Addressing the problem before there is a problem proves to be one of the most effective strategies available in reducing delinquency. Preventive action is less costly, and the best collections activities are those that manage clients who are not yet past due carefully. There are a number of proactive strategies that a lender may employ in the management of those clients before their loans are due.
Watch Whom You Lend To
Just over a year ago we took a difficult decision to fire one of our clients. It was particularly difficult because at that time business from his 5 companies accounted for almost 25% of our revenues. But we felt we had to let him go because of some observed integrity issues and because he was politically exposed.
Interestingly, by our estimate, he was owing over N3 billion personally and through 4 of his 5 companies. We were also aware that at least 3 of those loans were underperforming because he was diverting funds towards some real estate investments in the USA.
If only his bankers had cared enough to do some basic checks! But then again, maybe there were some other considerations driving these decisions, which were not aware of.
Educate Borrowers about Loan Terms and Repayment Schedule, Fees and Charges
Borrower education can go a long way towards reducing default rates. Prior to disbursement, loan officers should make sure the client understands how the product works and the payment schedule, while also providing information about the easiest way for this particular client to deposit sales proceeds in the bank. This might take the form of providing a POS terminal for card payments, helping the client collect payments through their website or introducing the client to the nearest branch for cash and cheque deposits.
Expenses related to the collections process must be transferred back to the client. It is important to stress during the client-education stage both the benefits of punctual payments and the costs incurred by the client for late payments. Yes, these terms are spelt out in the offer letter and loan agreement, but most clients don't read those documents carefully, nor do they take the trouble to digest them.
Make the Repayment Terms Match the Client's Cashflows
The first thing is to be sure the facility is structured by someone who understands the client's business and cashflow patterns. Then the repayment terms need to match projected cashflows. In this article Success Story: New Lease of Life for a Stone Quarry I shared an experience where an expensive stone crushing plant was financed without making provision for a moratorium. Nobody thought to make provision for the lead time between ordering the plant, installation, commissioning and all the other things that need to happen before the first revenue streams come in.
Involving the client in the establishment of mutually-agreeable payment dates may increase the probability of repayment. Generally this date must match the date on which the client experiences peaks in revenue or liquidity. At the same time, it should be far enough away from payment dates for other important obligations, such as rent, salaries, and other debts.
Address Customer-Service Complaints Quickly
In the development of new loan products linked to the purchase of assets, such as industrial equipment, vehicles and computers, it has sometimes been the case that the item bought turns out to be defective and/or the client did not receive adequate customer service from the supplier, resulting in cessation of client payments. By timely attention paid to complaints, staff members may be able to address clients’ concerns before they result in a late payment.
A similar situation could also be the result of fraudulent staff action, etc. In this case the institution must analyze the situation and, if it determines that late payment is due to problems with the good or service, propose a timely solution in order to “reactivate” the client.
Use Positive Reinforcement
Positive reinforcement, as simple as it seems, also plays a valuable role. The lending institution can recognize and reward clients who pay on time by offering them immediate access to renewals, larger loan amounts, preferential (lower) interest rates, certificates of good payment, training, and prizes. These actions should be implemented with the support of the marketing department and integrated into the sales strategy.
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