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.                                                                    

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.

Reduce Losses

Losses are a function of mindless orientation towards sales numbers and lack of credit management.

It is true that sales are important in any business, so is in finance business. Sales bring profits.

In many a bank, more so in MNC banks, I have heard that the top guy with orientation of marketing or credit is named alternatively for any branch. The first guy would show result in terms of sales and credit guy would clean up. It may be true because a country head or a product head in MNCs are normally for a three years term and they are under stress to show results to get a ‘better position’. Lest, they would be shown door.

In a competitive business like finance business, every thing gets measured by the boss, except the credit quality which shows up after an average period of 1-2 years. Losses occur after the term is over and the horse is bolted. It is important that banks and NBFCs have adequate credit analytics to show and even predict the quality of credit and portfolio regularly, at an interval not less than 3 months.

Probability of loss is 100% when there is lack of credit management in finance or banking business. They have a very high correlation with losses.

Credit losses arise because of:

1. External fraud by crime groups
2. Internal fraud by sales guys jointly with or without Direct Marketing Agents
3. Lack of credit history of customers
4. Bad credit policy
5. Too many subjective and qualitative assessment of credit
6. Too many exceptions because of interference of the top guy/ seniors.

Strong collection mechanism and strong credit management would deter crime groups and internal employees attempting to defraud by falsifying the application and documents. There are agencies like Experian is available, whose services will help avoid frauds in application stage to a large extent, at least in retail finance business, where number of applications is huge.

CIBIL

Credit history is made available by CIBIL in India; I believe they also offer credit score/ rating. They have done a commendable job of getting about 90 % of lenders to share the credit history of their customers. My experience, at least about 5 years ago, was that not many banks could share the right data in full, and from across India. More computerization of banks had happened since then and I am sure the data provided currently would be highly reliable. My suggestion would be to avoid all customers whose credit history is not traceable in CIBIL.

Should one use exclusively CIBIL credit scoring in approval process?

Rather not. CIBIL score is based on assessment of the ability of the customer to pay on the existing loans. It has no recourse to any other vital information that would be required to fully assess “ability and intention” of the customers and to quantify the credit risk of the customer more accurately.

Most of credit policies are made by "cut & paste" of competitor policies. It must be simple, clear and purposeful, supported by an internal credit scoring model, giving weight to credit history, credit score offered by CIBIL. Credit policy must be company specific and must be internal. There could be enough discussion on formulating the policy among heads of all departments including collection, sales & marketing. But, the interference must not be allowed with the policy till the next review meeting; feedbacks are welcome. Collection analytics like early default analysis, standard deviation of payments, ratio of high-risk accounts sourced in the last one year may be the bases for tinkering the policy and the norms like LTV, etc.

Strong collection department, and preferably internal recovery & legal vertical under collection department will go a long way in achieving better recovery ratio. Of course, the collection analytics will  help to direct efforts appropriately to achieve better collection and the right focus to mitigate losses.

Repossession of underlying asset is the most important activity to reduce or even mitigate losses. Why do you have an underlying asset as security, if you cannot have recourse to?

It is normal and easy to blame that collections are poor and losses are higher, because of inefficiency of collection department. May be. I recall here the famous statement of one my vice-president Carlos who once said, “Best of collections will not solve collections problem, but better credit will”.

Currently, the profit margins are 5-6% in retail finance business. Net margins are as low as 3-4%. It is clear that no bank or company can afford losses beyond this. What is important is that for, every 1% loss, the company's sales will have to be 33% more,  to have the same level of risk adjusted return.

Is it easy to do sales? Even if you can, is capital easily available? Even if capital is available, can you assure “return”? O boy! losses are too costly.

Is there an option? Reduce Losses.

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.