Ramesh S Arunacham
Rural Finance Practitioner
We have been hearing of various strategies to keep PAR low or zero. The most obvious one, which we have been hearing from the recent Andhra experience is that to ensure that the loan officers or field workers sit outside the client’s house and wait until the money is paid. And if the concerned loan officer does not get back in 1 hour, another loan officer from the branch travels to the same area and joins his colleague who is already in waiting. I have heard that this happens successively and there have been cases where 2 or more loan officers and sometimes, even a branch manager have sat outside a 1st time delinquent client’s house or place work until 6.30 PM and have recovered the money. Imagine the pressure on the client if they have to face this on Monday with MFI I, Tuesday with MFI 2, Wednesday with MFI 3 and so on…for week after week.
In one of the earliest CGAP ToT courses on delinquency that Ms Brigitte Helms (with Janet and Joyita) conducted way back in 1998 at AIM MANILA, the biggest take away for me was/is – there are no bad borrowers, ONLY BAD LOANS. This means that the institution is primarily responsible if any loan goes delinquent because it may have granted a bad loan. So, from that perspective putting such pressure on the clients is rather unfortunate. Very interestingly, some MFIs describe the above method of collection (where field workers and loan officers sit outside the house/work place of the client to collect the loan) as one of Satyagraha and equate it to the modus operandi of our Late Father of the Nation, Beloved Mahatma Gandhi Ji - something that Mahatma JI would never have approved off in the first place as Satyagraha and Civil Disobedience, as espoused by him, were for public and not selfish causes. In the past, I have observed the Zero PAR policy manifesting itself as staff taking loans to pay back any client overdues and then collecting from the clients.
While the above discusses some of the issues with the Zero PAR Policy, some Indian MFIs have also used the following strategies to keep PAR low or near ZERO:
1. Rescheduling - Reduces the whole PAR Ratio, while default risk still exists. If all overdue loans are rescheduled, then PAR will become Zero.
2. Refinancing (overdue amounts are rescheduled and fresh amounts are given to same borrower) - Reduces the whole PAR Ratio, while default risk still exists. If all overdue loans are rescheduled, then PAR will become Zero.
3. Write-offs - Reduces the whole PAR Ratio, while default risk still exists. If all overdue loans are written off, then PAR will become Zero
4. Fresh Loan Disbursements for which repayments are yet to begin (including those with a grace/moratorium period) - Reduces the whole PAR Ratio, while default risk still exists. If the fresh disbursements are sudden and so huge, they may result in PAR approaching insignificant percentages or even Zero
5. Sequence of payments, Principal first and interest next - Reduces the whole PAR Ratio, while default risk still exists. Distorts the age of past dues (over dues) and affects provisioning, reserve and sustainability and through reduction of interest payments (yield). Technically, if this is done, then PAR will be Zero if it is defined as Unpaid Principal Balance of All Loans with Payments Past Due/Total Outstanding Portfolio
However, the most interesting case was where the MIS was used to under report PAR.
The following example would serve to clarify this. One of the client loans was for Rs.1000/- and this was payable in 10 installments of Rs.100/- each with 18% interest.
The client repayment was due at the end of every month and at the end of the 1st month, the client paid Rs.215 – of this, Rs 100/- went towards 1st month principal, Rs 15 towards interest due at end of 1st month and Rs.100 was taken as prepayment of 2nd month principal.
When the 2nd month installment actually came, at the end of the month, when the client did not make any repayments (because she may have assumed that she had prepaid the entire amount), the MIS showed there was no principal overdue, which is correct. However, the client STILL had to pay interest on Rs.800/- that had been outstanding (Rs 1000 – Rs 200) for a whole month and therefore, the loan did have an interest over due.
The portfolio at risk (PAR) measure, as per the traditional good practices PAR definition (PAR is typically defined as Unpaid Principal Balance of All Loans with Payments Past Due/Total Outstanding Portfolio) would not capture this loan as a risky loan, as there was no principal overdue although in reality, these loans did have an interest overdue (which may not even be collected later).
Thus, the MIS had strategically used the technical definition of PAR (provided by global microfinance good practices) to (incorrectly) define the MIS process for calculating PAR, which then selected risky loans ONLY based on principal overdue. It omitted loans that had an interest overdue from the pool of risky loans. And there were several such loans in the MIS and a query incorporating interest OD as a condition resulted in the PAR figure changing significantly.
When the MIS is accurate in terms of the sequence rules for client repayment appropriation, this may not be such a huge issue but if the sequence of client repayment appropriation is also not as per the correct (good practices) sequence, then, things such as the above will undoubtedly play a huge role in contributing to near ZERO PAR…
[1][1] This note pertains to some of Indian MFIs that the author has had experience with and under no circumstances, is the author saying that these aspects are prominent in all Indian MFIs.
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