Asset quality goes to the heart of the quality of the loan portfolio and can show the current risk inherent in the loan portfolio at a given point in time.
Increasing trends in past-due loans and write-offs give a clear indication of potential profitability and funding issues ahead. The asset quality ratios are as follows:
1. NPL [30] Days Past Due
Due to the nature of MFI short term loans, the key ratio is loans that are 30+ days past due. This ratio provides a good indication of the risk in the portfolio at a given time and needs to be analysed with the other ratios in this section. There is a direct relationship between this ratio and the following Write-off ratio as a decline in this ratio may be reflected by an increase in write-offs.
2. Write-Off Ratio
This measure provides the value of loans written off against the average gross loan portfolio. Write off policies may vary by country and regulator. Changes in this ratio should be monitored with the NPL [30] ratio as an MFI may maintain risk on their balance sheet.
3. NPL [30] + Write-Offs Ratio
This ratio provides a clear measure of the loan portfolio quality and avoids the possibility of troubled loans being moved between NPL and Write-off categories.
To learn more about measuring, monitoring and managing financial and social performance in microfinance download our guide to managing two bottom lines.
