The largest asset most financial service providers have is the loans they have made to customers, and therefore, protecting their loan portfolio is of critical importance to their long term survival.
However, a loan portfolio is an unusual asset because although the loaned money belongs to the institution, borrowers are using it away from the direct control of the institution. So there is a risk attached to the loan portfolio , as the institution cannot always be sure that it will get the money back. What’s more, the size and quality (and hence the risk) of the portfolio changes continually as loans are disbursed, payments are made, and loans and payments become due.
This lesson will show you how a financial institution can measure and monitor the quality of their portfolio, how arrears are dealt with, and how credit operations can be managed to minimise portfolio risk. You will learn how to calculate delinquency rates, portfolio at risk and the ageing of arrears. You will also learn about loan loss rates, allowing for bad debts, refinancing, rescheduling, and how repayment rates, though a useful internal management tool, are not a measure of portfolio quality.
The lesson concludes by emphasising that if an institution experiences high levels of delinquency it should not be blamed on the borrowers but on the failure of the institution to devise effective methods of lending to and recovering from their clients.