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.

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!