1. Management of Hardcore Delinquent Accounts
Day II- Session 2
Remedial Management Unit

2. Remedial Management Unit Session Outline
Definition of Hardened Accounts
Definition & Goals of Remedial Management
Remedial Management Unit (RMU)
- Functions
- Structure
- Staffing
- Workload
Remedial Management Process
Facilitator:
Review the outline of the session. The presentation will review:
The definition of “hardened accounts”
Definitions and goals of remedial management
A discussion of the recommended organization and structure of an RMU, including the functions that should be delegated to the Unit, appropriate staffing, and the responsibilities (and workload targets) for RMU staff.
A discussion of the remedial management “process” by which a loan is transferred from the “field” (account officer) to a RMU and the process by which the RMU should approach loan recovery.

3. What are Hardened Accounts?
Accounts classified uncollectible, and therefore, worthless
Accounts requiring remedial or legal action as the only alternative to minimize losses
Loan accounts that are typically 90 or more days overdue
Facilitator:
Discuss the definition of hardened accounts.
Note that “90 days overdue” is not a hard and fast rule to classify an account as hardened. While this may generally be the case, accounts that are 30 or more days overdue should be a source of strong concern to the bank and require concentrated attention. In classifying accounts as “hardcore,” the bank should evaluate accounts on a case by case basis. If field officers (account officers, microfinance supervisors and branch managers) have exhausted efforts to recover the loan and consider the account “uncollectible” – then the account should be evaluated as “hardcore.” Note that this may include accounts less than 90 days past due.

4. What is Remedial Management?
The process of instituting effective and practical approaches in the collection and recovery of hardcore delinquent accounts.
Management of problem accounts, where early detection plays a major role.
Facilitator: Ask the participants what they understand of a remedial management function.
After the discussion – validate responses from the participants and introduce the session….
Remedial management is the management of problem accounts, where early detection is critical. When a client misses a payment, that is an “alarm signal” that the account could possibly turn into a problem account. The bank must have processes and resources in place to (1) Detect problems (2) Identify the causes of the problem (3) Propose remedies or actions to take to resolve the problem.
The remedial management function starts at the time when the bank grants the loan to the client. Remedial management begins during client selection specifically the client screening process (CIBI and cash flow analysis). Remedial management is also part of loan management – monitoring client’s repayment activity to detect warning signs that a client may be having difficulty in repaying a loan. Remedial management also includes the bank’s response once delinquency occurs – follow-up visits to delinquent clients by supervisors and branch managers, the issuance of “demand” letters and other debt recovery strategies.
The process of remedial management is instituting effective and practical approaches in the collection of hardcore delinquent accounts. The key words are effective and practical. For example, strict implementation of the practice of looking for ‘alarm signals’ is one effective and practical way of incorporating remedial management strategies into the bank’s collection effort.

5. Goals of Remedial Management
Implement preventive measures to minimize delinquency
Incorporate monitoring processes to detect when accounts begin to deteriorate and to classify problem accounts before they become hardcore delinquent
Maximize collection efforts through assigning a specialized unit to manage the recovery process
Discuss the goals of remedial management.
Read through the bullet points. These bullet points provide the rationale for remedial management.

6. What is a Remedial Management Unit?
A specialized unit to manage the collection and recovery of all written off or hardened accounts.
Introduce the Remedial Management Unit.
The remedial management unit is a specialized unit in a multi-branch bank created, organized and or activated specifically for the task of managing and conducting collection and recovery efforts against all written off accounts. As the time progresses however, the RMU may also be tasked with the collection and recovery of all hardcore delinquent accounts of the bank. An RMU activity is also focused on the formulation and implementation of effective collection strategies.

7. Functions of the Remedial Management Unit
Transfer the responsibility of recovery to a specialized unit that has is trained and responsible solely to the recovery of hardcore delinquent accounts.
Relieve branches of “uncollectible” accounts to focus on serving existing productive accounts and generating new accounts
Why do we have to create a separate unit just for remedial management?
RMU is the “life” after the write off. It is the activity which automatically functions when substantial accounts have become problem accounts that need to be written off, but need specialized collection effort.
The RMU assumes the responsibility of
Recovering written off accounts from the branches. The RMU relieves branches of uncollectible accounts so that the branch can engage in more productive activities.
Providing information and analysis of problem accounts. This helps management to formulate and revise credit-granting policies
With the organization of the Unit, assets surrendered by clients as payment for their loans can be managed and disposed efficiently.

8. Remedial Management Unit Structure
A Remedial Management Unit set up is ideal for banks with multi-branches
A single unit bank may opt to assign an experienced account officer or collector solely for remedial management functions
Facilitator:
The organization of a Remedial Management Unit varies depending upon the size and structure of a bank (i.e. single unit or multi-branch bank, organizational structure of the microfinance unit, etc). Tailor the discussion on structure of the RMU to the organizational structure of the banks represented in the audience.
The functions of the RMU may be tasked differently depending upon the size and organizational structure of the bank.
For example, a bank with a microfinance unit may structure a RMU within the MFU itself.
Alternatively, a bank that does not have an MFU, but that does microfinance activities within a broader lending division, may create an RMU to manage hardcore accounts for the entire lending unit, as opposed to focusing on just microfinance accounts.

