No Undue Harassment Of Debtors Please.

No undue harassment of debtors please, because: 

• It helps neither collection nor relationship
• RBI says No to undue harassment and coercion
• Debtors know their rights and are assertive
• It is illegal; general Criminal Procedure Code (CrPc) applies

"Undue" suggests that what is done must, having regard to the circumstances; extend beyond that which is acceptable or reasonable. It may ensure that conduct will only amount to harassment where what is done goes beyond the normal limits.

"Harassment” means persistent disturbance or torment, and can extend to frequent unwelcome approaches requesting payment of a debt. Generally, a person will be harassed when frequently troubled by a person. There is no requirement that the harassment involve a threat of an illegal act.

The following will be construed as undue harassment: 

• The use of obscene or profane language or language the natural consequence of which is to abuse the hearer or reader 
• Causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number 
• The placement of telephone calls without meaningful disclosure of the caller’s identity 
• Calling  work place after the debtor told not to 
• Demanding more money than what is due/ overdue 
• Sending collection letters that threaten a lawsuit, garnishment, seizure of property  
• Threats of action often, not intended to be taken 
• Filing a suit in a venue other than where debtor resides 
• Communicating the status of debtor’s account with third parties 
• Contacting debtor’s employer or co-workers

"Coercion" need not be ‘undue coercion’. It is enough if it contains an element of force or compulsion or threats of force or compulsion negating choice or freedom to act. There is no requirement that the coercion involve a threat of an illegal act.

The following will be construed as coercion:

• The use or threat of use of violence or other criminal means to harm the physical person, reputation, or property of any person 
• The publication of a list of debtors who allegedly refuse to pay debts 
• The advertisement for sale of any debt to coerce payment of the debt 
• Depositing a post-dated check early 
• Threatening to take possession of the collateral / property unless it can be done legally 
• Contacting the debtor by postcard 
• Sending collection letters on the letterhead of an attorney / Lawyer

Remember, your brand equity is more important for far term growth.

Keep A Watch On Uncleared Checks

Banks have an advantage that they can debit the customer account for the installment / EMI, on due date. Banks lend mostly to its customers and obviously have a better knowledge and control over customer account. If there is no balance in customer’s account, they come to know of the delinquency on the very due date and may start the collection process. Generally, banks do not lend in areas where their banks do not have branches.

But, non-banking finance companies have a disadvantage here. They accept Post-Dated Checks (PDC)for future installments from any bank.

Companies which hold post dated checks deposit checks on due dates either directly into their bank or through cash management service bank.

All PDCs are stored in a single place/ city or with cash management bank, for security reasons. Local checks are deposited through local clearing circle and the fate of the checks are known in 2-3 working days. Either thry are cleared or bounced / dishonoured.

Outstation checks are sent through clearing circle of customers’ banks. One gets to know the fate within, say 4-5 days depending upon proactive approach. After all, cash management bank depending on Service Level Agreements, stands to lose on interest if it does not collect money urgently or inform the bounces to companies early.

But, some customers’ banks do not fall in any of the clearing circle (remote, rural banks) and their checks are sent directly to the banks for clearance / payment. Customers and bankers in collusion neither clear payment nor bounce for a long period, sometimes exceeding 3 months. This phenomenon is very common with co-operative banks; some of these customers are a part of management of these banks; and even otherwise, they wield powers enough locally to stall any action on those checks by bank managers. Rarely these checks are cleared even after an undue delay. Complaints to the top management of these banks and Reserve Bank of India have very less impact on curing.

Till bounces are notified, accounts remain non-delinquent as presumptive credits are given on due dates by cash management service bank. When bounces are notified in bunch, these accounts get to 90-120 (days past due) bucket directly and get classified as high-risk-high-delinquency category, leaving very little time to repair these accounts, before many of them  move to charge off / losses.

It is recommended strongly that cash management is left to a bank for storing and collecting; there is hardly any cost as banks are satisfied with the float of collection amount enjoyed for 3-4 days. At least, it reduces operational risk and improves efficiency.

Proactively, lenders need to be alert if the post dated checks of co-operative banks are submitted by customers. Even collectors must avoid receiving past due payments by checks of these outstation and cooperative banks.

Solution lies in getting the list of customers with checks uncleared for a month or more and have their credit reassessed by field collectors ; easy and / or the right solution will be an early repossession of the underlying asset in such cases.

What Is Fraud And How To Prevent It In Retail Finance ?

Fraud as an aspect of corruption normally happens in companies where the governance structures are weak or have become corrupted themselves.

