They both related to late payments and thus the quality of the loan portfolio, but they must be thought of as conceptually separate items.

Arrears

Arrears means simply the amount of outstanding loans that have a missed payment of any time frame. A loan is "in arrears" if one payment is missed.

Arrears is what drives the Portfolio at Risk (PAR) numbers. PAR refers to the total percentage of the amount in arrears over the total amount of funds outstanding as loans.

See also quality of loan portfolio or Asset Quality below. Example from CAMEL http://www.gdrc.org/icm/micro-camel.html

Aging of the portfolio

Aging refers to the now outmoded idea of moving items from one ledger to another based on the "age" of the entry. That is, for late payments that were 15 days old on January 15th, after another 15 days, they are now ready to be entered into the 30 days late category and subtracted from the previous category.

Note that in aging, only the amount that is due is totalled, and not the entire loan amount. (This is the difference with arrears.)

Each organization treats aging slighly differently. An industry best practice would be 30/60/90, which mirrors the banking world approaches.

From my thinking about reports, a key piece of information to capture during set up is the preference for the portfolio aging default. These defaults can be overwritten at report generation time if the system application is able to accomodate that.

Examples of information to capture:

   Periods       Lengths
   1               0 -30 days
   2               31- 60 days
   3               61 -90 days 
   4               91 - 120 days 

or 
   1            0-15 days
   2            15 - 90 days 
   3            > 90 days

Thus, a "Porfolio Aging Report" refers to the use of these time segments to show the distribution (i.e. number of) and the amount of money involved in the missed payments.

So a report will show: Client Name 0-30 days (count, and amt overdue) 31 - 60 (count and amt overdue) and so forth

Because aging refers to the movement of transactions from one time segment to the other, the analysis is valid for the client, the group, and especially important for the entire organization.

Related Concepts

From CAMEL which stands for:

• C apital Adequacy
• A sset Quality
• M anagement
• E arnings
• L iquidity

Asset Quality

Loan Loss Provision Ratio Formula: Loan loss provision/average performing assets Purpose: Indicates provisioning requirements on loan portfolio for current period Definition: Loan Loss Provision - Allocation in current period to the loan loss reserve.

Portfolio in Arrears Formula: Balance of loans in arrears/value of loans outstanding Purpose: Measures amount of default in portfolio Definition: Arrears - past due; typically calculated in the basis of the loan advance.

Loan Loss Ratio Formula: Amount written off/Average loans outstanding Purpose: Indicates extent of uncollectible loans over the last period. Any loan more than on year past due will be automatically considered uncollectible. Definition: Amount written off - a loss recognized on a loan in a period.

Reserve Ratio Formula: Loan loss reserve/Value of loans outstanding Purpose: Indicates adequacy of reserves in relation to portfolio. Definition: Loan loss reserve - reserve maintained to cover potential loan losses.