Measuring delinquency and default in microfinance institutions

Abstract

The focus of this article is on measuring loan delinquency and default in microfinance institutions (MFls) at top management level. The core issue addressed is how well does an MFI's management control system accurately assess delinquency and default. By this I mean how do senior managers judge the quality of the loan portfolio from financial data. I do not intend to cover how a field-level staff responsible for, say, 150 borrowers monitors her loan portfolio. The article is clearly not intended for MFls with high quality loan portfolios, but for the run-of-the mill MFls (such as the typical Indian MFI with a Portfolio-at-Risk [PAR 60] of 14.1% (M-CRIL 2005). In this article, a loan is delinquent if installments are delayed and in default if one or more installments are never repaid.