DELINQUENCY:

The Hidden Monster

A Resource Manual for ARC Cooperatives

Sa Tao Foundation, Inc.

Department of Agrarian Reform
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
BLANK
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

v
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 re-
scheduling 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.

vi
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 - Director IV

Carlos Abad Santos - Assistant Director
Letecia N. Damole - OIC-Assistant Director
Remedios B. Aguila - CARPO
Ma. Elena C. Cabales - CARPO
Ma. Soledad Peralta - OIC-CARPO
Catalina T. Austria - OIC-SuARPO
Preciosa C. Osit - SARPO
Reena Concepcion G. Obillo - SARPO
Erlinda Agleham - ARPO II
Junicel D. Taghap - Clerk II
Noel R. Ilagan - 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.

vi