Even in the pre-pandemic period, loan delinquencies were rising. Earlier, existing collections and loan recovery processes were not quite effective. But the nationwide lockdown due to the coronavirus in 2020 meant the traditional means of collections turned more ineffective.
Moreover, in June 2020, the RBI tightened norms for recovery practices. RBI’s additional compliance guidelines for ethical collections now make it difficult to disburse loans speedily. Swift disbursal is especially required for ‘payday’ lenders specializing in offering small-ticket unsecured loans provided for short durations only.
Challenges of Collections and Recoveries
Additionally, strict adherence to new norms has made monitoring of in-field or manual collections more challenging. Besides, going by customer experiences, there is a growing misalignment of the contact strategies.
In recent years, P2P lending and the presence of start-ups in the lending segment have increased. As a result, faster loan processing and speedier, scalable collections have emerged as the need of the hour. The volatile macroeconomic conditions have also further strengthened the need for agile and on-demand collection capabilities. With agility, collection strategies can be changed faster if required.
In this connection, it’s important to wonder: when digital payments have increased, why not have digital repayments instead of cash? Considering that users on digital platforms are substantial and on the rise, it’s a most natural roadmap to enhancing efficiencies of collections.
It’s time that digital repayments are institutionalized from the lending cycle’s inception. Today, the majority of users prefer digital means of being contacted. Likewise, they may prefer being given the flexibility of making payments online without human intervention.
Such an approach is particularly pertinent against the backdrop of social distancing restrictions of the ongoing pandemic. Therefore, there could be nothing better than making the repayment process hassle-free by repaying through the convenience of mobile phones.
Apart from being practical, online repayments are the most feasible option since traditional methods remain expensive and manually intensive too. This is specifically true for small-value loans where the extra costs don’t make sense.
Making Digital Repayments Viable
Whereas digital repayments are a practical and alluring option, typically, it is easier said than done. That’s because defaulting borrowers may no longer be available via their previous contact coordinates. Here’s where the help of digital natives makes all the difference in a successful recovery.
Technology companies dealing in delinquency management are already helping leading banks in India in digital debt collections and recoveries. Primarily, the objective is achieved by turning unstructured data into usable information through the assimilation of data from a wide array of external sources. This is done via varied means, including skip tracing.
The latter refers to the process of locating debtors who have “skipped” or left their residence and city. Skip tracing is most helpful in instances where debtors fail to answer or return repeated calls and messages. Even if the physical addresses of clients are available for sending collection letters, many of these people may no longer be residing there. In such cases, borrowers moving to new homes may deliberately not leave any forwarding address.
When forwarding addresses are left, these could turn out to be incorrect or wrong. Though some may be genuine human errors, it still leaves no scope for informing these borrowers about their pending dues. Consequently, one cannot offer them the opportunity to pay the arrears before these end up hurting their credit scores. Due to this, they will no longer be eligible for fresh loans later.
In addition to skip-tracing aggregation, digitalisation can help by using artificial intelligence (AI) and machine learning (ML) at different stages of the lending cycle. Digital communications are beneficial in assisting customers to resolve their debt by making digital payments at the earliest. Where wilful defaulters are concerned, big data and ML-based segmentation can facilitate in knowing more about these customers and creating hyper-personalized communiqués.
AI and big data analytics can assist in the easy tracking of customers’ behaviour, their payment trends, choices and engagement with other institutional entities. Digital customer screening then becomes easy and convenient with insights provided by advanced analytics. Digital tools could also help in understanding the creditworthiness of potential as well as present borrowers. By capturing customers’ engagement preferences, it helps in further segregating them into more or less creditworthy cohorts.
Meanwhile, unlike legacy lenders who depend on conventional means of data collection, delinquency management companies leverage unconventional digital means to harvest a trove of customer data and relevant, actionable insights. For example, customers’ mobile call records can provide valuable insights into their current lifestyle choices. In turn, these can throw light on their spending patterns, making it possible to decipher whether the delinquency is a wilful or circumstantial default.
Such a holistic approach of leveraging optimal channels such as WhatsApp, email, SMS, phone and website browsing habits help in linking customers with their overall choices. Thereby, it advances the ability to connect better with borrowers by engaging them in their preferred language and mode of communication.
The ability to differentiate between creditworthy customers and potential delinquents is beneficial to both borrowers and lenders. Remember, reduced risks for lenders allows better chances for potential borrowers in availing loans at relatively lower rates of interest. That is why digitalisation of the loan recovery process can be a boon for all stakeholders.
Views expressed in this article are the personal opinion of Anshuman Panwar, Co-Founder, Creditas Solutions