Bad loans in savings groups: provisions, write-offs and recovery

Every lending fund eventually has a loan that won't be repaid. That isn't a failure. Banks lose some loans too. The failure is pretending the money is still there. When a fund keeps counting dead loans at full value, it overstates its wealth, pays dividends it can't afford, and surprises members later. This guide shows the honest way to handle bad loans.

#Step 1: Age your arrears

Every month, group outstanding loans by how many days the oldest missed payment is overdue:

Put this table in your monthly financial report as totals only, with no names. It's the single best early-warning signal a fund has.

#Step 2: Provision for likely losses

A provision sets aside part of the loan value to reflect the risk it won't be repaid. A simple, widely used scheme:

Worked example. Your fund has:

• GHS 150,000 current → 1% = GHS 1,500
• GHS 10,000 watch → 5% = GHS 500
• GHS 6,000 substandard → 25% = GHS 1,500
• GHS 4,000 doubtful → 50% = GHS 2,000
• GHS 2,000 loss → 100% = GHS 2,000

Total provision: GHS 7,500. The fund reports loans of GHS 172,000 minus GHS 7,500 = GHS 164,500 as their realistic value. The provision is recorded as an expense, which reduces the surplus available for dividends.

In double-entry terms, the entry is to debit "loan loss expense" and credit "loan loss provision". The loans themselves stay on the books. See double-entry bookkeeping for savings groups.

#Step 3: Keep recovering

Provisioning doesn't mean giving up. Continue the recovery process:

1. reminders, then a meeting with the borrower (see handling late loan repayments);
2. offer a restructured schedule if the borrower's situation has changed;
3. offset against the borrower's own savings, per your rules;
4. call on guarantors (see guarantors in group lending).

#Step 4: Write off when recovery is exhausted

When a loan is clearly unrecoverable, for example over 12 months overdue with savings and guarantees exhausted, the committee recommends a write-off:

• the loan is removed from the books (debit the provision, credit the loan);
• the members approve it, usually at the AGM (see how to run an AGM);
• the borrower still owes the money, and any later recovery is recorded as income.

Record the details in the minutes and keep the file.

#Effect on dividends

Provisions and write-offs reduce the year's surplus, so dividends fall. That's the honest outcome: members should share losses as well as profits. Our guide to shares and dividends explains how the surplus is distributed. Paying dividends on unprovisioned bad loans is effectively paying members with money that doesn't exist.

#Preventing the next bad loan

Look at your written-off loans each year and ask what they had in common:

• loans above the recommended limits?
• new members with short savings records?
• weak guarantees?
• slow follow-up on the first missed payment?

Then tighten that rule. Your auditor will check this too; see the annual audit checklist.

Frequently asked questions

Does writing off a loan forgive the borrower?

Not necessarily. A write-off is an accounting step that stops counting the loan as an asset. The fund can and usually should keep trying to recover the money.

What is a loan loss provision?

An amount set aside, on paper, for loans that might not be repaid, based on how overdue they are. It makes the fund's reported value realistic before any loan is formally written off.

Who should approve a write-off?

The committee should recommend it and members should approve it, usually at the AGM, because it reduces everyone's share value.

This guide is general information to help groups organise themselves. It isn't financial, tax or legal advice — rules for savings groups differ by country, so check with a qualified adviser for your situation.