9. Remedial Management Unit Staffing
Recommended Staffing for the RMU:
Unit head, preferably from among experienced Microfinance supervisors, to be based in the head office
At least two dedicated Collection Officers with experience and demonstrated success in resolving delinquent or problem accounts
RMU reports to the President or Head of Lending Operations
Facilitator: Walk through the organizational structure for an RMU.
Emphasize that account officers assigned to the remedial management unit should have experience in handling accounts for at least one (1) year. They should be experienced with different “types” of clients and with the management of problem accounts. They should be skilled in handling complaints, negotiating repayment plans, and assessing the repayment capacity of delinquent clients. These staff should also display the ability to be assertive but not abrasive in collection – strike a balance in recovering funds for the bank and maintaining a courteous relationship with clients. In the collection of delinquent accounts, the bank needs to strike a balance between preserving its image as serious in the business of banking, but also sensitive to the (sometimes uncontrollable) situations of clients.
Facilitator: Emphasize the importance of “specialization” in remedial management where the bank assigns staff to the specific task of the collection and recovery effort.

10. Remedial Management Unit Workload
As a rule of thumb, the RMU has 200 or more accounts
The ideal caseload per Collection Officer is delinquent accounts
Unit Head assigns geographic areas to Collection Officers for efficiency in loan recovery efforts
Facilitator:
Discuss the responsibilities of the RMU.
(1) To “justify” the establishment of an RMU staffed with 2 individuals, the RMU should have at least 200 accounts in its portfolio.
(2) A typical weekly schedule of collection officers should be:
-- 4 days of collection
-- 1 day reserved for administrative tasks, including reviewing and posting documentation to credit folders; planning activities, preparing performance reports and attending meetings

11. Remedial Management Unit Remedial Management Process
Classify Accounts
Recommend Accounts to RMU
Evaluation of Accounts by RMU
File Transfer
Pre-collection Preparation
Collection Process
Developing Payment Plan
Incentivizing Staff
Internal Control
Performance Monitoring Reports
Facilitator:
This slide presents the “flow” or remedial management process. Read through each bullet point. A visual process map is presented on the following slide that divides segments of the “process flow” into 3 columns (which represent distinct classification of activities).

12. RMU Remedial Management Process
Classify Accounts
Pre-collection
Preparation
Create
Incentives
For Staff
Recommend Accounts
to RMU
Collection
Process
Internal
Control
Mechanisms
Facilitator:
Use this process map to discuss the remedial management process.
Evaluation of Accounts
by RMU
Performance
Monitoring
Reports
Developing
Payment
Plan
File Transfer

13. Remedial Management Process Classify Accounts & Recommend to RMU
AOs alert MF Supervisor/Branch Manager when an account becomes difficult to collect or “hardened”
MF Supervisor/Branch Manager evaluate status of account
All possible measures taken in the field to recover account
When collection options are exhausted……
MF Supervisor/Branch Manager recommends
to write off a loan
Facilitator:
Read through the responsibility of the branch and field officers to classify accounts and recommend accounts to RMU

14. Remedial Management Process Evaluation of Accounts by RMU
RMU and senior management review recommendations from branches to write off loans
RMU validates recommendation for loan write off through review of account folders and a branch site visit to discuss the status of the account with the AO, supervisor and branch manager
Senior management validates loan write off and the account is “transferred” from the branch to the RMU
Read the slide.
This activity is conducted when written off accounts are endorsed from the branches. The RMU validates each referred account to determine what collection arrangements have been made previously; the status and whereabouts of clients; assets surrendered by clients, if any, and other repayment and credit history. The branch manager facilitates access to information on these accounts.

15. Remedial Management Process File Transfer
Account files transferred from branch to the RMU
A Statement of Account for each account transferred to the RMU should be prepared and filed in each credit file.
The account transfer is formalized to reflect the RMU’s responsibility for loan recovery or resolution
Read the slide.
When accounts are “turned over” to the RMU, the RMU retains full management control of the accounts.
Credit files are endorsed to the RMU for collection. The RMU does not accept endorsed written off accounts whose documentations or credit folders are missing.
The written off account becomes part of the Unit’s “portfolio.” Goals and targets should be created for the unit as a whole (i.e. the unit should have targets to recover a “x” percentage of the accounts in its portfolio). Incentives can be created to motivate staff within the department to encourage recovery efforts. To create targets and incentives, an analysis of the types of accounts classified as “hardened” needs to be conducted.

