A Portfolio at Risk (PAR) is a way to measure how much credit risk there is with loans. It looks at how many loans are not getting paid back on time – this tells us if those loans will be repaid or not.
By understanding the PAR, lenders can get a better picture of the credit risk their portfolio carries.
It is calculated by dividing the total amount of loans with arrears (those overdue for more than 30 days) and restructured loans, by the outstanding gross portfolio (the original loan balance).
What is Portfolio at Risk
Portfolio at Risk (PAR) measures the percentage of microfinance loans outstanding in a lender’s total loan portfolio that are at risk of default, typically defined as loans that are 30 days or more past due.
It is commonly used as a standard measure of credit risk in the microfinance industry and is an important metric used by lenders to manage their loan portfolios and assess their overall credit risk. A higher PAR indicates a higher level of credit risk in the portfolio.
PAR is the ratio of loans affected by arrears (those overdue for more than a certain number of days) divided by the total outstanding balance of loans.
It’s used to assess the credit risk in a loan portfolio and is an important tool for lenders when making decisions on loan origination, servicing, and collections. PAR typically looks at loans overdue for more than 30, 60, 90, 120, and 180 days.
The higher the PAR of a portfolio, the greater the risk that many of the loans will not be repaid in full.
How PAR Works
To understand how PAR works, it’s helpful to break down its components.
First, lenders need to identify the total balance of loans that are in arrears (overdue for more than 30 days) and any restructured loans – this is known as the “at risk” portion of the portfolio.
Next, they need to identify the total gross loan portfolio, which is the original balance of all loans issued by the lender.
Finally, they need to divide the at-risk portion of their portfolio by the total gross loan portfolio to calculate the PAR. The higher the ratio, the greater the risk that many of these loans will not be repaid in full.
The PAR helps lenders to identify potential problem loans and take proactive steps to mitigate the credit risk in their portfolio. It is a helpful tool for making better lending decisions and can be used as a benchmark by other lenders in the microfinance industry.
The Formula of Portfolio at Risk
Calculating the PAR is quite simple – it is the ratio of loans affected by arrears (those overdue for more than a certain number of days) divided by the total outstanding balance of loans.
PAR = Total Balance of Loans in Arrears/Total Outstanding Gross Loan Portfolio
For example, if a lender has 5,000 loans outstanding with a total balance of $2,000,000 and 100,000 of those loans are overdue for more than 30 days, the PAR would be calculated as follows
PAR = ($100,000/$2,000,000) x 100% = 5%
5% is considered a low PAR, indicating that the lender’s portfolio has a low level of credit risk.
Conclusion
Portfolio at Risk (PAR) is an important tool for lenders to manage their loan portfolios and assess overall credit risk. It looks at how much of the loan portfolio is overdue for more than 30 days or restructured, which gives lenders an indication of how securely their loans are being repaid.
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