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Estimating the Loan Loss Provision

Estimating the Loan Loss Provision. The loan loss provision is the amount expensed in a period to increase the loan loss reserve to an adequate level to cover expected defaults of the loan portfolio

hermione-mendez
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Estimating the Loan Loss Provision

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  1. Estimating the Loan Loss Provision

  2. The loan loss provision is the amount expensed in a period to increase the loan loss reserve to an adequate level to cover expected defaults of the loan portfolio It is based on the difference between the required loan loss reserve and the current outstanding loan loss reserve A loan loss reserve is an account that represents the amount of the outstanding principal that is at risk of not being recovered. Loan Loss Provision

  3. To determine an adequate loan loss reserve, an aging analysis should be performed monthly An aging analysis refers to the classification of delinquent loans into the period of time that they have been in arrears(e.g. 1-30 days, 31-60 days..) In the aging analysis, the entire outstanding balance of the loan that is in arrears is the portfolio-at-risk Loan Loss Provision

  4. The amount of the loan loss reserve should be based on historical information regarding loan defaults and the amount of time loans have been delinquent Remember that loans written off reduces loan loss provisions. Source of Data: MIS PAR report Loan Loss Provision

  5. Estimating Loan Loss Reserve

  6. Estimating Loan Loss Reserve

  7. What is the Loan Loss Provision for the month? Note: The loan loss provision is a non-cash expense and and does not affect the cashflow of an MFI.

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