Be Tech Savvy In Finance Business

It is highly impossible to have a good control on any part of finance business without being a tech savvy company.

There are enough gadgets including mobiles and high speed connectivity to have every information and capture any activity very accurately on site and off site.

Top guy need not be a computer wizard or software engineer to run a finance company; he still necessarily needs to be an economist, marketer and financial wizard.

He must be open to the change and he may have to be interested to know what computers and new gadgets can do to mitigate risk and help him have a full operational control.

Whatever computer is capable, must be done through only computers. This drastically saves cost and helps control the business better. Of course, he must choose right software vendor, to really get better return on huge financial outlay upfront.

There was a company who had invested a huge money in collection module of a financial software – Finness. It was not implemented till the author joined the company as collection head.


With implementation, the following were achieved quickly:

• Centralized control on delinquency; accurate delinquency ratio and rates
• Automated work flow; segmentation was done through queing system
• Tele-calling could be started for Low risk - Low deliquent accounts
• Dunning; collection letters were sent out on time, through collection system
• Customer disputes are known
• Mitigated the risk of cash handling and misapplication
• Daily allocation and assignment of cases to field collectors
• Access to collection system, through inter and intra net
• Accounts of customers at the press of the button; foreclosure data available
• Efficiency and effectiveness could be measured, thanks to analytics.
• Customer Contact / interaction details and feedback were recorded.
• Promises To Pay were to made to pop up on PTP dates, for close follow up.

The company had moved to a position of having the lowest delinquency ratio of 6% on their car portfolio from around 12% ( In fact, the company had no accurate delinquency ratio as it depended on field delinquency data till implemenation of dedicated collection sysytem ) and more importantly, it was useful to maintain accurate customer accounts.

I am sure more advanced versions of many software are available currently to track default accounts from delinquency to collection to losses to legal proceedings to recovery.

Have one, because charge-offs need to be minimised.

Out of Sight, Out of Mind

Sales are important; it is highly competitive as well. Marketing team is under pressure all the time to churn higher numbers, because a portion of it makes higher profit.

Everybody loves profit; it is an important KPI/ KRA for the top guy and the company.

Marketing team is eager to get customer from anywhere, even too far away place from the branch. With aggressive Direct Marketing Agents pushing very hard their files, Branch and Regional managers get too submissive and accept the files.

As long as these accounts do not turn delinquent, there is hardly an issue. But, it will not be so; delinquency is a part of the lending business. Delinquency level is high with such remote accounts because of bad banking culture and inefficient collection created by the distance.

“Out of sight, out of mind” is true with these accounts; the author had first hand experience with such accounts. Hardly any field collector ever visited high delinquent customers located remotely. The common excuse is that they do not get time; it takes the whole day to meet one customer; and there are other urgent issues. 

Senior guys when they are on field visits may focus on these remote accounts.

High delinquency and losses have high positive correlation. Invariably, these accounts suffer certain degree of loss.

So, it is better to have the following restrictions:

1.      Not to consider prospects located beyond 100 Kilometers from the branch; it should be    possible for a field collector to visit such a place in 2 hours by personal vehicle.

2.      One can make exceptions to customers whose credit history and experience is already available with the lender.

3.      One may consider prospects with regular income like: salary, interest, pension, etc., which could be verified from bank statements.

4.      In any other case, LTV should not exceed 50%; higher customer equity in the asset ensures semblance of repayment discipline.

5.      No ‘used vehicle’ must be financed to remote prospects.

However, wholesale finance and high value machinery finance need not have any restriction.

If the company is a captive, hardly any one can force any limits on area, sales and loss as well.

Due Dates Vs Collection Dates

These are two crucial dates in any finance business. The gap between these two dates creates delinquency. Every lender tries to ensure that both dates (bill/due date and collection date ) are same, so as to avoid ‘delinquency’. It may not happen.

Bur, lenders must avoid creation of artificial delinquency on technical grounds.

In India, private finance lenders take post-dated cheques for all future installments:

1. To ensure prompt collection;
2. To keep collection cost lower; and
3. To take recourse to criminal proceedings in case of dishonor.

But, large finance companies face huge problem of receiving, ensuring accuracy, storing, retrieving, depositing on due dates, getting credit and /or receiving dishonored cheques back from banks.

