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Retail banking is a highly competitive environment, every bank/ nbfc/ financial institution is more focused on its growth in business by not only the new acquisition of customers but as well in the retention of existing customers, expansion and increase in market share. Bank/ NBFC/ Financial institutions have to control the rising negligence of the customer in the repayment format to increase the profit else banks will be in a trapped situation which they had already gone through in 2008-09. Today the competition has risen because of many players in the market than 10 years back.
Banks/ NBFC/ Financial Institutions at the same time are also building up a powerful collection mechanism to handle the bad accounts of the company. The collection process has changed vigorously that was used to be followed in the last decade. Mainly the collection was done by giving threats, showing power, etc. In the past we came across many incidents where the managers of Banks/ NBFC’s/ financial institutions were arrested for giving threats, misbehave, showing power, etc to their customers.
The present scenario has changed where the major financial institutions are following proper collection mechanisms to handle the bad accounts. It is an effective method to recover though sometimes few processes take longer time to recover the money. Institutions follow different collection processes depending upon the category of the delinquent customers.
Here firstly let’s try to understand how the institutions categorize the delinquent customers or becoming delinquent. All delinquent customers are categorized into groups like 1-30, 31-60, 61-90 and so on. Here, the numbers mentioned above are the days past due (DPD). This means how many days are delayed from the scheduled due date of interest payment or Equal Monthly Instalment (EMI) Payments. For example, if the interest of the EMI’s due date is on the 1st of every month and the customer has not paid the interest or the EMI on 1st and today is 15th, hence the account is due for 14 Days i.e. 14 DPD. This means that the account is in 1-30 days Bucket. The delinquent case moves from the softer bucket (1-30 & 31-60) to a harder bucket (61-90 & above).
Depending on the bucket & the categorization of the product given to the customer, institutions follow the collection process like an in-house telecalling set up, collection officer or through third-party collection agency & legal tools.
Initially, the Banks/ NBFC/ financial institutions give a call to the customer to pay the EMI amount after the very first default of interest or the EMI payment on the due date. If the customer fails to pay the required amount within 30 days from the due date, the account shifts to a 31-60 bucket and is allocated to the collection officer. Again at the next stage, if the collection officer is unable to collect the amount within 60 days of the allocation, the account shifts to 61-90 bucket and is allocated to a third party (agency) for the collection.
As per the RBI norms, it is mandatory to attend a training program named ‘Debt Recovery Agent (DRA) Training’ of 100 hours for all the collection officers, associates, and agents which is given by Indian Institute of Banking & Finance (IIBF) before they go to the field to recover the due amount from default customer.
Apart from the regular follow-ups from the default customers through the collection agents, Banks/ NBFC/ financial institution starts initiating the legal procedures like the case files under section 138 for cheque bounce (Negotiable Instrument Act), Winding up petition, Suit File, Debt Recovery Tribunal (DRT), Arbitration, etc.
With all these processes that a Bank/ NBFC or any other financial institution has to go through the sales, credit, as well as the operations department, need to keep in mind that any wrong underwriting or the bad funding will increase the non-performing asset (NPA) percentage as well as affect the profit of the organization. Hence it is important for any financial institution that they should improve the underwriting process and provides different tools and training to the employed underwriters to increase the quality of underwriting and build up the strong collection process at once so that the funding can be done to the deserving clients who actually require the funds and provide maximum financial support even if the customer base increases.
