Measuring Microcredit Delinquency: Ratios Can Be Harmful To Your Health (Occasional Paper No. 03)

This paper explains how to calculate delinquency indicators:

• Collection rates;
• Arrears rates;
• Portfolio at risk rates.

Discusses the uses and abuses of them. Without knowing exactly what goes into the numerator and the denominator in calculation, delinquency ratios cannot be interpreted meaningfully, and may well suggest an unduly optimistic impression of portfolio quality. Indicates how to tell a good ratio from a bad one. Further the paper notes that:

• Most MFIs should track multiple delinquency indicators, because no indicator alone answers all the relevant questions;
• An MFI's outstanding portfolio tends to be roughly one half of the original disbursed amount of its loans;
• Collection rates, which divide amounts paid by amounts falling due in a period, are useful indicators but are subject to drastic misinterpretation: an MFI can have a 97 percent collection rate and still be losing a third of its portfolio every year;
• The most useful collection rate for day-to-day portfolio management is often an on-time collection rate that tracks success in collecting payments when they first fall due, supplemented by a clean-up report that tracks collection of late payments.

[Author's abstract]