Imagine a company with 100,000 accounts having 60 dated cheques for each month and account. It totals up to 6,000,000 cheques.

Problem compounds when cheques dated are spread across days of any month, because contracts are sourced across days of a month. This poses a big operational problem, creating risk apart. Some banks offer services for storing and collection.

The Service Level Agreements need to be drawn out carefully with banks; otherwise, banks would make companies pay for their operational failure/ inefficiency.

Due to faulty operations, some customer accounts will be delinquent for no fault of theirs:

1. Cheques do not hit customer accounts on due date.
2. Late credit by banks.
3. Undue late charges, fees and penalties.

Companies are advised to restrict due dates to two, say 10^th and 20^th of each month.

• 10^th can be a uniform due date for borrowers with fixed income like salary, etc. and corporates; and
• 20^th can be a uniform due date for remaining customers. 

This helps collection department to create the right collection cycle for segmentation, reducing operational risk apart. Interest for the period between date of disbursement and due date needs to be collected upfront, as a part of margin money / along with customer equity.

How do we align due dates with collection dates?

This is possible only if we make an arrangement with a bank to give credit for deposits made on due dates (and reverse the credit only on dishonour of the cheque by the customer). Alternatively, company CFO can do the same in the accounting system. This is not against any accounting principle.

With this, a lot of confusion and inaccuracy will be avoided. Accurate measurement of delinquency is paramount to collection. Any thing measured gets done!

Practice Management By Objective (MBO)

Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources.

It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identify their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback the process to reach objectives.

MBO managers focus on the result not the activity. They delegate tasks by "negotiating a contract of goals" with their subordinates without dictating a detailed roadmap for implementation. Management by Objectives (MBO) is about setting yourself objectives and then breaking these down into more specific goals or key results and measurable indicators.

It is called as Key Result Areas (KRAs) or Key Performance Indicators (KPIs) by different companies.

Management by Objectives (MBO) was first outlined by Peter Drucker in 1954 in his book 'The Practice of Management'. In the 90s, Peter Drucker was frustrated when he said: "It's just another tool. It is not the great cure for management inefficiency... Management by Objectives works if you know the objective, 90% of the time you don't."

I can sympathize with Drucker. How true he was in 90's.

In India, many Boards of Directors set the right goals for the enterprise and for the top management. But, it is NOT broken into right subordinate objectives for different functional heads and further down to the last employee in the hierarchy. Briefly, there is no alignment of goals achieved. This is because of lack of focus by CEO/ MD on such an important activity. It is generally delegated to HR department; they lack full functional knowledge to create right KRAs for each empowering employees and implement MBO in full.

MBO remains on paper and it is done for the heck of it just before the rewards to be decided as an annual routine. Most of the time, promotions and increments are drawn out first, based on whims and fancies of the supervisors and then performance appraisals are written to suit. Worst, KRAs are written just before the appraisal and when the timeline for performance is over.

Will efficiency improve? Can you retain best employees? Will company achieve the goal?

Practice MBO in letter and spirit; train all mangers on MBO. Turn organization ‘Goal oriented’.

Use Collection Analytics

Analytics

Analytics provides organizations with better visibility into the factors that drive revenues, costs, and shareholder value. Today’s business challenges demand timely financial information that enables executives, managers, and front-line employees to make better decisions, take action, and correct problems before they affect the company’s financial performance.

Analytics provide insight to the people who can impact business performance.

Collections + Analytics = Improved Recovery.

Collection Analytic is nothing but an intelligent analysis, using combination of mathematical and statistical tools, to arrive at a “behavioral scoring”, depicting accurate picture of the customer’s propensity and ability to pay, which is used to segment defaulters, prioritize collections activities to maximize recoveries and reduce collections costs.

Effective collection analytics empower the collection staff to focus on the right debtors, maximizing the payments collected by a combination of segmentation, scorecards, and strategies to help manage delinquent accounts better.

Collections Analytics segments and identifies accounts representing those that self-cure, those that cure with engagement, and those that will improve, remain stable, or grow more delinquent. Using Collections Analytics you can assign treatments and protocols to each of your segments depending on the account’s recovery score, outstanding balance, and balance age. This ensures collection teams are distinguishing well-intended, “accidental” debtors from those under economic hardship or potential cases of actual fraud. Strategies can be interfaces with client interaction further enhancing productivity by leveraging and optimizing investments in existing systems and providing a seamless integration to tools already being used to help collection teams.

