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