Summary: Asset Quality Ratios

Below are commonly used measures of loan portfolio delinquency in microfinance and commercial banking.

Portfolio at Risk as of 30 Days
In microfinance, the standard asset quality or portfolio quality measure has historically been Portfolio at Risk greater than 30 Days (PAR30) representing loans overdue by 30 days or more. PAR30 includes all renegotiated loans, which includes restructured, rescheduled, refinanced, and any other revised loans. Microfinance loans can be considered high risk in that they are not collateralized and are often disbursed to a more vulnerable and low-asset population. The repayment rate on microfinance loans has historically proven strong despite the high risk of the loans.

Non-Performing Loans (NPLs) in the commercial banking sector
A non-performing loan (NPL) is a loan on which the borrower is not making interest payments or repaying any principal. Local banking regulations determine the delinquency point to be classified as non-performing. Many banking systems define NPLs as those overdue by 90 days or more. Banks normally set aside money to cover potential losses on loans (impairment loss provisions) and write off bad debt in their profit and loss account.

Non-Performing Loans = Amount of Non-Performing loans / Gross Loan

Non-Performing Assets (NPA) in the commercial banking sector
A non-performing asset (NPA) is any obligation or loan for which interest and principal payments are more than 90 days overdue or a consumer loan more than 180 days overdue. NPAs include loans and leases with renegotiated terms, and real estate acquired through foreclosure. Similar to PAR30, NPA is usually expressed as a percentage of the lender's total loan portfolio. Thus, NPAs are measured somewhat like PAR30 since renegotiated loans are included in the ratio.

Introducing use of Non-performing Loans as of 30 Days Past-Due to replace Portfolio at Risk as of 30 Days
The Microfinance Financial Reporting Standards recommends that the microfinance industry refer to its overdue portfolio as Non-Performing Loans. In an effort to further integrate the poor into the formal financial sector, increasing use of commercial banking vocabulary and terminology can increase and broaden understanding of microfinance financial performance across sectors.

Microfinance NPLs and commercial financial NPLs are not defined identically. The microfinance NPL measure is more conservative than the traditional commercial NPL. Microfinance NPLs are based on loans overdue more than 30 days, consistent with the earlier PAR30 ratio, because microfinance loans generally have shorter repayment periods than commercial loans. Additionally, microfinance NPL will include all renegotiated loans, which includes restructured, rescheduled, refinanced, and any other revised loans. As described above, commercial banking NPL typically excludes renegotiated loans. Both of these aspects of microfinance NPL are intended to make the ratio financially conservative and prudent, consistent with the overall approach of the Microfinance Financial Reporting Standards.