Repayment rate

Repayment rate measures how much of what was due was actually collected. In its simplest form it is the amount received divided by the amount that fell due over a period, expressed as a percentage.

It is the oldest and most quoted portfolio metric in lending, and it is the one practitioners are most often warned against relying on. The reason is a mismatch between what it appears to say and what it actually says: a repayment rate describes cash flow over a period, while the question it is usually asked to answer — how healthy is this portfolio? — is about the stock of loans at risk.

A lender can report a repayment rate of 97 percent while a tenth of its portfolio is in arrears. Both figures can be arithmetically correct at the same time. Understanding why is the point of this entry.

The formulas

There is no single definition. At least four calculations circulate under the name "repayment rate", and they produce different answers from the same data.

Period repayment rate

Amount collected in the period ÷ Amount falling due in the period

The most common form. Measures collection performance over a month or quarter.

Cumulative repayment rate

Total collected since inception ÷ Total that has fallen due since inception

Used in older microfinance reporting. Extremely stable, and almost entirely uninformative, because a long history of good collection swamps recent deterioration.

On-time repayment rate

Instalments paid on or before the due date ÷ Instalments due

Counts events rather than value. Harder to inflate than the value-based forms, and more useful operationally.

Current recovery rate

Amount collected in the period ÷ Amount that fell due in that same period, excluding prepayments and early settlements

An attempt to correct the most obvious distortion in the first formula.

The first step in evaluating any quoted repayment rate is establishing which of these produced it. In practice it is often not stated, and sometimes not known.

Worked example

A lender with 1,000,000 outstanding across its portfolio reports for the month:

• Instalments falling due: 120,000
• Amount collected against those instalments: 116,400
• Repayment rate: 97.0% (116,400 ÷ 120,000)

The same lender's arrears position, measured on the loans themselves:

• Gross loan portfolio: 1,000,000
• Outstanding balance of loans with any instalment past due: 90,000
• Portfolio at risk (PAR): 9.0% (90,000 ÷ 1,000,000)

Both are correct. A 97 percent repayment rate and a 9 percent portfolio at risk describe the same portfolio in the same month.

The reconciliation: the 3,600 shortfall is small relative to the month's instalments, but the loans that shortfall belongs to carry 90,000 of outstanding principal. Repayment rate measures the missed instalment. PAR measures the whole loan that instalment belongs to.

Why repayment rate misleads

It measures flow, not stock

A missed instalment of 500 on a loan with 15,000 outstanding barely moves a repayment rate. It puts the entire 15,000 at risk. The metric responds to the size of the payment; the exposure is the size of the loan.

Growth hides delinquency

In a growing portfolio, the amount falling due each period is small relative to the total outstanding, because recently disbursed loans have not yet reached most of their instalments. The denominator is dominated by older, seasoned loans while the risk sits in the newer ones. Rapid growth therefore produces a flattering repayment rate almost automatically — and the flattery unwinds exactly when growth slows.

Prepayment inflates it

Early settlements and prepayments add to the numerator without a corresponding entry in the denominator. A portfolio with a few large early settlements can report a repayment rate above 100 percent while genuinely delinquent accounts sit untouched.

Rescheduling resets the denominator

Restructuring an arrears account replaces the missed instalments with a new schedule. The old obligation stops being "due", so it leaves the calculation. A lender that reschedules aggressively can maintain a near-perfect repayment rate on a deteriorating book. This is the single most effective way to conceal portfolio deterioration, and it leaves almost no trace in the repayment rate itself.

Write-offs remove the evidence

Loans written off no longer generate instalments due, so the worst-performing accounts exit the denominator permanently. Repayment rate computed after write-off is a measure of the loans that survived.

Aggregation conceals distribution

A 97 percent portfolio rate is consistent with every borrower paying 97 percent, or with 97 percent of borrowers paying fully and 3 percent paying nothing. These are entirely different situations with the same headline.

Repayment rate compared with other quality measures

Repayment rate

• Measures: Cash collected against cash due
• Basis: Flow over a period
• Captures full exposure: No
• Affected by growth: Heavily
• Affected by rescheduling: Heavily
• Inflated by prepayment: Yes
• Standard for reporting: No

Portfolio at risk (PAR)

• Measures: Outstanding balance of loans with any arrears
• Basis: Stock at a point in time
• Captures full exposure: Yes
• Affected by growth: Moderately
• Affected by rescheduling: Depends on classification policy
• Inflated by prepayment: No
• Standard for reporting: Yes

Arrears rate

• Measures: Value of overdue instalments only
• Basis: Stock at a point in time
• Captures full exposure: No
• Affected by growth: Moderately
• Affected by rescheduling: Yes
• Inflated by prepayment: No
• Standard for reporting: Secondary

Collection rate

• Measures: Cash collected against cash expected (including arrears recovery)
• Basis: Flow over a period
• Captures full exposure: No
• Affected by growth: Heavily
• Affected by rescheduling: Heavily
• Inflated by prepayment: Yes
• Standard for reporting: Operational only

The sector consensus is that portfolio at risk, segmented by aging buckets, is the appropriate measure of portfolio quality, and that repayment rate should not be used for that purpose. Funders, raters and regulators generally require PAR.

The "97 percent repayment rate" claim

Repayment rates in the high nineties have been quoted in microfinance promotional material for decades, and the figure is widely repeated as evidence that poor borrowers repay reliably.

The underlying claim has substance — group-guaranteed small-balance lending genuinely does achieve high collection — but the specific number should be read carefully:

• The formula is usually unstated, and cumulative repayment rate produces the highest figure of the four.
• Rescheduled and refinanced loans are frequently included as performing.
• Written-off loans have left the calculation.
• The same institutions often report PAR 30 in the mid single digits, which is a materially different picture of the same portfolio.

None of this means the lending is unsound. It means the headline figure is not the evidence it appears to be, and an institution quoting a repayment rate without a PAR alongside it is presenting the weaker of two available numbers.

Where repayment rate is genuinely useful

The metric has real operational value, provided it is not asked to measure portfolio quality.

Short-cycle collection monitoring. In village banking and other weekly-repayment methodologies, the question at each meeting is whether the group collected what was due. Repayment rate answers exactly that, immediately, without waiting for arrears to age.

Officer and branch performance. On-time repayment rate on a defined book is a fair measure of collection discipline, since the officer controls collection but not the historic composition of the portfolio.

Product and cohort comparison. Comparing repayment rates across products, disbursement months or client cycles isolates differences that PAR blurs, because the cohorts are matched.

Early warning. A repayment rate that moves before PAR does is a useful leading indicator — arrears take thirty days to register in PAR 30, but a shortfall in this week's collections shows up immediately.

In each of these the metric is being used for what it is: a measure of collection activity over a short, controlled period.

Computing it defensibly

• State the formula. Every quoted repayment rate should carry its definition.
• Exclude prepayments and early settlements from the numerator, or report them separately.
• Report rescheduled loans separately. A restructured account should be visible, not silently absorbed into the performing book.
• State whether written-off loans are included. Both treatments are defensible; only silence is not.
• Report the period. A monthly figure and a cumulative figure are not comparable.
• Never publish it alone. Repayment rate alongside PAR 30 and the restructured loan ratio gives a fair picture. Any one of them alone does not.
• Prefer on-time repayment rate where the purpose is operational discipline, since it counts events and resists value-based distortion.