For many years, there have been no records of frauds and types of frauds committed in finance companies in India. Do they consider  fraud risk less important or as a part of business?

In contrast, MNCs give a lot of importance to frauds and more to internal frauds. They record all the suspected frauds, get them investigated thoroughly, ensure severe punishment, ensure legal action in severe cases and improve policies, processes and procedures to mitigate similar future occurrences.

Reserve Bank of India, the regulating authority for finance companies in India, requires all frauds to be reported and monitored, vide their circular DNBS.PD.CC. No. 121 / 03.10.042 / 2008-09 dated July 1, 2008. Record of fraud information in the format, as recommended for reporting in the above circular, may be used by companies, for both systamatic record and easy reporting.

More importantly, frauds contribute the most to credit losses in finance companies. It is estimated that 1-2% of asset financed are lost due to frauds.

What is fraud?

A fraud is an intentional deception made for personal gain or to damage another; Fraud is a crime, and also a civil law violation.

Defrauding people or entities of money or valuables is a common purpose of fraud.

It is a false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

Fraud has five elements: (1) a false statement of a material fact, (2) knowledge on the part of the defendant that the statement is untrue, (3) intent on the part of the defendant to deceive the alleged victim, (4) justifiable reliance by the alleged victim on the statement, and (5) injury to the alleged victim as a result.

The Association of Certified Examiners of Fraud in the USA, define fraud as the “use of one’s occupation for personal enrichment through deliberate misuse or misapplication of the employing companys’ resources or assets.”

The Collins English dictionary (1999) defines fraud as “a criminal offence in which a person acts in a deceitful way. Fraud can therefore be categorized as either internal or external.”

How does RBI classify Fraud?

RBI based mainly on the provisions of the Indian Penal Code and frauds have been classified as under

• Misappropriation and criminal breach of trust.
• Fraudulent encashment through forged instruments, manipulation of books of account   or through fictitious accounts and conversion of property.
• Unauthorized credit facilities extended for reward or for illegal gratification.
• Negligence and cash shortages.
• Cheating and forgery.
• Irregularities in foreign exchange transactions.
• Any other type of fraud not coming under the specific heads as above.

RBI guidelines for reporting frauds to police:

Finance companies should follow the following guidelines for reporting of frauds such as unauthorized credit facilities extended by the NBFC for illegal gratification, negligence and cash shortages, cheating, forgery, etc. to the State Police authorities:

(a)    In dealing with cases of fraud/embezzlement, NBFCs should not merely be actuated by the necessity of recovering expeditiously the amount involved, but should also be motivated by public interest and the need for ensuring that the guilty persons do not go unpunished.

(b)   Therefore, as a general rule, the following cases should invariably be referred to the State Police:

(i)         Cases of fraud involving an amount of Rs. 1 lakh and above, committed by outsiders on their own and/or with the connivance of NBFC staff/officers.

(ii)        Cases of fraud committed by NBFC employees, when it involves NBFC funds exceeding Rs. 10,000/-.

Can 'handling of fraud' be left to the police?

Our law enforcers are too busy to detect fraud. Crimes involving personal injury or loss of life usually demand more immediate attention by police officers than do frauds. Besides, being a fraud investigator requires something more: a measure of financial knowledge and a criminal bent of mind.

Why fraud?

It is important to understand why people commit frauds. Crime group and / or employees, commit frauds because of:

• Greed ; they want to have it all and more than any one else
• Peer pressure especially where the peers have done very well financially
• Personal financial difficulties like gambling, drug abuse or alcoholism, habits that must be supported and which are very expensive
• Revenge or grudges that will motivate one to commit fraud
• Dishonesty by customer,employee, agents,etc.
• Greediness of customer and enticement og employee or agent
• Inefficient process, procedures, lack of control and oversight
• Fear of intimidation or threats that will lead to commit fraud
• Unrealistic targets that cannot be achieved
• Lenient penalty given to those who have been caught committing fraud; it will encourage others to attempt fraud since they will get away lightly
• Concealment of major incidences of fraud by companies earlier
• Employees’ awareness that management is window dressing accounts

How to prevent?

Companies must eliminate one or more of these three elements: perceived pressure, perceived opportunity, and rationalization. Only these three elements, which make up what's called the fraud triangle, are needed to make an honest employee do dishonest things.

Perceived pressure can be anything from pressure at work to produce results to pressure to cover personal financial obligations. Perceived opportunity is the perception that someone can commit fraud without getting caught. And rationalization is how employees convince themselves that there's really nothing wrong with their actions

There are two major factors involved in preventing fraud.

