Asset quality (historically referred to as “portfolio quality”) remains a key aspect of financial performance for MFIs. While MFIs continue to expand their provision of deposits, insurance and other financial products, the loan portfolio is still typically the predominant component of its asset base. Accordingly, asset quality remains a key indicator of an MFI's financial viability. Five new asset quality ratios are introduced in the Standards to complement the three ratios presented in the 2005 Framework. The eight asset quality ratios are important MFI financial performance metrics.
Below are commonly used measures of loan portfolio delinquency in microfinance and commercial banking.
Portfolio at Risk as of 30 Days
Non-Performing Loans (NPLs) in the commercial banking sector
Non-Performing Loans = Amount of Non-Performing loans / Gross Loan
Non-Performing Assets (NPA) in the commercial banking sector
Introducing use of Non-performing Loans as of 30 Days Past-Due to replace Portfolio at Risk as of 30 Days
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.
||Typical Delinquency Matrix||Includes Renegotiated Loans?||Centralized?|
|Non-Performing Loans||90 Days||No||Yes|
|Non-Performing Assets||90 Days||Yes (and real estate)||Yes|