DEBT COLLECTION IN P2P LENDING
BACKGROUND
Debt Collection is an effort of a P2P Lending Company for the following reasons :
- Minimising Loss from Credit Risk
- Branding to existing or prospecting investor on credit quality of mediation as the service of P2P Lending Company
Ideally, there is no credit risk on P2P Company's side as the provided service to users (debtor and investor) is mediation platform service. Credit Risk is purely on the side of investor. Then where is the loss coming from if Credit Risk is not truly a Risk in P2P Lending?
Whenever a debtor fails to perform repayment to investor via P2P Platform, P2P Company could involve in debt collection process as probably the legal binding (Service Agreement with Investor) mentioned collection support or loan collection guarantee clause. If a P2P Company fail to perform so, it could bring the company into legal case or degradation of branding which at the end potentially could trigger operational cost. Therefore, the loss is not directly coming from Credit Risk but Operational Risk instead.
Exception probably occurs in Indonesia where a P2P Lending Company must be registered and licensed under Financial Service Authority (FSA) or well known as Otoritas Jasa Keuangan OJK. As its fundamental function is to protect fund invested by people in a financial entity, surely OJK will encourage a P2P Company to protect investor's interest by risk capital reserve or to established a satisfactory loss recovery action procedure.
COLLECTION IN P2P LENDING
A P2P Company probably has mitigated credit risk already by credit insurance coverage or reserving risk capital in advance. However, collection effort probably is still needed to reimburse credit insurance claim or reserved risk capital cash outflow which was used to repay fully investor in case of default. In other words, collection action is more to reduce loss due to credit insurance claim or reserved capital cash outflow.
Talking about loss, it is certainly that potential loss is as much as OS Principal. When a loan account put into default status, surely by accounting principle a P2P Company would not recognise any future interest as income and any payment from debtor will 100% to reduce principal. In addition, if a P2P Company has an internal SOP for risk capital reserve, surely that capital will be returned as additional income in Profit and Loss sheet. Therefore, collection process in P2P Company will not be so much different will any conventional financial entity where the measurement of success collection lies on how much the collected or recovery amount is.
P2P Lending Portfolio consists of mass and various size of OS Principal and number of debtors. Not like in banking where reserved capital can be categorised as PAR (overdue days basis), in P2P Lending any overdue amount would be potentially default as its nature of loan account is mostly unsecured. This is why amount of recovery will be so important to reduce loss. Although probably a P2P Company has paid premium and reserve its risk capital, by total the potential loss will still be its 100% overdue OS Principal amount.
Disregarding coverage by insurance premium and reserved risk capital, field collection could be an alternative to reduce loss. However, it should be note that field collection (both by internal collection team or outsourced debt collector) will cost transportation, allowance and any other cost related to field daily activities. Considering cost, a P2P Company will need to have its own strategy on how to optimise recovery amount against cost resulting net recovery. Surely from credit administration database, a P2P Company will be able to map at least number of debtors, locations and size of OS Principal to collect. At least from these three parameters a P2P Company can start to estimate cost.
Let's start simply by seeing what 5x10 and 50x1 meaning are. 5x10 means you have 5 debtors with default OS of 10 while 50x1 means you have 50 debtors with default OS of 1. In average, we can see that visiting 50 debtors cost you more a lot compared with visiting 5 debtors. In addition, prioritising in collecting 5X10 should be more efficient. Why? because success collection of 1 debtor of 5x10 cost the same amount with 1 debtor of 50x1 but the different is on recovery result. 1 debtor of 5x10 recovers 10 while 1 debtor of 50x1 recovers only 1. So prioritising 5x10 group of default accounts will be more efficient compared with 50x1.
A P2P Company could have its own strategy for recovery. However, cost for collection like above illustration must be the first consideration as collection cost will impact net recovery amount and net recovery amount shows us how far a P2P Company will be able to reduce loss from default account. Mathematically, Final Loss will be booked as :
Final Loss = OS Principal - Collected Amount + Cost
CONCLUSION
- Although ideally loss from credit risk should not be bearing on P2P Company, collection strategy is highly recommended to maintain branding image of a P2P Company in front of credit insurance company, shareholders or investor. Better collection strategy performance will strength and bargain P2P Company to attract investor or shareholder to invest and to attract an Credit Insurance Company to continue on providing coverage;
- Collection SOP must be made. It must depart from cost as the 1st prioritised consideration. This is because higher cost will make the effort to reduce loss to be useless. In other words, materialistic level of recovered amount against cost must be the 1st priority.
Note : Writer is an observer of Risk Management in P2P Fintech and observer of Higher Order Thinking Skill Mathematic Education in Indonesia