DELINQUENCY:The Hidden Monster

A Resource Manual for ARC Cooperatives

Department of Agrarian Reform Sa Tao Foundation, Inc.

Copyright © 2005

Department of Agrarian Reform-Bureau of Agrarian ReformBeneficiaries Development (DAR-BARBD)Elliptical Road, Diliman, Quezon City

This publication may be reproduced with prior permissionfrom the copyright owner.

ISBN:

Editing and editorial supervision by Rodolfo DesuasidoCover design and layout by Joel Lozare

Printed in the Philippines

TABLE OF CONTENTS

Foreword .................................. vPreface ..................................... viAcknowledgement ................... vii

I Introduction .............................................................................. 1

II Delinquency: Causes, Costs and Effects .................................. 3Causes ................................................................................. 4Costs and Effects ................................................................ 5

III Default ...................................................................................... 7Costs of Default .................................................................. 8

IV Measuring Delinquency .......................................................... 11Portfolio Quality: Why is it important to an MFI? ........... 12Repayment Rate ................................................................ 13Portfolio Quality Ratio ..................................................... 16Loan Loss Ratios .............................................................. 22Frequently Asked Questions ............................................. 34

V Controlling Delinquency ........................................................ 35

VI Collection Method .................................................................. 43Working Capital and Fixed-Asset Loans .......................... 44Loan Collaterals ................................................................ 45

References ..................................................................................... 49

BLANK

FOREWORD

PROVIDING financial services to the poor involves not just lending butalso cost recovery. This ensures sustainability. In agrarian reformcommunities (ARCs), many microfinance institutions (MFIs) fail toattain sustainability due to a common problem: delinquency, or thefailure of borrowers to pay. Delinquency is a hidden monster that eatsup at a major asset—the loan portfolio—of MFIs.

To address this problem, the Department of Agrarian Reform (DAR),in partnership with Punla sa Tao Foundation, Inc. undertook the project“Microfinance Capability Building for Grassroots Banking in the ARCs.”The project aimed to assist the ARC cooperatives engaged in microfinancein managing and controlling delinquency among its borrowers.

This Operations Manual for Cooperatives was developed to help theARC cooperatives understand the nature of, and thus effectively control,the hidden monster called delinquency.

NASSER C. PANGANDAMANSecretaryDepartment of Agrarian Reform

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PREFACE

THIS manual discusses the nature of delinquency—its causes, costs,and effects on a microfinance institution. It also takes up the methodsof measuring delinquency, portfolio quality, and loan loss ratios. Itexplains the effects of loan losses and gives the reader an idea of theeffect of write-offs on the portfolio of a microfinance institution.

There are ways of controlling delinquency. During the training sessionson microfinance, the participants, which included DAR personnel andagrarian reform beneficiaries, showed eagerness in learning to control andprevent delinquency. They were given an idea of the advantages anddisadvantages of some methods of managing delinquency, such as re-scheduling and re-financing of loans.

The manual also discusses different collection methods that canbe used to manage, control, and prevent delinquency.

DAR-BARBDPUNLA SA TAO FOUNDATION, INC.

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ACKNOWLEDGMENT

HEARTFELT gratitude is extended to the management and staff of theDepartment of Agrarian Reform-Bureau of Agrarian Reform BeneficiariesDevelopment (DAR-BARBD) who gave all assistance in the productionof this manual:

Susana Evangelista-Leones - Director IVCarlos Abad Santos - Assistant DirectorLetecia N. Damole - OIC-Assistant Director

Remedios B. Aguila - CARPOMa. Elena C. Cabales - CARPO

Ma. Soledad Peralta - OIC-CARPOCatalina T. Austria - OIC-SuARPOPreciosa C. Osit - SARPO

Reena Concepcion G. Obillo - SARPOErlinda Agleham - ARPO II

Junicel D. Taghap - Clerk IINoel R. Ilagan - Clerk II

DAR Personnel and Agrarian Reform Beneficiaries:

Salvador B. Visperas - Regional Punla Point PersonRegion 1

Simplicia B. Abrigo - MAROMalimpin ARC, Pangasinan

Dina B. Abrigo - Provincial Point PersonQuezon II

Eleanor P. Tejada - Provincial Point Person, IloiloNita M. Labrador - DF, Agutayan Cubay ARCCecilia E. Alianza - DF, Timipal ARC

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Lourdes Dea Z. Pelayo - Provincial Punla Point PersonAklan

Marivic V. Palma - Provincial Point PersonBukidnon

Joven R. Pizarro - Regional Point Person, CARAGA

Tita C. Tafalla - DF, Buenasuerte ARCAgusan del Sur

Marlita EO Sagrado - DF, StaMARBEMCOSan Salvador ARC

Linda G. Diaz - ARB, Katuparan ARCMa. Teresa L. Cawad - ARB, Katuparan ARC

Evelyn N. Nueva - Provincial Point PersonPangasinan

Judy Zabala - Regional Point PersonRegion IV

Amador G. Gojar - DF, Katuparan ARCLani D. Salarda - Regional Point Person

Region VILucita S. Suner - DF, Mabusao ARC

Corazon B. Penaso - Regional Punla Point PersonRegion X

Josette Rivera - Regional Punla Point PersonCARAGA

And to all others who unselfishly contributed time and effort tothis project.

PUNLA SA TAO FOUNDATION, INC.

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