Loan Portfolio Performance and El Niño, an Intervention Analysis

This paper illustrates that natural disasters such as those created by extreme El Niño can significantly threaten financial institutions serving the poor. The effects of the 1997-98 El Niño on problem loans (restructured loans and those in arrears) is estimated using intervention analysis for a microfinance institution (MFI) in Piura, a region in northern Peru severely affected by El Niño. Extreme El Niño events like those 1982-83 and 1997-98 create catastrophic flooding that destroys transportation infrastructure, disturbs the livelihoods of households engaged in a wide range of activities, and destroys productive assets, crops, and private homes. The purpose of this paper is to assess exposure of a Piura MFI to the consequences associated with an extreme El Niño. Portfolio-level, monthly data from January 1994 to October 2008 were examined using an intervention analysis. While restructured loans averaged 0.5 percent of the total loan portfolio before the 1997-98 El Niño, the estimated cumulative effect of the El Niño indicates that an additional 3.8 percent of the total portfolio value was restructured in a short time period due to this event. No significant effect is found for changes in the proportion of late loans. The analyses demonstrate 1) that the correlated risk exposure of many small borrowers can significantly affect the lender when the catastrophe occurs; 2) the importance of considering bank management in assessing disaster risk to a loan portfolio; and 3) lender strategies to minimize losses may require long-term restructuring that perpetuates the effects of the disaster in the community.