Analysing the Loan Portfolio

The first step of portfolio management is to analyse the loan portfolio.

Financial Analysis and the Portfolio Report

The portfolio report is a result of the finance department's financial analysis. The bank conduct a financial analysis using four types of financial statements. All of these look at the financial status of an organisation with a different emphasis, but they all relate to each other. One of these statements is a portfolio report. The financial statements produced are:

1.1 Balance Sheet

This is a summary of the financial position at a point in time. It list Assets, Liabilities and Equity, where Assets = Liabilities + Equity.

1.2. Income Statement

The income statement reports on the organisation's financial performance over a specific period of time. It summarises Income and Expenses.

1.3 Cash Flow Statement

The cash flow statement shows where an organisation's cash is coming from and how it is being used over a period of time.

1.4 Portfolio Report

The loan portfolio report is a summary of information about loans of an Micro Finance Institution (MFI). The report can be prepared daily, weekly or monthly depending on the policy of the MFI. In a small MFI there may only be one loan report. In a bigger MFI you may generate one report per loan officer, each of whom deals with 50 loans. Those 50 loans from his/her loan portfolio.

1.5 Why do you Need a Portfolio Report?

The portfolio information in the report helps managers to analyse the [portfolio to see the level of risk. They do this by using quality ratios.

Using Ratios

2.1 What are Ratios for?

Ratio analysis helps managers to assess their bank's profitability or progress towards profitability. You need to look at the results of all the ratios to get a perspective on the financial health of the bank. No one ration gives all the information needed. It is the trend in the ratios viewed together that is most important.

Not only must ratios be analysed all together at one time, but they should be watched over a period of time. This helps the manager identify problems before they threaten the business seriously.

2.2 Two types of Ratio

In analysing a portfolio, you can use two types of ratio – those that evaluate portfolio quality and those that evaluate loan collection.

2.3 What is Outstanding Portfolio?

Most of these ratios use Outstanding Portfolio in their management. Outstanding portfolio is the principal amount of loan balances outstanding. In other words, it is all the money still owing on all loans.

Outstanding Portfolio = All money still owing (including future payments) on all loans.

2.3.1 Features of the Outstanding Portfolio

• Largest asset (it is a big sum of money owed to the MFI)
• Generates income through interest and fees
• Main product of the business
• Reasons for MFI existence

2.3.2 Why Do we Use Outstanding Portfolio in Ratios?

Only ratios with Outstanding Portfolio in the formula measure the quality of the portfolio. Some ratios do not include Outstanding Portfolio so they do not give an indication of the risk of potential losses – ie all the money that could be lost if a loan is never repaid. Since portfolio management is all about anticipating problems before they affect the MFI too severely, any quality analysis should predict potential losses.

Loan Quality Ratios

3.1 Ratio: Portfolio at Risk (PAR)

Portfolio at Risk (PAR) is the first quality ratio we will work with. It is the best indicator for assessing the risk of potential losses. It measures how much you could lose if all late borrowers defaulted.

The Par ratio works like this:

Total of outstanding balances of loans with payments past due / Outstanding Portfolio

To get the number needed for Total of outstanding balances of loans with payments past due, you need to:

1. Review your portfolio report
2. Identify all loans that are past due
3. Find the outstanding balances on each loan (see right hand column of the portfolio report)
4. Add all these balances together

To get the Outstanding Portfolio you need to:

1. Review the portfolio report
2. Find the total that represents all the money still owing (including future payments) on all loans.

Debtor Age Analysis Reports

Portfolio at risk by Age is the same process as PAR, but the aging separates more risky loans from less risky loans. This information is useful because the longer a loan goes unpaid, the higher the risk that it will never be paid.

The PAR by Age ratio works like this:

One day overdue

Total of outstanding balances of loan with payments past due (by 1 day or more) / Outstanding Portfolio

30 days overdue

Total of outstanding balances of loan with payments past due (by 30 days or more) / Outstanding Portfolio

60 days overdue

Total of outstanding balances of loan with payments past due (by 60 days or more) / Outstanding Portfolio

90 days overdue

Total of outstanding balances of loan with payments past due (by 90 days or more) / Outstanding Portfolio

120 days overdue

Total of outstanding balances of loan with payments past due (by 120 days or more) / Outstanding Portfolio

A debtor age analysis report allows you to analyse the outstanding amounts your debtors owe you in periods such as current, 30, 60 and more than 90 days. These reports are essential for credit control.

As an aid to effective credit control, an age analysis of outstanding debts may be produced. This is simply a list of the customers who currently owe money, showing the total amount owed and the period of time for which the money has been owed. The actual form of the age analysis report can vary widely, but a typical example is shown below:

The age analysis of debtors can be used to help decide what action should be taken about debts that have been outstanding for longer than the specified credit period. It can be seen from the table above that 25 per cent of Valentine & Co's outstanding debtor balance is due to L. Julius. It may be that L. Julius is experiencing financial difficulties. There may already have been some correspondence between Valentine & Co and L. Julius about the outstanding debts.

Par Age Analysis Table

Having calculated each ration you will have an amount for each age bracket (1-30, 31-60 etc). Now you have to lay these out clearly so you can see where most of the risk lies. Here is a clear way to present your findings. From the PAR ration you may have discovered that the total PAR is 12%. Of that 12% you can how much falls into the different brackets.

Example:

Compuscan Academy has developed a learning programme, called 'Managing Loan Portfolios', on this subject. Please click here to view the course brochure. If you want to learn more about this topic, please contact Compuscan Academy at Tel: 021 888 6000 or e-mail us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it