Introduction
Effectively monitoring a loan portfolio involves more than just tracking repayments. Financial institutions use a set of critical KPIs to assess credit risk, profitability and overall performance of their loan books.
In this article, we essential KPIs such as CDR/PDs, CPR, recovery of losses, IRR and total return along with how these metrics can be sliced for deeper analysis using tools like Narrator, G-Square’s proprietary BI platform.
KEY PERFROMANCE INDICATORS
1. Cumulative Default Rate (CDR) / Probability of Default (PD)
Definitions:
- PD (Probability of Default) measures the likelihood that a borrower will default over a defined period.
- CDR (Cumulative Default Rate) shows what portion of outstanding loans defaulted over time relative to the portfolio size at the start of each period.
Calculations:
- PD = Number of defaulted loans / Total number of loans
- CDR (monthly) = Defaulted principal during the period / Outstanding principal at the beginning of the period
This gives a truer picture of credit risk as it adjusts for the decreasing principal over time due to repayments.
Objective of these measures:
Tracking CDR and PD by geography, credit score, vintage or months on book (MOB) can highlight emerging risk pockets early and support proactive risk mitigation.
2. Prepayments – Conditional Prepayment Rate (CPR)
Definitions:
Prepayment refers to borrowers paying off loans earlier than scheduled. This is measured monthly through the Single Monthly Mortality (SMM) rate and annualized using the Conditional Prepayment Rate (CPR).
Calculations:
- SMM = Voluntary prepayments in the month / Outstanding principal at the beginning of the month
- CPR = 1 – (1 – SMM)^12
Only voluntary (unscheduled) principal repayments are considered; scheduled EMI components are excluded.
Objective of these measures:
High CPR can reduce interest income and create reinvestment risk, while low CPR might signal borrower stickiness. CPR analysis by credit score, region or tenure helps optimize product pricing and cash flow planning.
3. Recovery of Losses
Definitions:
Recovery refers to the portion of defaulted loan amounts that are ultimately collected through legal actions, collateral sales, or collections.
Calculation:
- Recovery Rate = Amount recovered post-default / Charged-off amount
Objective of these measure:
High recovery rates reduce net credit losses. Tracking recoveries by loan size, MOB at default, or recovery channel helps optimize collection strategies and provisioning.
4. Internal Rate of Return (IRR)
Definitions:
IRR represents the annualized return of a loan based on its actual cash flows including disbursal, repayments, prepayments and recoveries. It accounts for the time value of money.
Calculations:
- IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows from the loan equal to zero.
- It typically requires spreadsheet or software tools to compute based on actual inflow/outflow dates.
Objective of these measures:
IRR gives a realistic picture of loan profitability. Comparing IRRs across products, vintages or geographies helps in portfolio optimization and strategic pricing.
5. Total Return on Cash Disbursed
Definitions:
This measures the absolute return (interest, fees, recoveries) earned over the entire life of the loan relative to the amount disbursed.
Calculations:
- Total Return = (Total inflows including recoveries / Total disbursed amount) – 1
Unlike IRR, this does not account for the time value of money but provides a straightforward view of profitability.
Objective of these measures:
Simple yet powerful, this KPI helps identify high-yielding customer segments or products and evaluate overall portfolio performance.
UNLOCKING DEEPER INSIGHTS THROUGH SEGMENTATION
To extract actionable insights, these KPIs should be segmented across various dimensions:
- Geography – Identify regions with higher risk or profitability.
- Credit Scores – Assess how well underwriting criteria align with outcomes.
- Vintage Analysis – Monitor how loans originated in different periods behave over time.
- Months on Book (MOB) – Study early behaviour patterns, as first few months often indicate long-term risk or stickiness.
Such slicing enables sharper credit policy, better risk-based pricing and targeted interventions.
HOW BI TOOLS LIKE OUR NARRATOR CAN HELP
G-Square’s proprietary BI platform, Narrator, empowers teams to convert raw loan data into strategic insights. Check out https://narrator.cloud
Key capabilities:
- Live Dashboards: Track KPIs like CDR, CPR, IRR in real-time with visual indicators can be created.
- Cohort Analysis: Drill down into vintage or credit score-level performance with a few clicks.
- Predictive Insights: Use historical behaviour to forecast defaults or prepayments.
- Portfolio Simulation: Run what-if scenarios (e.g., how does a 20% CPR shift impact cash flows?).
- Automated Alerts: Get notified when a KPI breaches thresholds (e.g., spike in default rate in a specific region).
- Thus, Narrator can bridge the gap between raw data and business strategy helping credit risk, finance, and business teams to make decisions backed by reliable insights.
Conclusion
Monitoring and optimizing a loan portfolio require a deep understanding of performance KPIs. Metrics like PD, CDR, CPR, IRR, and total return provide vital clues into borrower behaviour and portfolio health. When paired with intelligent segmentation and powered by BI platforms like Narrator, these KPIs become powerful tools for informed, data-driven lending strategies.
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