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.
