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
banks active portfolio and classifying
that loan as written of
It is an accounting function where a
written of account is classified from
active to bad debts written of;

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 banks 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

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 banks 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
Compensation/benefits
Bad debts written off
Provisions (loan-loss)
Etc

P xxxxxx

xxx
xxx
xxx
xxx
xxx

Net Operating Income

Extraordinary Credits

P xxxxxx

Recovery from Charged Off

NET INCOME BEFORE TAX

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 banks 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 presidents action, the list is submitted to the banks

Board of Directors for approval;
After the BODs 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

Notice of write off to be signed by the GM or

President;
Duly accomplished list of accounts for write off (RBCOB 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 banks 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.