Collections with a heart.

How the new age collection systems should be? What should be the right approach of collections and NPA management ?

Here we will discuss features to develop a agile collection system with a heart.

The collection systems need to enhanced in tandem with the changing world.

Real-time, automated deduction:

The fees and charges are no longer get deducted in the night batch. The trigger is the credit transaction. As soon as you receive a payment in the bank, bank deduct the fees and charges and past dues if bank/credit account is maintained in the lender linked account.

That's not enough. Collection need to be split to total default amount, convert to a new EMI, able to deduct daily from the business credits. That is similar to selling shampoo in small packets, making it affordable.

Where to place the due dates?

Most of the credit cards products keep 5th of every month as due date. If it is a gold card the cycle date is 20th and with 15 days repayment days it falls on 5th. and If the card product has a 20 days of credit free period then banks keep cycle date on 15th of every month so that due date again fall on 5th!

Most unsecured lending products keep due dates during 3rd-9th of a month. But that is too late. A person with hardship will repay his home loan, send money to other account and other lenders on 1st/2nd of the month. Hence any due date after 4th is late, unless you want customer to default.

Right strategy can be keep the due date on 5th and enable a auto deduct on 1st/2nd of the month without a bounce charge. And if we want to split the due, auto debit/ECS job can run every day for multiple deductions in a month.

Collection from sales and not profit:

If an UPI TPAP start lending then they need to have a collection system which can deduct certain amount/percentage from the daily credits the small merchant is getting.

Collection from sales will be more effective and ahead in the curve rather than waiting for end of the cycle. Traditionally when a lending system receive a repayment the repayment comes from merchant profit. (After tax/vendor payments)

Spitted EMI will be from the sales and it is like getting royalty income irrespective of business making profit or not safe guarding repayment.

That's how American big chains work right? Mac Donald's, Domino's do not work in a profit sharing and rather they work in royalty models where royalty will be paid as soon as there is a sales. Same ways GST is more impacting than the corporate taxes!

Automatic Restructuring:

Also automatic restructuring must happen when customer can show he lost a job/unavoidable circumstances.

Like give 50 percent waiver in late fees and interest dues and convert the outstanding to sustainable EMIs which can be serviced by his current earnings. Specifically in case of unsecured lending lenders can conceive some automation in certain use cases.

Enable collecting statement in small ticket size. Once statement is generated,split and spread the total due to a month and to 4 due dates to address hardship.

When to act?

If you look at your data, you will understand customers stop making payments beyond a point. For example the principal outstanding due was 100,000$ and customers stop making payments when the due becomes 160,000$. Emails, calls and agencies make zero impact there. The outstanding don't make sense and customers wait for waiver, restructuring and intervention. This is the time the Institution must act.

System must rationalize the due now considering Original outstanding+cost of fund+30% fees and charges on outstanding.

Scenario 1: 100,000$ Due for 1 year then cost of fund = Original due +Cost of fund (100,000$*10%) + 30% on Original due = 140,000 and convert to 24 EMIs.

Scenario 2: 100,000$ Due for 1 year then cost of fund = Original due +Cost of fund (100,000$*20%) + 30% on Original due = 150,000 and convert to 24 EMIs.

In a emerging market scenario:?

Scenario 1: 10000$ Due for 1 year then cost of fund = Original due +Cost of fund (100,000$*10%) + 30% on Original due as fee/charge = 14000 and convert to 24 EMIs.

Effective EMI is 583$ per month which is serviceable.12 EMI will be effective 1167$ which is again serviceable.

Scenario 2: 10000$ Due for 1 year then cost of fund = Original due +Cost of fund (100,000$*20%) + 30% on Original due = 15000 and convert to 24 EMIs.

Effective EMI is 625$ per month which is serviceable.12 EMI will be effective 1250$ which is again serviceable.

Businesses can also look at charging a 300$ fee as a processing fee for EMI conversion. This can rescue banks from provisioning, unnecessary bad names and address the customer concern. Here we are still charging 30 percent for fees and interest charges and also considering the cost of funds for the fund being stuck.

As a thumb rule carrot and stick will be applied for adoption of this scheme like if you don't pay your credit score will be ruined forever.

If you don't pay you can't take any loan, banking products for lifetime. Then present this plan. This kind of automatic restructuring would empoer the collection team as well.

Automatic Notification:

Amount defaulted need to be sent to person immediate family members, employer which can genuinely help in address the hardship and not humiliate.

=> Remind the due amount before the salary arrived.

=> Sending notifications with UPI Auto debit ECS mandate/payment links

Collection with a Heart:

Every (most) borrower want to payback the loan taken from a bank and do not make payments when economic downturn/blue swan events like corona/global crisis hit hard the customers.

Banks and financial institutions adopt different collection strategy for different customer segments. But the one those who lend a ear, understand the situation and convert outstanding to EMIs are the winners in the game.

For example Axis banks collection strategy was more humane comparing to other banks when a friend of mine had credit card defaults. Since then my relationship with Axis bank is rising.

The essence of the new age functions are the real time processing and not wait for night batch. Last and not the least having a human touch, being humane is the key. Is your systems ready for the same?

Follow this page for #ideas, #solutions to address the issues of #banking industry. Change which can make the world a better place to live.