Banks are confronted with newer challenges every time the previous ones are overcome. Some of the major challenges faced by banks today are, heightened regulatory scrutiny, changing customer behaviour, cyber-crimes and cultural changes. One challenge that has been there, right from when the world economy slowed down in 2008, is the challenge of reduced liquidity. This was becoming a major decelerator and the problem worsened, when the macroeconomic environment deteriorated, leading to increased interest rates.
As the credit terms tightened, the debt collection obstacles rose. As more and more loans were going bad, banks realized the need to pull up their pants and get solving the issue while carefully ensuring customer loyalty does not get affected.
Let’s look at some of the biggest debt collection obstacles that the banks face today and how they go about overcoming each to sustain their business:
Banks have to halt their collection efforts, once a customer (person or business) declares itself bankrupt. Because bankruptcy is a detailed and lengthy process, it can sometimes take years for a bank to receive money, if at all it does. Several bad loans are suffered by banks due to this reason.
The banks in this situation can chose to foreclose secured properties and freeze accounts to recover whatever little they can. Some banks do not let the person continue banking with them till he is discharged from bankruptcy. However, some allow basic banking while the customer is still undischarged.
Banks are finding it increasingly difficult to recover their money from defaulting borrowers as bad loans continue to pressurize their capital base and threaten their ability to grow in a competitive environment.
Customers failing to pay because of genuine reasons are few, whereas those that use tactics to delay or flout payment are many. Banks have been breaking their backs over these customers, trying hard to access them and get them to communicate their reasons. The only way a bank can better the situation is to anticipate debtor excuses, and have more effective debt collection processes in place.
Several debtors each year, take heavy loans as business investment and then fall flat and the business collapses hard. This engenders the debtor helpless and unable to pay off any loans. This is a cardinal obstacle that banks face.
Banks, in order to overcome this obstacle to an extent, should undertake rigid credit application processes when asked for loans, have credit checks and trade verifications in place and employ strict rules regarding account receivables.
When a customer fails to pay off his debts past the due date, the bank has to indulge in a lot of correspondence including sending past due notices, debt collection letters, request letters, and follow up statements. Emails and calls are regularly sent out in an attempt to get in touch with the customer and know if payoff is possible. If this correspondence becomes overtly nagging, the bank risks losing out on its loyal customers. Thus it becomes a major obstacle.
The bank has to adopt measures that seem less aggressive and softer hinted to get its customers to open up and eventually clear of their debts.
Granting loans is the relatively easy part, but recovery is far more difficult. Acting before the loan fully goes bad is the key and that is only possible if loans are regularly monitored through multiple channels.
Banks tend to hire commercial collection agencies, much after sinking in the sea of debtors, escalating collection efforts. The likelihood of the collection becoming a reality is greatly reduced due to this.
Commercial collection agencies offer to collect unpaid invoices on behalf of the bank and charge a percentage of the owed amount in return. This service is worthwhile owing to its expertise and resources. The only obstacle is failing to know when to employ its services. A bank therefore should take proactive effort to gauge the right time to employ collection services and thereby save money, time, and cash flow in the long run.
As part of Verinite Labs, we recognized collections as one business area worth disrupting and offering banks a new age solution that will help to overcome bad loans and sour debts. Our technology solution offers collectors and customers a platform to overcome most of the challenges highlighted above thus helping banks to improve recoveries and reduce cost of collections. More about the solution in the next blog!!!