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.

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.

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.”

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.

Draft Fair Practices Code For Collection Agencies In India

Preamble

Model Fair Practices Code is a set of guidelines designed to ensure that Service Provider working as agents of……...(name of NBFC)  conduct in conformity with the laid down policies and procedures as set in the Code.

Definitions

The term “Service Provider” in this document refers to all Direct Collections Agencies, Vendors and their employees working as Agents for NBFC/ Bank.

The term “Customer” refers to existing customers of the NBFC/ Bank.

The term ‘services’ refers to services that the service provider agrees to provide the NBFC/ Bank in pursuant of an agreement.

Applicability

Upon adoption and inclusion as part of agreement between the NBFC/ Bank and the Service Provider this code will apply to all persons involved in collections of any loan or other financial product of the NBFC/ Bank.

The Service Provide must agree to abide by this code prior to undertaking any direct collections operation on behalf of the NBFC/ Bank.

Any Tele Collections Executive & Field collection personnel found to be violating this code will be permanently removed from working on the NBFC/ Bank processes handled by the Service Provider and such action taken should be reported to the NBFC/ Bank from time to time by the Service Provider.

Failure to comply with this requirement may result in permanent termination of business of the Service Provider with the NBFC/ Bank and may even lead to permanent blacklisting of the service provider And/or its personnel by the industry.

A declaration is required to be obtained from Collection Executives & Field personnel, by the Collection Agencies before assigning them their duties to be annexed to this Code.

Field visits / Calls to Customers

Visiting / Calling hours

Collectors are not allowed to visit or call debtors before 7.00 am or after 7.00 p.m.

Precautions to be taken on visits / contacts

Field Collections Executive will respect personal space, maintain adequate distance from the customer.

Field Collections Executive will not enter the customer’s residence / office against his / her wishes.

Field Collections Executive will respect the customers’ privacy.

No alcoholic beverages are to be consumed while on the job. 

Collectors will not use abusive language, threaten or use strong-arm tactics.

If the customer or customers threaten(s) to approach law enforcement authorities over any action of the personnel of the service provider, the service provider shall provide timely information to the NBFC/ Bank about such threat and events leading to such threat.If the service provider or its personnel come into contact with law enforcement authorities during rendering services or if approached for law enforcement authorities over the service rendered to the NBFC/ Bank, the service provider shall notify the NBFC/ Bank about the incident and events leading to such incident.

Appearance & Dress Code

The Field Executive must be in proper attire while meeting up with Customer. The Field Collection Executive should wear a clean and well-ironed shirt and pants.

The Field Collection Executive should carry the Identity card provided to him by the Service Provider. The identity card issued by the Service Provider should state the full name, designation of the Field Sales Executive along with his photograph and the details of the service provider such as name address and contact telephone numbers. The executive must display prominently the said identity card on person.

Payment from Customers

Service Provider shall forward to the NBFC/ Bank all payments within 24 hours of receipt from the customers. No amount shall be retained / deducted by them as collection fee. All payments received by the Service Provider in respect of Accounts assigned to them, collected in the form of cash/account payee cheque/ Bank draft/pay order payable to the Bank, shall be deemed to have been collected only on realization of the amount by the NBFC/ Bank. Any liability arising out of loss of Cash or any other payment instrument shall be solely of the Service Provider and the Service Provider shall be liable to make good to NBFC/ Bank the amount within 24 hours of such loss. 

Issue of Receipts and maintenance of Receipt Books: - Service providers are required to issue official receipts for all payments received using receipt books approved by the NBFC/ Bank. All receipt books   are to be used solely for the Accounts assigned by the NBFC/ Bank to them. 

A register of such receipt books must be maintained in their office to control the movement of receipt books issued to their staff. 

Each receipt book should contain no more than twenty (20) receipts plus carbon copies.

Every receipt should have an original, NBFC/ Bank, office; permanent copy, i.e. four leaves. 

Official receipts are to be used in numerical sequence and spoilt receipts are to be retained

and stapled to the receipt books in numerical sequence.  

All used receipt books must be retained at the Service Provider’s office for auditing by the NBFC/ Bank.

Use and disclosure of Confidential Information

Confidential Information includes but is not limited to all proprietary and confidential information of the NBFC/ Bank or its subsidiaries, affiliates, or licensees, including without limitation all information, in any form, tangible or softcopy, including without limitation applications, charts, data, documents, forms, instruments, papers or statements, regarding the NBFC/ Bank or any of its subsidiaries, affiliates, or licensees; the customers or debtors of the NBFC/ Bank or the customers of any of its subsidiaries, affiliates, or licensees, the accounts, account numbers, names, addresses or any other personal identifier of such customers; or any information derived there from.

The Service Provider must not use or disclose Confidential Information for any purpose other than the purpose for which the Confidential Information was provided to the Service Provider as set forth in the Agreement, and agrees to cause all the Service Provider’s employees, agents, representatives, or any other party to whom the Service Provider may provide access to or disclose Confidential Information to limit the use and disclosure of Confidential Information to that purpose.

The Service Provider agrees to implement appropriate measures designed to ensure the security and confidentiality of Confidential  Information, to protect such information against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of, Confidential Information that could result in substantial harm or inconvenience to any customer of the NBFC/ Bank or any of its subsidiaries, affiliates, or licensees; the Service Provider further agrees to cause all the Service Provider’s agents, representatives, subcontractors, or any other party to whom the Service Provider may provide access to or disclose Confidential Information to implement appropriate measures designed to meet the objectives set forth in this paragraph; and the Service Provider shall provide the NBFC/ Bank with copies of audits and test result information sufficient to assure the NBFC/ Bank that the Service Provider has implemented information security measures consistent with this paragraph.

