Loan Recovery Monitoring Mechanism

Abstract

Abstract-This paper proposes the use of Macaulay Duration as an operational and objective measure of the performance of loan repayments. It uses the Macaulay Duration measure to calculate the Duration of an individual loan and shows how changes in calculated Duration vary over time with loan repayments, prepayments or defaults. These changes in Duration are used to provide an objective measure for the repayment performance of loans. The duration approach also allows the construction of a numerical measure for the loan repayment performance of a portfolio of loans that has unique characteristics, or for the overall loan repayment performance of a financial institution or a larger economic region. The model is ideally suited for Microcredit institutions that are scarce on resources to monitor their loan portfolios.

A procedure for loss-optimising default definitions across simulated credit risk scenarios

“…2. The Macaulay Duration index-based measure (or MD-measure g 2 ) from Sah (2015), which is an index of the weighted average time to recover the capital portion of a loan; 3. A modified version of g 2 , called the Degree of Delinquency (or DoD-measure g 3 ), which incorporates the sizes of disrupted cash flows in assessing delinquency.…”

“…A marked difference is reasonably expected when substituting these instalments with the actual receipts R. Moreover, it becomes necessary to track the arrears balance as it develops (if it does) over the loan life. In line with Sah (2015), any arrears at any time are added to the last expected (contractual) instalment at t = t c , since it represents the last contractual opportunity to repay any such arrears, short of the lender intervening and restructuring the loan. This last instalment is then recursively updated for each subsequent period t, denoted by the vector I , which equals instalments I at first.…”

“…Firstly, the popular number of payments/months in arrears, called the Contractual Delinquency (or CD-measure g 1 ), is refined into a more robust measure. Secondly, a more concise algorithm is contributed that creates the Macaulay Duration index-based measure (or MD-measure g 2 ) from Sah (2015), which is an index of the weighted average time to recover the capital portion of a loan. Finally, a modified version of the MD-measure is introduced, called the Degree of Delinquency (or DoD-measure g 3 ), which incorporates the sizes of disrupted cash flows in assessing delinquency.…”

Loan Recovery Procedures in Tanzania: A Case of Selected Microfinance Institutions in Dar-Es-Salaam, Tanzania

“…The issue of loan recovery has emerged to be a matter of concern among financial institutions globally (Kaveri, 2016;Sah, 2015). The essence results from the critical position occupied by loans in determining any financial institution's financial health status (Messai & Jouini, 2013;Ozili, 2019;Waqas et al, 2019).…”

“…The challenge is attributed to internal procedural weakness, which is evident in many MFIs in developing countries (Kimasar, 2014;Sarma & Borbora, 2014). Loan recovery refers to the totality of efforts initiated by the lender to ensure the borrower repays the borrowed money as per agreed terms and conditions (Kaveri, 2016;Khalily & Meyer, 1993;Sah, 2015). For the loan recovery to be implemented, MFIs need to ensure the availability of solid policies through which guidelines and procedures emanate (Marini et al, 2017;Osunde & Mayowa, 2012).…”