—This paper proposes the use of Macaulay Duration as an operational and objective measure of the performance of loan repayments. It uses the Macaulay Duration measure to calculate the Duration of an individual loan and shows how changes in calculated Duration vary over time with loan repayments, prepayments or defaults. These changes in Duration are used to provide an objective measure for the repayment performance of loans. The duration approach also allows the construction of a numerical measure for the loan repayment performance of a portfolio of loans that has unique characteristics, or for the overall loan repayment performance of a financial institution or a larger economic region. The model is ideally suited for Microcredit institutions that are scarce on resources to monitor their loan portfolios.
—Duration, loan repayment, microloans.
Rakesh Sah is with the College of Business, Montana State University, Billings, MT 59101 USA (e-mail: rakesh.sah@ msubillings.edu).
Cite: Rakesh Sah, "Loan Recovery Monitoring Mechanism," International Journal of Trade, Economics and Finance vol.6, no.1, pp. 62-66, 2015.