Delinquency Prelims

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 Reform Beneficiaries Development (DAR-BARBD) Elliptical Road, Diliman, Quezon City This publication may be reproduced with prior permission from the copyright owner. ISBN: Editing and editorial supervision by Rodolfo Desuasido Cover design and layout by Joel Lozare Printed in the Philippines

TABLE OF CONTENTS

Foreword .................................. v Preface ..................................... vi Acknowledgement ................... vii I

Introduction .............................................................................. 1

II Delinquency: Causes, Costs and Effects .................................. 3 Causes ................................................................................. 4 Costs and Effects ................................................................ 5 III Default ...................................................................................... 7 Costs of Default .................................................................. 8 IV Measuring Delinquency .......................................................... 11 Portfolio Quality: Why is it important to an MFI? ........... 12 Repayment Rate ................................................................ 13 Portfolio Quality Ratio ..................................................... 16 Loan Loss Ratios .............................................................. 22 Frequently Asked Questions ............................................. 34 V Controlling Delinquency ........................................................ 35 VI Collection Method .................................................................. 43 Working Capital and Fixed-Asset Loans .......................... 44 Loan Collaterals ................................................................ 45 References ..................................................................................... 49

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FOREWORD

PROVIDING financial services to the poor involves not just lending but also cost recovery. This ensures sustainability. In agrarian reform communities (ARCs), many microfinance institutions (MFIs) fail to attain sustainability due to a common problem: delinquency, or the failure of borrowers to pay. Delinquency is a hidden monster that eats up 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 microfinance in managing and controlling delinquency among its borrowers. This Operations Manual for Cooperatives was developed to help the ARC cooperatives understand the nature of, and thus effectively control, the hidden monster called delinquency.

NASSER C. PANGANDAMAN Secretary Department 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 methods of measuring delinquency, portfolio quality, and loan loss ratios. It explains the effects of loan losses and gives the reader an idea of the effect of write-offs on the portfolio of a microfinance institution. There are ways of controlling delinquency. During the training sessions on microfinance, the participants, which included DAR personnel and agrarian reform beneficiaries, showed eagerness in learning to control and prevent delinquency. They were given an idea of the advantages and disadvantages of some methods of managing delinquency, such as rescheduling and re-financing of loans. The manual also discusses different collection methods that can be used to manage, control, and prevent delinquency.

DAR-BARBD PUNLA SA TAO FOUNDATION, INC.

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ACKNOWLEDGMENT

HEARTFELT gratitude is extended to the management and staff of the Department of Agrarian Reform-Bureau of Agrarian Reform Beneficiaries Development (DAR-BARBD) who gave all assistance in the production of this manual: Susana Evangelista-Leones Carlos Abad Santos Letecia N. Damole Remedios B. Aguila Ma. Elena C. Cabales Ma. Soledad Peralta Catalina T. Austria Preciosa C. Osit Reena Concepcion G. Obillo Erlinda Agleham Junicel D. Taghap Noel R. Ilagan

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Director IV Assistant Director OIC-Assistant Director CARPO CARPO OIC-CARPO OIC-SuARPO SARPO SARPO ARPO II Clerk II Clerk II

DAR Personnel and Agrarian Reform Beneficiaries: Salvador B. Visperas - Regional Punla Point Person Region 1 Simplicia B. Abrigo - MARO Malimpin ARC, Pangasinan Dina B. Abrigo - Provincial Point Person Quezon II Eleanor P. Tejada - Provincial Point Person, Iloilo Nita M. Labrador - DF, Agutayan Cubay ARC Cecilia E. Alianza - DF, Timipal ARC vii

Lourdes Dea Z. Pelayo - Provincial Punla Point Person Aklan Marivic V. Palma - Provincial Point Person Bukidnon Joven R. Pizarro - Regional Point Person, CARAGA Tita C. Tafalla - DF, Buenasuerte ARC Agusan del Sur Marlita EO Sagrado - DF, StaMARBEMCO San Salvador ARC Linda G. Diaz - ARB, Katuparan ARC Ma. Teresa L. Cawad - ARB, Katuparan ARC Evelyn N. Nueva - Provincial Point Person Pangasinan Judy Zabala - Regional Point Person Region IV Amador G. Gojar - DF, Katuparan ARC Lani D. Salarda - Regional Point Person Region VI Lucita S. Suner - DF, Mabusao ARC Corazon B. Penaso - Regional Punla Point Person Region X Josette Rivera - Regional Punla Point Person CARAGA And to all others who unselfishly contributed time and effort to this project. PUNLA SA TAO FOUNDATION, INC.

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