16. Remedial Management Process Pre-collection Preparation
RMU classifies accounts according to:
Collectible
Uncollectible
Collection officers should focus initially on higher potential collectible accounts
Collection officers organizes field visits
One of the primary activities of the remedial management unit is the process of account identification and classification.
After the written off accounts are endorsed to the Unit, the first activity is to classify the accounts: collectible and/or uncollectible. This process involves the review of individual credit folders, including the notes of AOs who handled those accounts and supervisors and branch managers that supervised those accounts and recommended them to the RMU.
After the accounts are classified, the RMU plans follow-up activities. Immediate attention should first be placed on recovery efforts of accounts classified as “collectible.”
Accounts that are classified as uncollectible shall be validated by the Unit head to determine the actual reasons why the account/s have become uncollectible.

17. Remedial Management Process Collection Process
RMU staff visit borrower with written off or hardened accounts at least twice a month
RMU staff follow up on collection agreements and propose an approach to recover the account;
Recovery activities organized per area to maximize the minimum target of clients per Collection Officer;
Collections shall be turned-over to the branch or office where the CO has completed the collection;
Collection reports organized daily or weekly as procedures dictate
Facilitator:
Review the collection process outlined on the slide.
Note: These guidelines and procedures are generic – targets such as how many borrowers a collection officer should visit per day while in the field, are dependent upon the staffing levels of a remedial management unit and geography of the delinquent account portfolio. For example, if a collection officer’s portfolio is 50 accounts, and then accounts are in 12 branches in different regions, then the number of borrowers that he may be able to visit will be less than a collection officer with a portfolio of 50 accounts in one or two branches that are within 30 to 40 minutes of each other.
While the collection “process” (i.e. classifying accounts, organizing and transferring files, and restructuring payment plans) may be relatively fixed, or consistent – daily targets and targets for recovery balances are dependant upon the portfolio and must be determined by senior management with counsel from the director of the remedial management unit. It may take trial and error, and “field experience” in establishing the RMU, to solidify these policies and targets.

18. Remedial Management Process Developing Payment Plan
Payment Terms
Amount Collectible
Full settlement w/in 60 days after notice.
1. Principal balance only.
Full settlement of account in single payment over 60 days
Principal balance, plus
Accrued interest up to date of payment
Settlement of account on staggered basis
a) 3 months w/ monthly payments
b) 4 months w/ monthly payments
Accrued interest, plus
25% of penalties due;
1. Principal balance, plus
2. Accrued interest, plus
% of penalties due
Facilitator:
This slide presents payment terms that the bank can consider in restructuring delinquent accounts, and encouraging clients to settle their accounts as soon as possible.

19. Remedial Management Process Creating Incentives
A commissioned-based incentive scheme should be developed to motivate the RMU to recover hardcore accounts in its portfolio:
10% commission for accounts considered collectible
30% on accounts considered uncollectible
All staff facilitating the collection of bad accounts should be considered for incentives
Read the slide.
A sample incentive scheme is illustrated on this slide.
An incentive scheme serves to motivate staff to collect accounts. The incentive scheme should reflect realistic goals in recovering collectible and uncollectible accounts. The incentives package must be clear in its policies. Management reviews and incentive scheme to confirm their comprehension and commitment.
Refer to the “Guidelines on Microfinance Loan Write-off Policies and Procedures” developed by MABS for more information.

20. Remedial Management Process Internal Control
Control and custody of credit files
Preparation and review of final Statement of Account
Designate approving authorities on final settlement option and rescheduling of payments
Timely turn over of collections to nearest branch office
Monitoring of collections and other cash management issues
Separate MIS listing of written off accounts
One of the critical issues to the remedial management function is internal control.
The RMU is assigned accounts that have been written off the books of the bank. Any collection from these accounts goes directly to the bank’s revenues. To protect against fraud, the bank should establish internal control mechanisms.
Some control mechanisms include:
Create a separate loan listing for written off accounts. This involves transferring written off accounts from the bank’s outstanding portfolio. This transfer can be automated through the use of the bank’s MIS and/or manually through subsidiary ledgers
(2) Maintain detailed records of restructured payment plans with clients (i.e. dates of expected payments) and monitor client credit files.
(3) Require a paper trail (i.e. official receipts) to validate all financial transactions
(4) Require weekly performance collection reports to monitor collection efforts

21. Remedial Management Process Performance Monitoring Reports
Daily collection and follow up reports
Weekly performance reports
Monthly Status Reports of Collections
The Remedial Management Unit should provide performance monitoring reports to management on a regular basis.
Collection officers complete daily and/or weekly collection reports and submit to the unit head. (Facilitator: share with participants examples of weekly and monthly performance reports)
Weekly reports are consolidated to a monthly reports and presented by the RMU unit head to senior management.

22. Remedial Management Unit Recommendations
RMU is an effective and practical approach to collect and recover hardcore delinquent accounts.
To be effective, RMU must be a separate, specialized unit with its own portfolio of hardened accounts.
RMU must have goals and targets and reporting mechanisms.
The Remedial Management Unit should provide performance monitoring reports to management on a regular basis.
(1.) Collection officers complete daily and/or weekly collection reports and submit to the unit head. (Facilitator: share with participants examples of weekly and monthly performance reports)
(2.) Weekly reports are consolidated to a monthly reports and presented by the RMU unit head to senior management.