How to Measure Delinquency
What is Delinquency?
Delinquency is a measure that is used to establish and monitor the extent of non-payment or defaults happening in a loan portfolio. A loan portfolio consists of several loans that has been given to different customers. Any finance company or a bank that is into the lending business must keep a close eye on the delinquency. A loan account (typically like a savings account, but for a loan customer), becomes delinquent, when the customer fails to pay the instalment on the due date of the month. In this article, we see as to how the delinquency in the portfolio is measured.
Measuring Delinquency
An account is considered delinquent when there has been a failure to meet the contractual due date of repayment. For reporting purposes however, as per the standard practices followed, an account is considered to be delinquent when it is more than 30 days past the payment due date.
Each account has a “payment due” date. ‘dpd’ represents ‘days past due’. Delinquency is measured by the number of days that no payment is received from this due date”.
| Contractual Delinquency | Payments Missed |
| 1 – 29 Days Past Due ( Dpd) | 1 |
| 30-59 Dpd | 2 |
| 60-89 Dpd | 3 |
| 90-119 Dpd | 4 |
| 120-149 Dpd | 5 |
| 150-179 Dpd | 6 |
| 180 plus | 7 + |
Reporting Delinquency
Delinquency is always reported as at a point-in-time, which is the last day of the calendar month. Even though technically, an account that is in 1 dpd, is also delinquent, for management reporting purposes, all accounts that fall in 30dpd + buckets are taken as delinquent.
Delinquency computation is done as follows :
Principal outstanding at 30+ dpd (sum of outstanding of all accounts in 30+ dpd)
divided by
Total Portfolio Outstanding
The above formula would give the 30+ delinquency ratio.
Coincidental and Lagged Delinquencies
The delinquency is measured in two ways – Coincidental and Lagged. These two types of delinquencies are explained below:
Coincidental Delinquency:
The formula for coincidental delinquency is the same as given above. It is,
Principal outstanding at 30+ dpd (sum of outstanding of all accounts in 30+ dpd)
divided by
Total Portfolio Outstanding
The coincidental delinquency provides the delinquency of the portfolio as at the end of a particular period, taking into consideration the entire portfolio outstanding, including the account booked into the portfolio as on that date. The drawback with this method of measuring delinquency is, when a portfolio is growing fast, the denominator keeps ballooning. As a result the real delinquency of the portfolio is understated due to a large denominator.
Lagged Delinquency
The lagged delinquency method, measure the real delinquency of the portfolio, without considering the disbursements made in the recent months. The delinquency on any one bucket, is matched with the portfolio, that has originated the delinquency. The total delinquent portfolio is divided into buckets and for each bucket, the corresponding portfolio from which the delinquency could have originated is used as the denominator. Thus for the portfolio that is in 30-59 dpd in April09, the denominator used would be the portfolio outstanding as of Feb09.
Past Due Classification
A loan will be classified as ‘past-due’ if the following occurs :
The Equated Monthly Instalment is not received on the due date on account of either the due-dated cheque bouncing out of the post-dated cheques given, when presented or the instruction sent vide electronic clearing system not honoured.
An account where the EMI in whole OR in part is not received within 30 days from due date will be reported as delinquent. The reporting date every month is the last calendar day of each month. Consider the following table in case of an account, which has missed its payments starting 31st Jan.
| Payment Due Date | Delinquency reporting | Payment Missed |
| 31st Jan | Reported as in 1 – 29 Days Past Due ( Dpd) on 28th Feb reporting | 1 |
| 28th Feb | Reported as in 30 – 59 Days Past Due ( Dpd) on 31st March reporting | 2 |
| 31st March | Reported as in 60 – 89 ays Past Due ( Dpd) on 30th April reporting | 3 |
| 30th April | Reported as in 90 – 119 Days Past Due ( Dpd) on 31st May reporting | 4 |
| 31st May | Reported as in 120 – 149 Days Past Due ( Dpd) on 30th June reporting | 5 |
| And so on….. |
Loans which have only any outstandings due to late payment charges or any other charges levied will not be classified as past-due. However, maturity processing of that account must not be done until all such outstanding charges / dues have been cleared.
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