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.

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.

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.”

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.

What Do Debtors Do / Say?

They do either one or more of the following:

They pay partly or in full the past due amount, when asked efficiently and effectively

They change phone numbers

They normally do not have landline phones. If they had one, they give up quickly

They do not pick up the phone, at least after the first time

They shift their residences, and even locations

They refuse mail or arrange to be returned as ‘undelivered’

They fraudulently sell the underlying asset

They manipulate the receipts

They threaten debt collectors

They do or try to bribe debt collectors

They close their bank accounts, if they had already issued dated/ post-dated / blank checks to the lenders

They do or refuse to surrender the underlying asset.

They say either one or more of the following:

 “Wrong number”

“I am not the one”

“I am busy”; “in a meeting “; or “driving” and “will call back”

 “Already paid, please check with your banks/ books”

“Paid cash/ gave check to your field collector”

“The check is in the mail”

“Ordered a new check book”

“Have problems with my bankers”

“Did not know the due date”

“’Due date does not suit me”

“You wrongly applied my payment”

“I don't owe anything”

“I don't have any money”

“I will not pay, do what you can”

 “Don’t disturb me; I know my liability and responsibility”

“I will pay with penalty, later”

“Do not phone, proceed legally”

“Your account is wrong”

“I have a dispute with the interest charged / installments / EMIs”

“I have a dispute with the product or after sales service”; “ had a marriage in the family”; “ had a death in the family”; “ met with an accident”; “lost my job”; “illness in the family” ;”paid school fees” and so ‘I cannot pay immediately”

“Will pay next month”

“Expecting money; as soon as received will pay”

I will post in near future as to what debt collectors must do or say in response .

Have The Right HR

Right Human Relations (HR) department will get the right people. The right people can make the right company. After all, what could be more important than people in the service industry and especially in the financial service industry?

In finance business, any wrong decision could put the company 3 years backwards, because the average term of any loan is about three years. To clean up any bad loan will take an average term of 5 years, given more attention to the problems consistently and continuously.

Bad decision is possible by even good people; wrong people can only take wrong decisions.

There was a company which wanted to get into truck finance business after achieving a leadership position in car finance market ( it is different story that the company had lent at an interest rate lower than its weighted cost of funds, to achieve the coveted position). HR was asked to hire people from the leader in truck finance (located in South India). HR was forced to quicken the process. They finally managed to get about 4 manager type people. They brought another set of people to which HR gave a free hand. All are from the same company. The company had to face huge losses from this portfolio because of bad policy and fraudulent transactions; culture of previous company may have to be probably blamed.

Moral is that the company can force HR to recruit quickly, but not insist on recruiting from one company. People who leave a good company are the ones who could not match the speed of the company or are misfit to its culture. HR needs to be careful when a group of people from a single company approach for employment.

HR people need to be highly knowledgeable about the business of the company. At least, they must have an attitude to learn quickly. I had a business relationship with a product head (from IIM) in a finance company and I was surprised to see him as an HR head a few years later in another finance company which had a Singapore partner in the recent past. I was too happy to find a line manager in HR. I have heard that he is doing a good job in terms of recruiting the right people and retaining good talent. Hope the company does better in near future.

HR people really set the culture for the company by doing the right kind of induction. Many a time, the very people were found to be with questionable integrity. They must not only be good but appear to be good.

Selection only based on telephone interview may have to stop; detailed personal interviews will only reveal the level of knowledge, skills and more importantly attitude. Additionally, more specialized, internet based,  professional skill and attitude tests may be conducted for mangers, to ensure the right fit.

My experience with another HR person is bothering; he has been honest with very high integrity. Over the years, I have seen this person turning flexible and today he is at ease with people with questionable integrity.

"Who is perfect?”, he asks.

If the current corporate culture can spoil such a regid and perfect person in about a decade, I have a reason to believe strongly that the culture and ethos in corporate world is getting worse at increasing rate.

Who will stem the rot but HR?

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.