Delinquency is a term used to characterise the status of contractual lending relationships with respect to repayments of interest and/or principal. A relationship (a borrower, debtor, counterparty) is delinquent when Contractual Cash Flows obligations have not been been fulfilled
The delinquency status is linked to observable characteristics of the credit relationship, primarily the lapsed time since a missed payment. This is usually measured in days Past Due. By convention, certain time periods are singled out as signalling significant information in relation to the state of the relationship
- 30 days past due is an indicator that the observed delinquency might not be an accidental lapse but signals repayment difficulty
- 90 days past due is an indicator of a borrower in Financial Difficulty which may classify the relationship as Non-Performing Exposure
- 180 days past due is the threshold used in the Basel II regulatory framework for retail and public sector exposures
Delinquency history denotes the enumeration of the delinquency status of a borrower from the inception of the Credit Relationship to the present day (or the termination of that relationship, which-ever comes first)
The capture and representation of delinquency history must make an number of design choices:
After a missed payment the delinquency status changes with each calendar day. A 30-Day (monthly) observation period is typical (even though essentially an arbitrary convention) as a means to simplify the representation of delinquency status.
The collection of actually reported states will include (depending on the nature of the borrowers and credit products) the union of the following sets:
- An enumeration of distinct Current states (if there are more than one)
- An ordered list of Delinquent states. While any granularity is possible in principle, it is quite typical that the shortest period is 30 days past due, whereas the longest can be 90 days past due or 180 days past due.
- An enumeration of distinct Default states (including such possibilities as Forbearance, Foreclosure etc)
Worst delinquency denotes the most severe delinquency status in a borrowers delinquency history.
The delinquency history over one annual period of several distinct accounts captured in monthly observation periods. The delinquency status is represented by a numeral indicating the number of months in delinquency (rounded down to a number of full months)
- Acct1 is always current
- Acct2 was reported current up to the end of month 5, reported 30 days past due at the end of month 6 (hence missed a payment during month 5) and became current again in month 7 (corrected the missed payment during month 6)
- Acct3 became 60-days past due in month 7 before restoring to current
- Acct4 repaid during month 2 an amount due from month 1 but missed an amount due from month 2. Its worst delinquency is 60 days past due on month 7
- Acct5 is declared in default on month 5 (which is assumed to be an Absorbing Default State. Acct 5 is also an example of Direct Default, namely a borrower that migrates into default without any instance of curing (remedying) the payment status.
Issues and Challenges
- There are trade-offs in the granularity and accuracy of capturing delinquency history versus the cost
- To the degree that delinquency assessment is focused on the repayment history of a specific financial contract it may not capture accurately the entire range of credit behaviour of a borrower
- D403: Prudential treatment of problem assets - definitions of non-performing exposures and forbearance