Why collection analytic?

Because it increases amount of collection and more importantly reduces the losses by 1-2%. This translates into almost the existing profit of many well-run companies; will company not like to double its profit?

Predictive models

Predictive models analyze past performance to assess how likely a customer is to exhibit a specific behavior in the future in order to improve collection effectiveness. Many types of models are available and uniformly, all of them deduce the analysis to a scoring. A good scoring model requires varied data accurately and on timely manner.

Data is at the heart of everything.  With expertise in the interpretation and use of credit bureau, clients’ customer data and customer contact history, Analytics turns this data into information, which enables organizations to predict how defaulters will behave in the debt collections process.

Do Indian companies require them? Yes, banks and big finance companies certainly require. But, are they ready? One is not sure.

Very few banks and lenders have applications data, credit bureau data, credit scores, and collateral details electronically. Some do not have a dedicated debt management system. Migration or pulling data from one to another system creates its own set of problems.

This apart, hardly any bank or lender has captured and recorded customer contact/ interaction history systematically and digitally. Without this crucial information, no predictive model implemented will churn out any meaningful results. It would take a few years more, provided companies realize the value and importance of recording customer contact/ interaction history.

Predictive models are of no use to Indian banks and lenders, in near term.

Descriptive models

This may be appropriate for India. Descriptive models quantify relationships in data in a way that is often used to classify default customers into groups. In other pages, we have classified and grouped them under four groups/ quadrants:

I           High Delinquent        -           High Risk

II         High Delinquent         -           Low Risk

III        Low Delinquent         -           High Risk

IV        Low Delinquent         -           Low Risk

Additionally, we may use six sigma concept to further identify high risk accounts within the groups based on payment pattern falling outside six sigma (standard deviation). This would help rank-order the cases within the groups or in the collection lists.

We will discuss the level of effort, type of effort, timing of effort and the right strategy for each the above groups in future blogs.

How Does RBI Look At Default In NBFC ?

Default and Provisioning.

Asset Classification

Every non-banking financial company shall, after taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realization, classify its lease/hire purchase assets, loans and advances and any other forms of credit into the following classes,  namely:

(i) Standard assets;

(ii) Sub-standard assets;

(iii) Doubtful assets; and

(iv) Loss assets.

The class of assets referred to above shall not be upgraded merely as a result of rescheduling, unless it satisfies the conditions required for the upgradation.

“Standard Asset” means the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business;

“Sub-Standard Asset” means:

(a) an asset which has been classified as non-performing asset (NPA) for a period not exceeding 18 months;

(b) an asset where the terms of the agreement regarding interest and / or principal have been renegotiated  or rescheduled or restructured after commencement  of operations, until the expiry of one year of satisfactory performance under the renegotiated or rescheduled or restructured terms.

“Doubtful Asset” means a term loan, or  a lease asset, or  a hire purchase asset, or any other asset, which remains a sub-standard asset for a period exceeding   18 months;

“Loss Asset” means:

(a) an asset which has been identified as loss asset by the non-banking financial company or its internal or external auditor or by the Reserve Bank  of India during the inspection of the non-banking financial company, to the extent it is not written off by the non-banking financial company; and

(b) an asset which is adversely affected by a potential threat of non- recoverability due to either  erosion in the value of security or non availability of security or due to any fraudulent act or omission on the part of the borrower;

‘Non-Performing Asset’ (referred to in these Directions as “NPA”) means:

a.        an asset, in respect of which, interest has remained  overdue for a period of six months or more;

b.       a term loan inclusive of unpaid interest, when the installment is overdue for a period of six months or more or on which interest amount remained overdue for a period of six months or more;

c.       a demand or call loan, which remained overdue for a period of six months or more from the date of demand or call or on which interest amount remained overdue for a period of six months or more;

d.       a bill which remains overdue for a period of six months or more;

e.       the interest in respect of a debt or the income on receivables under the head `other current assets’ in the nature of short term loans/advances, which facility remained overdue for a period of six months or more;

f.        any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of six months or more;

g.      the lease rental and hire purchase installment, which has become overdue for a period of twelve months or more;

h.       in respect of loans, advances and other credit facilities (including bills purchased and discounted), the balance outstanding under the credit facilities (including accrued interest) made available to the same borrower/beneficiary when any of the above credit facilities becomes non-performing asset:

Provided that in the case of lease and hire purchase transactions, a non-banking financial company may classify each such account on the basis of its record of recovery;

Provisioning requirements

Every non-banking financial company shall,  after taking into account the time lag between an account becoming non-performing, its recognition as such, the realization of the security and the erosion over time in the value of security charged,  make provision against sub-standard assets, doubtful assets and loss assets as provided hereunder :-

(i)         Loss Assets: The entire asset shall be written off. If the assets are permitted to remain in the books  for  any  reason, 100% of the outstanding  should be provided for;

(ii)       Doubtful Assets:

(a)    100% provision to the extent  to  which  the advance is  not  covered  by  the  realizable value  of  the  security  to  which  the mortgage guarantee company has a  valid  recourse shall  be made. The realizable  value  is  to be  estimated  on a realistic  basis;

(b)   In regard to the secured portion, provision is to be made on the following basis  to the extent  of  20% to 100% of the secured portion depending upon  the period  for  which  the  asset has  remained doubtful:

     Period for which the asset has remained in doubtful category,

Up to one year,                                    20%

One to three years,                               30%

More than three years,                        100%

( iii)      Sub-standard assets: A general provision of 10% of total outstanding shall  be made

(iv)       Every Non Banking Financial Company shall make provision for standard assets at 0.25 percent of the outstanding, which shall not be reckoned for arriving at net NPAs. The provision towards standard assets need not be netted from gross advances but shall be shown separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet.”

Classify To Bring Focus

Delinquencies need to be classified appropriately to bring the right focus. Different institutions use different type of delinquency/ collection reports. Each has its advantage and disadvantages.

Some foreign banks use collection reports based on ‘exposure given default’ – EGD. This gives a list in descending order of exposure. Here, the focus is on accounts with high exposure. Obviously, they do not want loss per account to be huge. Here, classification does not reflect neither level of delinquency or level of risk.

Some NBFCs use collection reports based on ‘past due amount’. This gives a list in descending order of default amount or past due amount. There is no clarity on delinquency and risk levels.

Most MNC lenders use collection reports based ‘days past due’ – DPD. This gives a list in descending order of number of days accounts in default. One can get ‘months past due’ by dividing DPD by 30. Months past due gives number of installments overdue.  Similarly, many credit card lenders use ‘buckets’ generally representing different months past due, say first bucket to mean account with past due from 1-30 days. This certainly indicates the level of delinquency and not fully the level of risk. Yes, default accounts with high DPD tend to be high risk; it gets increasingly difficult to collect with an increase in DPD.

Then, how do we measure risk, delinquency level and classify them broadly based on delinquency and risk, to bring the right focus by allocating and assigning resources to mitigate losses?

It is important to have accounts classified in the following matrix.

I High Delinquency - High Risk	III Low Delinquency - High Risk
II High Delinquency - Low Risk	IV Low Delinquency - Low Risk

Collection reports rak ordered by delinquency rate would help classify, based on risk.

Delinquency rate is, as defined elsewhere in my blogs, the rate of amount past due as compared to amount billed so far for the contract.

Top 20% of accounts on the list are certainly high risk accounts; balance can be classified as low risk accounts. These can be further classified based on DPD. Accounts with DPD higher than 90 may be classified as high delinquent and remaining low delinquent.

Now, we have 4 quadrants which constitute Debt Lifecycle as follows:

I        High delinquent – High risk

II       High delinquent – Low risk

III      Low delinquent -  High risk

IV      Low delinquent – Low risk

It is clear that the focus needs to be on high risk accounts and more on Quadrant I accounts which are High delinquent – High risk. Different quadrants require different levels of curing like calling, field visits, repossession, agency collection, legal actions, etc.

Try them; you will see results. Losses will come down.

Collection analytic will help further classify to bring razor sharp focus; I will write on collection analytics on different pages in near future.

Reduce Losses

Losses are a function of mindless orientation towards sales numbers and lack of credit management.

It is true that sales are important in any business, so is in finance business. Sales bring profits.

