LOAN RECOVERY TECHNIQUES IN THE BANKING INDUSTRY - PART ONE

By Kelvin Mkwawa, Seasoned Banker.

Debt collection is a part of credit risk management which is defined as a practice of mitigating the probability of loan loss due to borrower’s failure to make loan payments at any given time. Bank customers expect their bankers to provide them with a loan to make up the shortfall in their budgets and the ability of the bank to survive depends on how well it manages its assets portfolio; anything shorter than that is a recipe for disaster for a bank. Hence loans make up the biggest risk for any bank and because of that, the banking industry has been focusing more attention than ever on credit management. Due to unfavourable economic conditions in emerging markets, the level of Non-performing loans has reached unprecedented levels in the last two years.

Even though the average Non-performing loans (NPLs) ratio of banks has been dropping to a manageable level for the last two years, it is still above the benchmark set by the regulator, Bank of Tanzania (BOT), of 5%. Because of this, banks are under pressure to improve their collection abilities to ensure that the NPLs are within the regulatory threshold. This has put the collection and recovery departments of banks to test and forced them to become more inventive. There is a classic motto for collectors which is still true as ever – “if you don’t call, you don’t collect” but calling itself doesn’t hold water anymore. 

Most of the customers nowadays often have debts/loans with more than one financial institution and they simply cannot keep up with payments with all of them all the time. Hence banks have no choice other than to rise to the challenge by either restructuring their internal collection and recovery team or forming strategic alliances with third-party collectors to ensure efficient collection process. So this week, I will share the steps and techniques banks can use to recover debt effectively.

• Post Disbursement Monitoring - Banks should have a dedicated department that will monitor their loan portfolio instead of leaving the task to relationship managers who are occupied with chasing sales most of their time. This will enable a bank to maintain consistent contact with customers and always remain available whenever customers are in danger of defaulting. To ensure the effectiveness of this technique, make sure that you choose an appropriate customer-approach channel for your customers. This strategy helps tremendously in the collection phase as the human tendency shows that if a creditor is in constant contact with a debtor, the creditor shall likely get first preference in the list of creditors when the customer decides to make a payment. When one reaches out to a customer for collecting your debt when he/she has money well before any other creditors, you have a great chance to recover your debt. 

• Centralize Your Collection Tools – This technique of centralizing all your collection tools is key as information is easily shared and decisions are made quickly through the centralized decision-making process. The main purpose of the collection process is to get a customer to commit himself/herself and enter into an agreement to repay the overdue amount, ensuring the agreement is enforced. The collections agreements are in different forms and conditions such as restructured, fractions, or pay off settlements. Therefore, it is critical to make sure that all tools used in enforcing these agreements are centralized. By centralizing these tools, your collection team will be able to strategize, plan, and monitor the progress of the collection process from one point, hence maximizing the results.

Next week, I will share more steps and techniques banks can use to recover debt effectively.

Written by Kelvin Mkwawa, MBA
Seasoned Banker
Email address: Kelvin.e.mkwawa@gmail.com