On the expiry or termination of relationship with the Service Provider, the Service provider shall hand over or cause to be handed over all such Confidential Information and all other related materials in the Service Provider’s possession to the authorized officer of the NBFC/ Bank.

In the event of a breach or threatened breach by the Service Provider of this clause, monetary damages may not be an adequate remedy; therefore, the NBFC/ Bank shall be entitled to injunctive relief to restrain the Service Provider from any such breach, threatened or actual.

Leaving messages and contacting persons other than the Customer

The Service Provider must ensure that calls are first made to the customer/immediate family member or any person specifically authorized to receive messages.

In the event the customer not available, a message may be left for him/her, the aim of the message should be to get the customer to return the call or to check for a convenient time to call again. 

Ordinarily, such message may be restricted to Customer’s accountant/secretary/spouse, authorized by the Customer.

No misleading statements/misrepresentations permitted

The Service provider and its personnel will not mislead the customer on any service offered. The Service provider should not mislead the customer about its business or organization’s name or falsely represent themselves as NBFC/ Bank’s employees and should not make any false / unauthorized commitment on behalf of NBFC/ Bank for any facility / service.

Professional Representations and Conduct

The Service Provider and its employees shall use their best efforts to ensure maximum recovery on all Accounts PROVIDED, HOWEVER, THAT, in so doing.

The Service Provider shall, at all times, comply with all laws and regulations governing the conduct of debt collectors, commercial agents and like persons, as such laws and regulations apply to Service Provider, in force in any jurisdiction in which the Service Provider shall perform the Services. 

No methods or tactics used by the Service Provider or any personnel engaged by the Service Provider will be inconsistent with or repugnant to the policies of the NBFC/ Bank nor should it bring discredit to the reputation of the NBFC/ Bank and should the Service Provider have any doubt as to whether any method or tactic might contravene this sub clause the Service Provider shall consult the NBFC/ Bank before employing such method or tactic and shall abide by any decision of the NBFC/ Bank with respect thereto. 

The Service Provider / its collectors shall not seek to secure the arrest or committal of any customer, unless advised by the NBFC/ Bank.  The Service Provider shall not do anything that can give a right to any person for a civil liability for tort or criminal.

Gifts or Bribes

The Service Provider or its personnel will not accept gifts or bribes of  any kind from Customer / Prospect.

The Service Provider or its personnel will report any offer / bribe made by the customer / Prospect to the NBFC/ Bank.

The Service Provider or its personnel will not offer any gifts / gratitude in cash or kind to the customer to solicit business.

Inspection and Right to Audit

The Service Provider shall keep complete and accurate records of all the operation and expenses in connection with the Services provided to the NBFC/ Bank.

All such records shall be kept on file by the Service Provider for a period of two years from the end of the financial year to which they pertain or for which they are made, whichever is later.

The Service Provider shall, upon reasonable notice, allow NBFC/ Bank its representatives, its auditors and its regulators, the opportunity of inspecting, examining and auditing the Service Provider’s operations and business records, which are directly relevant to the Services.

The Service Provider shall permit authorized representatives of the NBFC/ Bank to examine and audit the Service Provider’s records/processes in connection with any Account including receipt books, cashbooks, etc. at any time during business hours.

The Service Provider will cooperate with the NBFC/ Bank’s internal or external auditors to ensure a prompt and accurate audit.

The Service Provider shall also cooperate in good faith with NBFC to correct any practices, which are found to be deficient as a result of any such audit within a reasonable time after receipt of the NBFC/ Bank’s audit report.

All such audits or reviews will be at the expense of the NBFC/ Bank. However, if the audit discovers discrepancies or overcharges, then upon completion of such audit or review, the Service Provider will reimburse the NBFC/ Bank for discrepancies or overcharges and for the cost of the audit.

Avoid Systemic Risk

In any finance company or bank, debt collection takes the back seat till losses mount to a rate higher than profitability. Typically, debt-collection is restricted to a small team reporting to sales structure.

As mentioned elsewhere, inaccurate customer accounts lead to a lot of confusion, erosion of brand image leading to lower sales and high delinquency & losses. In a decentralised set up, accurate accounts are almost impossible. Technology needs to be put to use to ensure that customer accounts are accurate to avoid systemic risk. That would ensure the right delinquency reports. In fact, delinquency reports may have to flow from central system to avoid any manipulation to delinquency rate/ collection rate. I am aware that in at least 4 large finance companies in India, companies still relay on delinquency reports prepared by branches for review meeting, despite huge investments made in collection system software.

Things are different in MNC banks and finance companies. There is a lot of importance given to debt collection and credit underwriting. Most importantly, both collection and credit department are placed under a single head, making him/ her responsible for any delinquency and losses. Bad credit and frauds are major reasons for creation of delinquency. Some external factors like dramatic change of economic conditions, natural calamity, etc. may contribute to delinquency and consequently to losses. Placing credit and collection under the same department would avoid systemic risk of passing of bucks and bring the necessary credit control leading to lower losses.

The companies need to put down in clear terms the credit policy and revisions if any very systematically and let all departments know on monthly basis so as to avoid sourcing bad files.