In many a bank, more so in MNC banks, I have heard that the top guy with orientation of marketing or credit is named alternatively for any branch. The first guy would show result in terms of sales and credit guy would clean up. It may be true because a country head or a product head in MNCs are normally for a three years term and they are under stress to show results to get a ‘better position’. Lest, they would be shown door.

In a competitive business like finance business, every thing gets measured by the boss, except the credit quality which shows up after an average period of 1-2 years. Losses occur after the term is over and the horse is bolted. It is important that banks and NBFCs have adequate credit analytics to show and even predict the quality of credit and portfolio regularly, at an interval not less than 3 months.

Probability of loss is 100% when there is lack of credit management in finance or banking business. They have a very high correlation with losses.

Credit losses arise because of:

1. External fraud by crime groups
2. Internal fraud by sales guys jointly with or without Direct Marketing Agents
3. Lack of credit history of customers
4. Bad credit policy
5. Too many subjective and qualitative assessment of credit
6. Too many exceptions because of interference of the top guy/ seniors.

Strong collection mechanism and strong credit management would deter crime groups and internal employees attempting to defraud by falsifying the application and documents. There are agencies like Experian is available, whose services will help avoid frauds in application stage to a large extent, at least in retail finance business, where number of applications is huge.

CIBIL

Credit history is made available by CIBIL in India; I believe they also offer credit score/ rating. They have done a commendable job of getting about 90 % of lenders to share the credit history of their customers. My experience, at least about 5 years ago, was that not many banks could share the right data in full, and from across India. More computerization of banks had happened since then and I am sure the data provided currently would be highly reliable. My suggestion would be to avoid all customers whose credit history is not traceable in CIBIL.

Should one use exclusively CIBIL credit scoring in approval process?

Rather not. CIBIL score is based on assessment of the ability of the customer to pay on the existing loans. It has no recourse to any other vital information that would be required to fully assess “ability and intention” of the customers and to quantify the credit risk of the customer more accurately.

Most of credit policies are made by "cut & paste" of competitor policies. It must be simple, clear and purposeful, supported by an internal credit scoring model, giving weight to credit history, credit score offered by CIBIL. Credit policy must be company specific and must be internal. There could be enough discussion on formulating the policy among heads of all departments including collection, sales & marketing. But, the interference must not be allowed with the policy till the next review meeting; feedbacks are welcome. Collection analytics like early default analysis, standard deviation of payments, ratio of high-risk accounts sourced in the last one year may be the bases for tinkering the policy and the norms like LTV, etc.

Strong collection department, and preferably internal recovery & legal vertical under collection department will go a long way in achieving better recovery ratio. Of course, the collection analytics will  help to direct efforts appropriately to achieve better collection and the right focus to mitigate losses.

Repossession of underlying asset is the most important activity to reduce or even mitigate losses. Why do you have an underlying asset as security, if you cannot have recourse to?

It is normal and easy to blame that collections are poor and losses are higher, because of inefficiency of collection department. May be. I recall here the famous statement of one my vice-president Carlos who once said, “Best of collections will not solve collections problem, but better credit will”.

Currently, the profit margins are 5-6% in retail finance business. Net margins are as low as 3-4%. It is clear that no bank or company can afford losses beyond this. What is important is that for, every 1% loss, the company's sales will have to be 33% more,  to have the same level of risk adjusted return.

Is it easy to do sales? Even if you can, is capital easily available? Even if capital is available, can you assure “return”? O boy! losses are too costly.

Is there an option? Reduce Losses.

What Do Debtors Do / Say?

They do either one or more of the following:

They pay partly or in full the past due amount, when asked efficiently and effectively

They change phone numbers

They normally do not have landline phones. If they had one, they give up quickly

They do not pick up the phone, at least after the first time

They shift their residences, and even locations

They refuse mail or arrange to be returned as ‘undelivered’

They fraudulently sell the underlying asset

They manipulate the receipts

They threaten debt collectors

They do or try to bribe debt collectors

They close their bank accounts, if they had already issued dated/ post-dated / blank checks to the lenders

They do or refuse to surrender the underlying asset.