The first factor creates a culture that takes away opportunities to commit fraud and has the following components:

• Hire honest people and then provide fraud awareness training.
• Create a positive work environment.
• Have a well-understood and respected code of ethics.
• Create an expectation that dishonesty will be punished.

The second factor is directed at eliminating opportunities to commit fraud. Here are ways to do that:

• Have a good system of internal controls.
• Discourage collusion between employees and customers or vendors.
• Clearly inform vendors and other outside contacts, of the company's policies against fraud.
• Monitor employees.
• Provide a hotline for anonymous tips.
• Conduct proactive auditing.

Common frauds in retail finance companies:

• Theft and embezzlement of cash by employees
• Misapplication of installment received
• Misuse of cash receipts by employees, customers and/ or debt collection agencies
• Wrong identity of applicant; fudged documents by employees and/or by direct marketing agents
• Conditions of disbursement are not fulfilled
• Misuse of credit; no underlying asset bought
• Defective titles to the underlying asset
• Lien not marked; lien wrongfully cancelled; and lien of other financier marked
• Intentional misplacement of the file including, contract/agreement
• Asset repossessed, but not reached the yard; dilapidated asset repossessed; wrong asset repossessed; theft of components from the repossessed asset; and repossessed asset missing from storage
• Repossessed vehicle sold for lower price; unapproved sale; and unathorised return to customers
• Unauthorized settlement with customers by employees, repossessing agency and debt collection agencies; Unauthorized "No due" letters issued
• Over statement of expenses, charges and fees by employees and/or service providers.
• Unauthorized software alteration; data manipulation; and cyber crimes by accountants.

How proactive  is your company?

(a)    To what extent has the company established a process for oversight of fraud risks?

(b)   To what extent has the company created “ownership” of fraud risks by identifying a member of senior management as having responsibility for managing all fraud risks ?

(c)    To what extent has the company implemented an ongoing process for regular identification of the significant fraud risks to which it is exposed?

(d)   To what extent has the company implemented measures to eliminate or reduce through process reengineering each of the significant fraud risks identified ?

(e)    To what extent has the company implemented measures at the process level designed to prevent, deter and detect each of the significant fraud risks identified ?

(f)    To what extent has the company implemented a process to promote ethical behavior, deter wrong doing and facilitate two-way communication on difficult/ confusing issues?

Debt Collection Strategy For Retail Fianance

Strategy is a plan; Strategy is a pattern in actions over time; Strategy is a position; and Strategy is perspective, that is, vision and direction.

Strategy bridges the gap between policy and tactics.

Effective collection Strategy should have a comprehensive approach which encompasses:

Automating work flows: Automation of work flows through dedicated collection system would help classify, allocate, prioritize, and assign accounts and maintain flexibility to respond to changing circumstances. This is estimated to reduce delinquency by 1-2%.

Monitoring Resource Performance: Measurement of efficiency and effectiveness of collectors, supervisors, business unit is very important. Dash board approach is good; system should provide on-line performance to all stakeholders, continuously and consistently. System based and systematic monitoring for course correction is estimated to reduce delinquency by 1% and reduce collection costs by 4-5%.

Improving performance of Debt Collection Agency (DCA): It is important to get better results and accountability from DCA handing delinquent and recovery cases. Letting DCAs to use collection system on web and seeking accurate and daily contact and collection details help improve recovery and achieve high liquidation rate. Alternatively, it helps shifting of the cases to more effective agencies.

Reporting to Credit Bureau: Lenders will have to supply accurate delinquency data on each default customer to Credit Bureau. This brings discipline in few customers and results in payment in full ; and ensures future payments on time.

Capturing contact details digitally:  It appears very easy; but it is the most difficult activity in the Debt Life cycle. There are a lot of constraints and resistance to get contact details recorded systematically and daily. Some field collectors have retained most information on delinquent customers in their diaries and the notes go with them when they leave. Currently, contact history is very important to grade delinquent accounts systematically for different actioning.

Let us discuss tactics for each of the following category.

I High Delinquent – High Risk ( DPD > 89 & Delinquency rate > 66% )	II Low Delinquent – High Risk ( DPD < 90 & Delinquency rate > 66% )
III High Delinquent – Low Risk ( DPD > 89 & Delinquency rate < 67%)	IV Low Delinquent – Low Risk ( DPD < 90 & Delinquency rate < 67% )

Strategy for Quadrant IV – LDLR

These accounts may be allotted to desk collection; desk collection is responsible for tele-calling and written communication.

