MICROENTERPRISE ACCESS TO BANKING SERVICES Remedial Management & Other Collection Alternatives

Delinquency Defined

What is a Loan Delinquency? Any loan with a missed amortization of even one day is a delinquent account.

Causes of Delinquency Inefficient screening process Defective CIBI Erroneous cash flow analysis Inefficient collection and follow ups activities

Why Delinquency is no Acceptable It reduces profitability It reduces the bank’s competitiveness It negatively affects the bank’s image in the community It can lead to bank failure

REMEDIAL MANAGEMENT ACTIONS ON DELINQUENT ACCOUNTS I. Setting up of the Remedial Management Unit or function that will focus on: Collection Processes Legal remedies

WHAT IS THE OBJECTIVE OF COLLECTION? COLLECTION PROCESS WHAT IS THE OBJECTIVE OF COLLECTION?

to collect to collect promptly minimum cost maintain goodwill To obtain payment of accounts promptly at a minimum cost and at the same time maintains goodwill with borrowers to collect to collect promptly minimum cost maintain goodwill

2. To extend assistance to borrowers who thru unexpected expenses or temporary loss of income or combination of both may find it difficult to keep obligation up to date. financial advice technical know-how Term payments

3. Assist in correcting errors in credit decision such that potential and actual losses are reduced to its minimum. provide information/insight

What problem accounts require?

Immediate and proper identification of problem type cause magnitude

Proper corrective measures/remedial management

WHY PROMPT COLLECTION EFFORTS?

Laxity in collection would merely invite more difficulties in collection and at the same time helps convert potential good borrowers into poor ones.

The longer the receivable remains outstanding, the longer the bank becomes continually exposed to hazards and risk of non-payment or loss.

Prompt collection tend to reduce the investment required in receivables and its capital cost.

Remedial Management What is remedial management For financial institutions A specialized unit or department in the bank the primary function of which is, the management and recovery of all written off accounts;

Remedial Management Process Why set up an RMU? Management’ common belief that after a write-off, collection stops! Manage and dispose assets surrendered by clients as loan payments; The unit that will ultimately focus collection of all hardened and problem accounts of the bank.

Remedial Management Unit- Organization & Set up Written off and hardened accounts should have reached 200 or more; The Unit is headed by the MF Product Manager to be based in the head office; Initially, Two (2) dedicated Collection Officers (COs) will be assigned to the Unit; Experienced account officers/supervisors are the ideal staff that should be manning the unit.

Remedial Management Unit - Targets & Workload Each hardened/written off account should be visited at least twice a month by the COs or the Unit head; Collection officers shall be given geographical assignments and schedules for an effective recovery effort; The ideal caseload per CO is 120-150 borrowers.

Remedial Management Unit Approaches For banks with multi-branches, an RMU set up is ideal; Single unit banks, assign an experienced account officer solely for remedial management functions.

Remedial Management Unit The Process Account classification and identification Classify accounts as to their collectibility, such as: Collectible, and Uncollectible Collection officers shall focus initially on the collectible accounts; Unit head shall conduct a validation of those classified as un-collectible

Remedial Management Unit Credit files management Inventory and validation of credit files of written off accounts endorsed to the Unit; Management and control of files shall be the responsibility of the Unit head; For internal control purposes, recording and monitoring of performance shall be done on a daily, weekly and monthly basis; Prepare a Statement of Account for each and account to be attached and filed with its credit files.

Remedial Management Unit Collection process Collection process shall be done at least 4 times a week; Coordinate with branch offices’ AOs to know the background and history of the account, including present collection arrangement, if any; A minimum of 15 accounts should be followed up in a single day COs to remit collections with the nearest branch not later than the cut off time, (4:00 pm) and prepare a daily collection and follow up report.

Remedial Management Unit Payment Re-scheduling The Unit can recommend re-scheduling repayments based on limits to be determined by the bank; The Unit should be authorized to arrange a final settlement option with the borrowers, such as: Full payment w/in 60 days after notice. Principal balance only. Full settlement of account within 90 days. Total amount due on the SOA. Settlement of account in 3 monthly payments. Principal balance + interest only.

Remedial Management Unit 4. Settlement in 4 monthly installments. Principal + interest + 25% of penalties Nature of payments Cash or in-kind (chattels), surrendered by the client. Custody and disposal of Chattels The Unit shall be responsible for the management and disposal of all assets repossessed or surrendered by clients

Remedial Management Unit Incentives The bank should adopt incentive schemes based on a commission basis for written off accounts recovered. 5% commission on all written off accounts that are considered collectible; 30% on accounts validated as un-collectible The incentives may be open to all staff of the bank who can facilitate the collection of bad accounts

Remedial Management Unit Performance monitoring reports Daily collection and follow up report; Weekly performance report Monthly Status Report of Collections

Remedial Management Unit Internal control measures Control and custody of credit files Preparation and review of a final Statement of Account; Approving authorities on final settlement option and rescheduling of payments; Turn-over of collections before cut off with the nearest branch office; Review and monitoring of collections and other cash management issues. Separate MIS listing of written off accounts

STEPS TO BE TAKEN IN COLLECTING FROM DELINQUENT BORROWER

Maintain a regular, continuous follow-up. Keep in constant touch with the borrower. Try to be cooperative and helpful. Always show courtesy but nevertheless firm. Exercise some compassion and understanding as circumstances would indicate. The bank must not hesitate to use all available resources to enforce collection.

HAVE A NICE DAY