They say either one or more of the following:

 “Wrong number”

“I am not the one”

“I am busy”; “in a meeting “; or “driving” and “will call back”

 “Already paid, please check with your banks/ books”

“Paid cash/ gave check to your field collector”

“The check is in the mail”

“Ordered a new check book”

“Have problems with my bankers”

“Did not know the due date”

“’Due date does not suit me”

“You wrongly applied my payment”

“I don't owe anything”

“I don't have any money”

“I will not pay, do what you can”

 “Don’t disturb me; I know my liability and responsibility”

“I will pay with penalty, later”

“Do not phone, proceed legally”

“Your account is wrong”

“I have a dispute with the interest charged / installments / EMIs”

“I have a dispute with the product or after sales service”; “ had a marriage in the family”; “ had a death in the family”; “ met with an accident”; “lost my job”; “illness in the family” ;”paid school fees” and so ‘I cannot pay immediately”

“Will pay next month”

“Expecting money; as soon as received will pay”

I will post in near future as to what debt collectors must do or say in response .

Have The Right HR

Right Human Relations (HR) department will get the right people. The right people can make the right company. After all, what could be more important than people in the service industry and especially in the financial service industry?

In finance business, any wrong decision could put the company 3 years backwards, because the average term of any loan is about three years. To clean up any bad loan will take an average term of 5 years, given more attention to the problems consistently and continuously.

Bad decision is possible by even good people; wrong people can only take wrong decisions.

There was a company which wanted to get into truck finance business after achieving a leadership position in car finance market ( it is different story that the company had lent at an interest rate lower than its weighted cost of funds, to achieve the coveted position). HR was asked to hire people from the leader in truck finance (located in South India). HR was forced to quicken the process. They finally managed to get about 4 manager type people. They brought another set of people to which HR gave a free hand. All are from the same company. The company had to face huge losses from this portfolio because of bad policy and fraudulent transactions; culture of previous company may have to be probably blamed.

Moral is that the company can force HR to recruit quickly, but not insist on recruiting from one company. People who leave a good company are the ones who could not match the speed of the company or are misfit to its culture. HR needs to be careful when a group of people from a single company approach for employment.

HR people need to be highly knowledgeable about the business of the company. At least, they must have an attitude to learn quickly. I had a business relationship with a product head (from IIM) in a finance company and I was surprised to see him as an HR head a few years later in another finance company which had a Singapore partner in the recent past. I was too happy to find a line manager in HR. I have heard that he is doing a good job in terms of recruiting the right people and retaining good talent. Hope the company does better in near future.

HR people really set the culture for the company by doing the right kind of induction. Many a time, the very people were found to be with questionable integrity. They must not only be good but appear to be good.

Selection only based on telephone interview may have to stop; detailed personal interviews will only reveal the level of knowledge, skills and more importantly attitude. Additionally, more specialized, internet based,  professional skill and attitude tests may be conducted for mangers, to ensure the right fit.

My experience with another HR person is bothering; he has been honest with very high integrity. Over the years, I have seen this person turning flexible and today he is at ease with people with questionable integrity.

"Who is perfect?”, he asks.

If the current corporate culture can spoil such a regid and perfect person in about a decade, I have a reason to believe strongly that the culture and ethos in corporate world is getting worse at increasing rate.

Who will stem the rot but HR?

Right Rates, Ratios In Debt Collection

In India, there is no uniform collection lingo, jargons or definitions used. All are borrowed from MNCs.

Most in the finance industry are seen misusing ‘recovery rate’ to mean ‘collection rate’. Both are different.

Recovery rate:

The amount in proportion that a creditor would receive in final satisfaction of the claims on a defaulted credit is recovery rate. It is generally used relating to ‘loss’ accounts, rightly so.

Default Rate and Delinquency Ratio:

They both mean the same though both these are misused quite often to indicate delinquency rate.

Number of past due loans  divided by the total number of  current  loans is default rate or delinquency ratio. It is an indicator of the quality of a lender’s loan portfolio.

What is delinquency?

Failure to repay an obligation when due or as agreed is delinquency.  A delinquent loan (or loan in arrears) is a loan on which payments are past due.

Then, what is delinquency rate?

Uniform ally, even MNCs use delinquency rate and ratio interchangeably.

Delinquency rate is different from delinquency ratio. Delinquency ratio measures the efficiency of delinquency control while delinquency rate measures the effectiveness of collection.Delinquency ratio is used to measure the portfolio, while delinquency rate is account specific.