Soft collection letter may be sent after each cheque bounce or a missed payment.  Each letter must positively bring focus on possible loss of credit rating with credit bureau, pointing out the benefit of saving penalty, late payment charges/ fees, etc. apart.   80% of default accounts with DPD less than 31 will be cured with a simple letter. This includes self cure. (We will discuss the content and tone of different collection letters in future blogs).

Calling may be scheduled for accounts with DPD exceeding 30. A tele-caller can effectively and must call 50-60 accounts a day including ‘pop-up’ and ‘Promise-To-Pay’ cases. They may cure a minimum 70% of allotted cases; accordingly resources may be planned and provided for. The resources must be well trained to be effective to collect, but still relate. Being low delinquent, relationship with these customers are important and may be handled in a way relationship is not affected at all.

Strategy for Quadrant II – LDHR

These accounts will have to be allocated to field collection. These accounts should not be allotted to DCAs for collection, as highly reliable details on these customers are required for quick ‘grading’.  Collectors must meet these customers and record accurate contact details focusing on “Ability and/or Intention to pay”.

Collection tactic for each of the following metric is as follows:

High Ability – High Intention	Low Ability – High Intention
High Ability – Low Intention	Low Ability – Low Intention

High Ability – High Intentio               :           collect money

Low Ability – High Intention             :           seek and get surrender of the asset

High Ability – Low Intention             :           repossess the asset

Low Ability – Low Intention             :           charge off and/or sell the account

Strategy for Quadrant III – HDLR

These accounts may be considered for allocation to Debt Collection Agency (who is a good DCA?). Alternatively, it may be allocated to field collectors. Most likely, many accounts here will be high on intention and low on ability. Economics of these customers may have started deteriorating in the recent past. Collection should be possible and seeking the surrender of asset may be considered as next option. The interface with this customer will have to still be customer centric and communication both ways need to be managed better.

Strategy for Quadrant I – HDHR

These accounts are very Low on intentions. These must be allocated to the most experienced field collectors or collection supervisors. Best way to realize any collection from these accounts is by repossession and sale of asset. It is advised not to repossess assets which are in non-saleable condition.

Losses can be only minimized if the sale of repossessed asset is done urgently and through robust process. Many a time, the process is subject to judicial review, when suit is filed for recovery. So, it is advisable to keep the record of the process and documents in customer files without fail.

In many cases, there would be difficulty in repossessing the assets. In such cases where the ability is high, legal proceedings must start immediately without wasting any time.                                                                    

Which Are High Risk Default Accounts?

Risk is the effect of uncertainty on objectives; the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility.

Credit risk is most simply defined as the potential that a borrower will fail to meet his obligations in accordance with agreed terms.

Any measurement of risk is basically an estimate made using simple to complex statistical tools and methods. Simple way to measure risk is by application of probability theory. The probability of default is estimated by using the frequency of past missed payments. This is nothing but delinquency rate (%).

Delinquency rate is the total amount of past due as compared to the total instalments/ EMI billed/ matured, so far. This equals to ‘probability of default’.

Total receivables multiplied by delinquency rate give the total risk amount for a default account. This is very similar to the concept of LGD – Loss Given Default.

Pareto’s Principle - The 80-20 Rule

The 80/20 rule helps identifying high risk accounts. The 80/20 Rule means that in anything a few (20 percent) are vital and many (80 percent) are trivial.

You can apply the 80/20 Rule to almost anything, from the science of management to the physical world.

Applying Pareto rule here, top 20% of rank order list of defaulters based on delinquency rate can be considered as High Risk. Invariably, these high risk accounts will constitute 80% of the credit loss.

Limitation here is that some of ‘early’ defaulters on technical grounds will also appear as high risk accounts. To eliminate such accounts as high risk, DPD (90 days) is used, to differentiate. That is how our Quadrant-I accounts are classified/ segmented as “High Delinquency - High Risk”.

On follow up and serious field investigation, you will be sure to find the following in Quadrant-I:

1. Customer is not traceable
2. Asset is not traceable
3. Skip
4. Asset is with unrelated party
5. Lien is NOT marked
6. Asset is in accident condition
7. Asset is confiscated by authorities for misuse
8. Asset is attached and rotting in the Courts.
9. Asset is with a thug, lawyer or politician
10. File along with contract/ agreement is missing
11. Asset is double financed
12. Fraud

An early and serious action would help salvage; and minimize losses. Will these still constitute 80% of the credit loss?

Yes, it will.