance of loans with late payments, while the denominator is the unpaid balance on all loans.
–The numerator captures all amounts placed at increased risk by the delinquency
Causes of Delinquency
1.Organizational (Internal Factors)
- Laxity in screening/recruiting customers
- Poor/inefficient processing of loan applications by staff.
- Poor monitoring, recording and reporting system
- Weak collection system and procedures
- Irrelevant, disseminated and unwritten lending policies and guidelines.
- Poor staff services
- Poor leadership/ bad management
- Officers poor attitude towards training.
- Lack of clear outreach target groups
- Supply versus supply forces
- Recovery process lenient
- Wrong loans
2.Borrowers Factors
- Inadequate paying capacity
- Misappropriation of funds borrowed
- Lack of technical skills in running the business
- Lack of financial skills
- Over-borrowing more than needed
- Unwillingness to pay
3.Externally Driven Causes
- Death or illness of borrower
- Local and national world economy
- Currency devaluation
- Pandemics
- Drought
- Government taxation
- Import and export policy
Delinquency Controls
- Implement effective methodology or appropriate product design
- Create an image and philosophy that doesn’t make late payments acceptable. Create disciplined borrowers
- Design products that suit client needs
- Design loan sizes and terms that don’t make repayment difficult.
- Employ incentive system that uses both financial and non-financial incentives to encourage repayment
- Know your borrowers and borrowers business
- Maintain close contact with your borrowers
- Have accurate management system
- Require collateral/insurance of accounts considered high risk.
- Offer small loans to new borrowers
- Embrace transparency
- Prevent over-indebtedness
- Fair and respectful treatment of clients
- Modify credit strategy to manage exposure and ensure effectiveness of providing support and solutions to customers delinquency
- Eliminate underperforming products and reducing portfolio–risk exposure
- Loan monitoring loans after disbursement.
Actions to take in a Delinquency Crisis
- Review credit policies and operations
- Improve on quality of appraisal by effective use of latest technology
- Evaluate loan officers compliance culture
- Retrain the loan officers
- Design incentive and penalty systems to facilitate compliance
- Move stubborn loans to a specialized collection department
- Refinance some clients who have a genuine potential to repay.
- Set deadline for improving performance and reward achievement
- Review performance of new verses old loans after about six months under new policies.
- Remove loan officers who continue to perform poorly by lending to poor customers.
- Appointment of recovery agents or in-house enforcement staff
- Recovery through legal
- Seizing collateral