Delinquency rate  is nothing but the total amount of past due as compared to the total instalments/ EMI billed/ matured so far. 

This rate would help prioritise the collection activities and even identify early fraud or bad credit accounts. Tracking them to the respective credit underwriters would help address training needs to course correct bad underwriting at the earliest.

For example a company has two delinquent accounts out of 20 current accounts. One is two month old of 36 months contract and has both instalments/EMIs ( Rs 100000 per EMI) past due. The second one is 35 months old of 36 months contract with three instalments/ EMIs ( Rs 10000 per EMI) past due.

Delinquency ratio would be 2/20 = 10%.

Delinquency rate for the first contract is 100% and for the second one is 5.7%

Obviously, the focus would be on the first contract where the delinquency rate is 100% . Lesser the delinquency rate, easier is the collection.

Similarly,  delinquency rate can be calculated for the portfolio , company, bank, etc. This would be the right rate to measure really the delinquency.

Even RBI need to rethink on Prudential Norms on Income Recognition, Asset Classification and Provisioning on Advances based on delinquency rate instead of days past due criteria it follows currently. It may not be able avoid for long with “loss given default’ concept fast spreading through Basel norms.

Collection rate:

Collection rate is currently referred to as 100  minus default rate. If that is so, a bank with  10% default rate should collect 90% of the monthly claim. In practice, it is not so, because collection rates are arrived at on quantum ( of loans) basis. This is misleading and companies and banks must resort to collection rates calculated on the actual amount collected against claims for the month/ period of the accounts that are current.

Tips To Make Your Contact Successful

PREPARE:

Review the paperwork, number of days past due and contact history on the debtor before making the call. Know the history of the account, credit record, and the promises kept/broken. Have all records in front of you, ready for reference.

ATTITUDE:

Adopt a straight, professional business-like attitude. You have a contract, money is owed, payment is overdue and you have a right to expect payment. Never let it become personal. Don't yell or raise your voice; and never swear. Don't threaten; legal action is your recourse.

CONTACT:

Make sure you're talking to the right person. Don't let the individual brush you off with "You'll have to talk to the accountant" Identify the person who will pay the installments. If you can't get through after several calls, tell the secretary that you know your calls are being screened. Indicate the purpose of your call and if necessary give timelines.

CONTROL:

Control the conversation. Keep it focused on the debt and on the repayment schedule. Don't let the customer sidetrack you with personal history, excuses, etc. Remember, the object of your call is to collect money, or get a commitment, not to become friendly with the customer or win arguments.

FLEXIBLE:

Be ready to adjust to the situation. Think about the kind of customer you're dealing with and adapt to meet the circumstances. Be prepared to accept a reasonable payment schedule, and a willingness to deal with a customer's circumstances.

NOTES/ CONTACT/ INTERACTIVE HISTORY:

Keep detailed, accurate notes of every contact with the customer. Probe for further information on the customer through field executives. Notes of these contacts will help you in subsequent phone calls, and may be invaluable in litigation. Good notes will also help in further credit decisions, or in cases where skip tracing may be needed.

PRODUCTIVE:

Keep contact brief and to the point. This is a business call, not a social one. View your efforts on a ratio of time expended to results achieved. Long conversations probably mean the customer is stalling you, or trapping you in the buddy syndrome.

PRECISE:

Never leave a contact open ended, such as "I will call you soon," or "I'll send what I can." Every contact should result in a commitment to payment or Promise-To-Pay (PTP), of a specific amount, by a specific date and the mode.

 TIME:

The longer an account is held, the less likely it is that it will be recovered. If payment or a payout is not arranged within 90 days, place the claim with a repossessing agency and/or start legal proceedings.

PLACEMENT:

Use only an agency that has an experience and practices Fair practices advised by RBI. This will insure that you're dealing with ethical professionals who are fully bonded to guarantee your remittance.

Go Legal At The Right Time

Here, we will limit our discussion to recovery of bad loans through Indian legal system.

When follow up and negotiation fail, the only option is to go through judicial process. Many fraudsters ( sometimes on the advice of their legal counsel) refuse to settle through negotiation as they are aware that the last option left to lenders is to go legal, and which takes ages in India.

