Commercial Loan Charge-Off Rate

Commercial Loan Charge-Off Rate

KPI Details

Commercial Loan Charge-Off Rate is a vital risk-related measure of the organization's loan underwriting methods, as well as an indicator of potential losses due to loan charge-offs. Loan charge-offs are typically publicly reported (in regulatory filings, etc.), placing increased scrutiny and importance on this measure, as poor performance may impact the bank's overall market standing. This KPI is a lagging indicator of commercial loan underwriting quality, risk appetite, and the overall risk associated with commercial lending practices. High values for Commercial Loan Charge-Off Rates can indicate that the servicing portfolio contains a large number of high-risk options for financial institutions, which increases the likelihood of not collecting on numerous outstanding commercial loans. The increased likelihood of default negatively effects the financial institution's profitability and may lead to a need to access loss reserves in order to compensate for losses on uncollected commercial loans.

KPI Definition

The dollar amount (remaining balance) of commercial loans that must be charged-off (i.e., delinquent loans unlikely to be collected) by the organization divided by the average dollar amount of commercial loans in the organization's servicing portfolio (i.e., total loans outstanding) over the same period of time, as a percentage.

KPI Best Practices

• Well-defined processes for the Collections function to receive payment from delinquent accounts
• Create forecasts to predict which loans will reach next stage of delinquency (60 days, 90 days, etc.) and focus on collection or loss mitigation from those loans
• Review underwriting procedures regularly to determine if too many risky loans are being originated

KPI Calculation Instructions Commercial Loan Charge-Off Rate?

Two numbers are used to calculate this KPI: (1) the total remaining balance of commercial loans that must be charged-off by the institution, and (2) the average dollar amount of commercial loans outstanding over the same period of time. Commercial loans are typically formally charged-off after being delinquent for a certain period of time (typically between 90-150 days past due). Count the total remaining balance (sum) of all charged-off commercial loans in the numerator for this calculation. Commercial loans in the financial institution’s servicing portfolio (i.e., total commercial loans outstanding) includes those commercial loans that have been closed and funded, and are actively being serviced by the institution during the measurement period. To calculate average total commercial loans outstanding, add total commercial loans outstanding at the beginning and end of the measurement period and divide that value by 2. Do not include mortgages or other consumer loans in this calculation.

KPI Formula :

((Sum of Remaining Loan Balance of Charged-Off Commercial Loans) / (Average Total Commercial Loans Outstanding))*100