What is the Delinquency rate?
The delinquency rate is the rate of percentage which defines the number of loans that are made due in any financial institution or bank. Delinquency simply means a delay in the activity. Banks and financial institutions grant loans to various borrowers in the market and from this borrower if one or some of them make a delay in payment of installment by one day also the loan is considered as delinquent but this same activity goes on repeating then banks can consider the same loan as default. This can be calculated by knowing the total amount of loans issued and the number of loans that are outstanding. Usually, banks or financial institutes will not report the loan as a delinquent loan until the borrower misses out on two installments i.e. till 60 days. Banks would wait for 270 days after the borrower has missed out two installments and if he is not able to pay his debt within 270 days then banks will consider this loan as a default and banks earn his payment of installment by sell or auction the borrower property or any other thing he has kept as a mortgage.
Get complete CFA Online Course by experts Click Here
How it is calculated
Any bank and financial institution who provide a loan in the market calculate it delinquency rate by dividing the number of outstanding loan (which are of more than 60 days) by the total number of loan they had issued in their institution and multiplying it by 100.
Delinquency Rate = Number of Delinquent Loan * 100
Total Number Loans Issued by Bank
Get complete FRM Online Course by experts Click Here
- Let’s say for Example a bank has issued a total of 300 loans and out of 300 loans, 17 loans are considered delinquent because the payment is outstanding for more than 60 days thus for calculating delinquency rate following method is considered.
Delinquency Rate = Number of Delinquent Loan * 100
Total Number Loans Issued by Bank
Delinquency Rate = 17 * 100
300
Delinquency Rate = 5.6%
Conclusion
The delinquency rate is calculated by banks and various analysts in the market to know the efficiency of the bank and this financial institution. Banks will try to lower the rate of delinquency because it will result in a better loan portfolio of that bank. Thus, it is used to measure the number of outstanding loans in any financial institution and help them to know that if the rate is high they should try to lower it as soon as possible.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing MBA with the specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated about financial market.
Related Post
