Management of
Hardcore Delinquent Accounts
Day II - Session 1
Loan Write Offs
Lesson Objectives

Understand the importance and basics of
loan write-offs

Their advantages and disadvantages

Regulatory law in relation to write-offs.
Management of
Hardcore Delinquent Accounts
Remedial Management includes a series of options to collect
hardcode delinquent accounts. These options include:
•
•
•
•
Loan write-offs
Debt Recovery Program
Collection Agencies
Legal options
Managed and Performed
By a Remedial Management
Unit within the Bank.
This is the “Life After the Write-Off”
Loan Write Off
Flow of
Procedures to
Identify and
Manage
Hardcore
Delinquent
Accounts
REMEDIAL
MANAGEMENT
IDENTIFY/CLASSIFY
ACCOUNTS
COLLECTIBLE
Debt Recovery
Program
Collection
Agencies
UNCOLLECTIBLE
Legal
Actions
Loan Write-Offs
Loan Write-Offs

Definition
Removing a loan account from the bank’s
active portfolio and classifying that loan
as written off
 It is an accounting function where a
written off account is classified from
active to bad debts written off;

Why Write-Off Loans?
1.
2.
3.
4.
5.
Allows the bank to recover the costs allocated for bad
debts.
Trims the excess “fat” from assets, and reflects the
true value of loan portfolio.
A unit (or RMU) can focus on collection and recovery.
Allows staff (account officers) to focus on the
generation and management of quality accounts.
Provides more flexibility and options in recovering
bad accounts.
What happens when bad debts are
not written off?




Loan portfolio becomes loaded with nonperforming assets; size of loan portfolio and
assets becomes ‘misleading’.
Amount of portfolio at risk will continue to be high
Instead of generating new and good accounts,
AOs & supervisors spend more time for follow up
and collection that produces minimal results.
Bank does not get the benefits from the expenses
already incurred for loan/loss provisioning.
Loan Write Offs . . .
Advantages to the Lender
Balance Sheet
• Cleanses and improves the portfolio quality
Income Statement
• Helps reduce the bank’s tax liability
• Written off accounts when collected turn into income
Loan Recovery
•
Loan write offs can be delegated to a specialized unit to focus on
recovery.
Tax Benefits from write offs: Illustrative Example
No write off
With write off
P100,000,000
100,000,000
Operating expenses
50,000,000
50,000,000
Other expenses
20,000,000
20,000,000
Provision for loan losses
5,000,000
(5,000,000)
5,000,000
(5,000,000)
Expense for Bad debts
written off
0
5,000,000
Net income before tax
P 30,000,000
P25,000,000 ??
Income tax due (32%)
9,600,000
8,000,000
Item
Gross Income
Less:
Tax savings
P1,600,000
NOTE: BIR recognizes provisioning as an expense only with actual write offs.
Sample MF Performance Data as of December 2006
Loan Portfolio
Active clients
Allowance for Probable loss
Regular Loans
Microfinance Loans
P 55,445,225
4,353
P 12.2 million
P 6.8 million
P 5.4 million
MF Delinquency: PAR and Loan Loss Provision Required
PAR Ageing
# Accts.
PAR Amt
%*/
Estimated Loan/loss
provisions
PAR over 7 days
878
6,984,766
12.59%
211,399
PAR over 30 days
365
1,432,378
2.58%
398,455
PAR over 90 days
1667
3,985,367
7.18%
3,985,367
*/% of total MF loan portfolio
Loan Loss Provisioning
The setting-up and maintenance of sufficient
reserves to absorb losses inherent in the loan
portfolio or other bank assets.
Loan Loss Provisions is an EXPENSE:
 required to be set up under BSP regulations;
 is charged to the bank’s current operations.
 a permanent cost item which cannot be
reversed, but needs to be replenished when the
situation warrants.
Loan loss provisions and loan write offs
In order to benefit from this expense item, the bank
must use it for the purpose it was created, that is,
write off bad loans against the existing amount of
provisions.
A bank with an adequate amount set up for loan
losses need not incur additional expense when
writing off bad loans.
In fact, the bank benefits from the tax that does not
need to be paid on the amount written off during
the period.
Loan Write Offs
Illustration:
Balance Sheet
Total Loan Portfolio
Less:
Specific Loan-loss provision
General loan-loss provision
Loan Portfolio – Net
P xxxxxx
( xxxxxx )
( xxxxxx )
P xxxxxx
Note:
 The loan-loss provision stated in the balance sheet is an allowance serving
as reserves or buffer for future credit loss.
 It is only during actual write offs, that these reserves are utilized
Loan Write Offs
Illustration:
Income Statement
Total Operating Income
Less:
Operating Expenses
– Interest expense
xxx
– Compensation/benefits
xxx
– Bad debts written off
xxx
– Provisions (loan-loss)
xxx
– Etc
xxx
Net Operating Income
Extraordinary Credits
– Recovery from Charged Off
NET INCOME BEFORE TAX
P xxxxxx
P xxxxxx
P xxxxxx
Loan Write Offs
Accounting Entries:
1. Booking of Loan-loss provision
Dr. Loan-loss provisions expense
Cr.
Allowance for Probable Loss
2. Booking of Write Off
a) Dr. Allowance for Probable Loss
Cr.
Loan-loss provisions
b) Dr. Bad Debts Expense
Cr.
MF loans
Loan Write-Offs
---
Disadvantages . .
The bank experiences a temporary reduction in
portfolio and outreach
However –
-- removing hardcore delinquent loans from the
portfolios of account officers and transferring them
to a specialized unit for recover enables account
officers to focus on monitoring exiting accounts and
generating new productive accounts.
Loan Write-Offs
Regulatory Policies –