All of us know that Indian courts are overloaded with very high number of cases; obviously it is going to take time to see the light at the end of tunnel. Delay is not all because of inefficiency of courts or judges alone. In about 80% of cases, delay is attributed to late start, improper preparedness, attitude and quality of legal counsel.

Many companies do not have legal department or lack a legal professional in the department. As mentioned elsewhere, top guys do not have skills and/ or attitude for debt collection or do not believe in recovery through legal recourse. They have a preconceived notion that it takes a long time and they are not sure whether they would remain at the top that long. They rather believe Keynes who said, ‘everybody is dead in the long run’. The Board and promoters need to be focused; recovery could be a good profit centre.  Besides, lenders need to enjoy a good reputation in the area of operation that bad debtors will be haunted.

Management many a time argue that they cannot put good money after bad money; it shows their attitude.

Much of litigation is started by lenders very late, in most cases to cover them. They cite very delay in the courts as the reason. Appropriate litigation must start immediately after an account is ‘charged off’ and moved to ‘losses’, which is normally after 180 days past due in case of many well run finance companies and it is beyond 720 days past due in many companies in India. It is the delay in charging off by many companies that makes highly improbable to collect through legal proceedings. Law of limitations apply.

Of course, there must be a prudence used as to whether one should resort to legal recourse in each case; however, review and decisions cannot be unduly delayed. Where is the customer contact/ interaction history for a meaningful review?

In almost all cases, history of contacts and other important papers are not found in the customer file. For example, a motor vehicle is repossessed and sold by a lender, he needs to let customer know at each stage of the sale process (as his equity is involved) and produce enough evidences to that effect to the courts that the vehicle was sold through a good process by which the best value of the vehicle was realised. In cases, where such papers are not found, manger responsible removes the account from the probable list or achieves to lose the file in full.

It is sad that legal counsel in India, irrespective of quality or experience, just wants more and more legal cases from the company. He is willing to under quote and resort to wrong means, just to get accounts.

Obviously, he is more interested in upfront advance payment; he has neither infrastructure nor intention to start proceedings early and move fast. There is a huge delay here. They keep blaming lenders for not providing information or the right papers; why should they accept such incomplete files? Many legal firms have put enough hardware and software to use, more to print their bills. It would be in the interest of both t to speed up complaints and proceedings. Sadly, most of the times, it is the plaintiff counsel who seeks postponement or vaaidha in courts. I do not blame here the total legal community, but more than a few.

Lenders need to start legal proceedings in appropriate cases through professional counsel who may charge high but deliver results, and quickly.

Currently, not all debtors are having the last laugh!

RBI circulars debt-collector must know

	Circular No.	Date	Subject
1.	RBI / 2009-10/64 DBOD.FSD.BC.19/ 24.01.011/ 2009-10	July 01, 2009	Master Circular on Credit Card Operations of banks
2.	RBI/2008-09/177 DBOD.No.FSD.BC.45/24.01.011/2008-09	September 17, 2008	Unsolicited Commercial Communications - National Do Not Call (NDNC) Registry
3.	RBI/2008-2009/100 DBOD.FSD.BC.23/24.01.011/2008-09	July 23, 2008	Credit Card Operations of Banks
4.	RBI/2007-2008/296 DBOD.No.Leg.BC.75/09.07.005/2007-08	April 24, 2008	Recovery Agents engaged by banks
5.	RBI/2007 -2008/163 DBOD.FSD.BC.35/24.01.011/2007-08	October 19, 2007	Unsolicited Commercial Communications – National Do Not Call Registry
6.	RBI/2007-2008/78 DBOD.FSD.BC.19/24.01.011/ 2007-08	July 3, 2007	Unsolicited Commercial Communications – National Do Not Call Registry
7.	RBI/2006-2007/280 DBOD.No.Leg.BC.65/09.07.005/2006-07	March 06, 2007	Guidelines on Fair Practices Code for Lenders
8.	RBI 2005-06/ 211 DBOD. FSD. BC. No. 49/ 24.01.011/ 2005-06	November 21, 2005	Credit Card Operations by banks
9.	DBOD.Leg.BC.104/09.07.007/2002-03	May 5, 2003	Guidelines on Fair Practice Codes for Lenders
10	DBOD.No.FSC.BC.120/24.01.011/2000-01	May 12, 2001	Credit Card Business of banks