MICROBANKING BULLETIN - Microfinance Information Exchange

APPENDICESin accounting for loan delinquency. Some count theentire loan balance as overdue the day a paymentis missed. Others do not consider a loan delinquentuntil its full term has expired. Some MFIs write offbad debt within one year of the initial delinquency,while others never write off bad loans, thus carryingforward a hard-core default that they have littlechance of ever recovering.We classify as “at risk” any loan with a paymentover 90 days late. We provision 50 percent of theoutstanding balance for loans between 90 and 180days late, and 100 percent for loans over 180 dayslate. Wherever we have adequate information, weadjust to assure that all loans are fully written offwithin one year of their becoming delinquent.(Note: We apply these provisioning and write-offpolicies for ease of use and uniformity. We do notrecommend that all MFIs use exactly the samepolicies.) In most cases, these adjustments are notvery precise. Nevertheless, most participating MFIshave high-quality loan portfolios, so loan lossprovision expense is not an important contributor totheir overall cost structure. If we felt that a programdid not fairly represent its general level ofdelinquency, and we were unable to adjust itaccordingly, we would simply exclude it from thepeer group.Financial Statement Adjustments and their EffectsAdjustment Effect on Financial Statements Type of Institution Most Affectedby AdjustmentInflation adjustment of equityReclassification of certain long termliabilities into equity, and subsequentinflation adjustmentSubsidy adjustment: Interest savingson subsidized liabilities involving atleast a 25 percent discount in relationto market based loans to the sameinstitution or, in the absence of suchloans, the deposit rateSubsidy adjustment: Current-yearcash donations to cover operatingexpensesSubsidy adjustment: In kind donationof goods or services (e.g., line staffpaid for by technical assistanceproviders)Loan loss provision and write-offadjustment: Applying policies whichmay be more aggressive than the MFIemploys on its own booksIncreases financial expense accountson profit and loss statement, to somedegree offset by inflation incomeaccount for revaluation of fixed assets.Generates inflation adjustment accountin equity section of balance sheet withnet balance of inflation adjustments.Decreases concessionary loan accountand increases equity account;increases inflation adjustment on profitand loss statement and balance sheet.Increases financial expense on profitand loss statement. Increases subsidyadjustment account on balance sheet.Reduces operating income on profit andloss statement (if the MFI recordsdonations as operating income).Increases subsidy adjustment accounton balance sheet.Increases expense on profit and lossstatement, increases subsidyadjustment account on balance sheet.Increases loan loss provision expenseon profit and loss statement. Onbalance sheet, increases in loan lossreserve and/or write-offs are accountedfor by equal reductions in loan lossreserve and portfolio.NGOs funded more by equity thanby liabilities will be hard hit,especially in high-inflationcountries.NGOs that have long-term lowinterest“loans” from internationalagencies that function more asdonations than loans.Banks or NGOs that use large linesof credit from governments orinternational agencies at highlysubsidized rates.NGOs during their start-up phase.This adjustment is relatively lessimportant for mature institutionsincluded in this edition.NGOs during their start-up phase.Less important for matureinstitutions included in this edition.MFIs that allow bad loans toaccumulate within their portfolio.This common problem tends tohave a limited effect on leadingMFIs because their loan losses arelow, even after adjustment.MICROBANKING BULLETIN, SEPTEMBER 2000 57