BSP Cir. No. 409 (2003). Provides basic guidelines in
loan/loss provisioning for microfinance

BSP Cir. No. 463 (2004). Implementing guidelines on
write-offs issued in 2004

BSP Cir. No. 501 (2005). Amends and supercedes
guidelines of Cir. 463. Banks need only notify the BSP,
within 30 days after a write off (together with the basic
requirements)
Loan Write-Offs
Procedural steps prior to write off

The account officer prepares a PAR Aging Report
based on his/her delinquency report to identify
accounts falling under PAR over 91 days (see
MABS PAR Form 1.1).

Prioritizing accounts for loan write-off: the following
“type” of accounts should be reviewed and
considered as “priority” for write-off:
•
•
Accounts over 90 days PAR
Accounts for which the client cannot be located, is
deceased or has no source of income
Loan Write-Offs
Procedural steps prior to write off
The bank exerted all remedies and collections
efforts to collect from the client, such as
those contained in the bank’s ‘alarm signals’
(See MABS PAR Form 1.2)





Sent reminders and demand letters
Collect from co-makers or co-borrowers
Applied savings balances that guarantee the loan
Gone after the serialized assets
Filed legal or collection case (Barangay/Court)
Loan Write-Offs
The Process


The MF supervisor validates the accounts
submitted by the account officers for write off,
based on the procedural steps undertaken. If he
finds merit to the list, recommends the same to the
BM for endorsement to the BOD for approval;
For multi-branches, the product manager prepares
a consolidated list for write-off based on the
validations and recommendations of the branch MF
supervisors. He submits the list to the president or
GM for notation;
Loan Write-Off
The Process. . .




After the president’s action, the list is submitted to the
bank’s Board of Directors for approval;
After the BOD’s approval, the bank or branch can book
the write-off of the accounts;
Within 30 days after the write off, the bank must notify the
BSP of such a write off together with supporting
documents and other requirements
Loan and credit folders of written off accounts should be
transferred to the Remedial Management Unit, if there is
any, or a unit to that effect;
Loan Write-Offs
Documentary requirements
o
o
o
o
Notice of write off to be signed by the GM or
President;
Duly accomplished list of accounts for write off
(RB-COB Form 23);
Sworn Statement signed by the president or officer
of equivalent rank, that the same write off do not
include DOSRI accounts;
Board Resolution approving the write off.
Loan Write-Offs
In Sum



Loan write-offs prevent the build up of
worthless accounts in the bank’s portfolio –
writing off cleanses and improves the
portfolio
Adequate loan provisioning must be provided
for delinquent accounts
Collection efforts do not end after writing off
the loan. There are diverse recovery
strategies.