Loan collection is an important process for lending businesses. Whether you are a bank, credit union, or other financial institution, collecting on overdue loans is essential for the health of your loan portfolio.

An effective loan collection process not only helps in recovering disbursed loans but also helps in maintaining a good relationship with borrowers. 

However, there are many challenges lenders face with loan collection. One of them is that manual collection methods severely reduce collection rates. Another one is that many lenders do not have a loan recovery policy and some employ unethical means of recovering loans. 

This article will cover key collection KPIs to track, what unethical loan recovery methods are and three ways to improve loan collection among borrowers to preserve lender-borrower relationships.

How to Measure Debt Collection Performance

Collection KPIs are the metrics that lenders use to track the performance of their delinquent accounts. This is especially useful in the reconciliation efforts in loan collection departments since many lending businesses have several collection agents.

To track the overall performance of debt recovery and collection, here are some useful debt collection key performance indicators [KPIs]:

• Days Sales Outstanding [DSO]: This metric reveals the amount of time it takes to collect outstanding debts on a monthly, quarterly or annual basis.

• Right Party Contacts Rate [PRC]: Right party contacts rate measures how successful collection agents are in reaching the obligor, which could either be the debtor or the guarantor.  

• Collector Effective Index [CEI]: The collector effective index helps you to measure the effectiveness of your credit policy and collection team. It contrasts all the loans your team recovered within a period of time with outstanding repayments. 

• Percentage of outbound calls resulting in PTP: Promise to Pay [PTP] measures the number of outbound calls to borrowers resulting in a promise to pay in relation to the total number of outbound Right Party Contacts [RPCs] made by debt collectors over the same duration.

• Profit per Account [PPA]: How much overall revenue is made by each account.
• Bad Debt to Sales Ratio: Bad debt can happen when debtors declare bankruptcy or when collection is costing more than the debt itself. Hence, this KPI is calculated by evaluating the company’s total value of debts vs total sales.
• Percentage of total recoveries collected: This metric is calculated by dividing the total payment amount by the total amount of debt. The result is the recovery rate.
• Amount collected per collections employee: This is an average if the total amount collected across all collections employees measuring work quality and productivity.
• Delinquent accounts per collections employee: The total number of delinquent accounts divided by the total number of employees in the Collections department.
• Bad debts write off rate: This metric is one of two methods used by lending businesses to calculate bad debts. It is calculated by dividing the amount of bad debt by the total accounts receivable for a period multiplied by 100. If you have a high debt write-off rate, consider your criteria for extending credit to borrowers.

• Cycle Time: Debt to Recovery: The average lifecycle of a debt when a borrower defaults on a payment. It helps to determine the effectiveness of your loan collections strategy. Thus a short life cycle is best.

• Average Collections Payment Size: This is the average of the amount of the total collection across the number of payments made against the expected instalment payment in on-time payments. It is used to determine how effective communication is across borrowers to receive their payments.

Recovery Methods with Adverse Effects

For collection methods to be effective, it has to be legal. Lenders should never consider unethical practices in their collection in spite of how challenging loan collection might be. 

Some unethical recovery methods that might get a lending business reported include:

1. Harassment: This can include calling at odd hours, shaming in public, relentless calling, unplanned visits, implying the borrower is a thief and other shady tactics that can cause the borrower apprehension.

2. Intimidation: Name-calling and insultive phone calls by an ‘official’ are part of methods employed by unscrupulous lenders to rattle their debtors. By intimidating their debtors in a variety of ways, their goal is to get the debtor to pay up to end the discomfort.

3. Making threats: This is a common tactic by shady lenders popularly known as loan sharks. They threaten to expose the debtor to family and friends, to publish the debt in the public space or to send a message to all the debtor’s contacts. Some carry out their threats and circulate a defamatory poster intended to shame the debtor.

4. Impersonation: Posing to be someone else is impersonation. An unscrupulous person will usually pretend to be a government official to get a borrower’s attention over the phone for intimidation.

3 ways to Improve Loan Collection

The stability of your lending business is dependent on efficient loan collection. Here are some ways to take control of your loan collection process:

1. Streamline Communication with Borrowers

Effective communication is the cornerstone of any successful loan collection process. This is important to avoid misunderstandings and build trust with their borrowers. With only one channel of communication such as phone calls, borrowers can easily bar lenders from communicating with them. Thus, more than one communication channel is necessary. Here are some of the steps you can adopt to improve communication with borrowers.

Implement Automated Reminders and Updates

Lenders can send automated reminders and updates through email, text message, or phone call, reminding borrowers of their upcoming loan payment due date. This not only saves time and effort for lenders but also helps borrowers keep track of their loan payments. Configure loan management software simplifies the process of automated reminders using multiple communication channels such as email and SMS. Configure also sets up automated messaging. Lenders can choose the frequency and other criteria. 

Provide Multiple Communication Channels
Lenders should provide their borrowers with multiple communication channels to reach out to them in case of any issues or questions regarding the loan. This can include email, phone, live chat, or social media. Providing multiple channels of communication allows borrowers to reach out to lenders in the way that works best for them. A core lending software like Configure easily embeds multiple communication channels like SMS and emails. From the Requests page, you can send a message directly to the borrower and attach an image in any of the approved file formats.

Foster a Personalised Approach
Lenders should try to foster a personalised approach in their communication with borrowers. This can include addressing borrowers by their name, providing customised loan repayment plans and offering support and guidance in times of financial difficulty. A personalised approach helps build trust and a good relationship with the borrowers, making the loan collection process smoother. Borrowers who have a cordial relationship with their loan officers rarely default on their loans.

Personal relationships are crucial to reduce credit constraints and improve entrepreneurs’ incentives to repay. Close social ties between the loan officers and the borrowers can increase the offer of credit to micro entrepreneurs, but also indicate that the demand for credit can depend on social ties.

2. Leverage Technology and Data Analytics

Technology has revolutionised the loan collection process, making it easier and more efficient for lenders to collect loans. By leveraging technology and data analytics, lenders can streamline the loan collection process and make informed decisions.

Utilise a Loan Management Software

A loan management software is a useful tool for lenders to manage their loan portfolio. Using a loan management software, lenders can manage their repayments and collections more easily. A repayment feature enables you to track every single repayment for easier recovery. With insights into full repayments, partial repayments, repayment method, lenders have data to understand what works best in their business.

Configure provides a centralised platform for lenders to track loan payments, generate reports, and automate reminders and updates. This software saves lenders time and effort, making the loan collection process more efficient and accurate.

Insights Into Payment Behaviour and Trends 

Data analytics can help lenders better understand borrower behaviour and payment trends. By analysing this data, lenders can identify any potential issues and proactively address them. For instance, a borrower may clear out accounts prior to repayment dates and the system will be unable to process a repayment. This insight can help in reducing the number of defaulted loans and improving the overall loan collection process. 

Configure provides detailed insights into a borrower’s repayment activity from number of open loans, total pending repayments to total overdue repayment. Collection on Configure can be automated based on set frequency. Loan requests can only be successful on Configure when borrowers attach a payment method.

3. Cultivate a Collaborative and Empathetic Culture

The loan collection process can be stressful for both lenders and borrowers. To reduce stress and make the process smoother, foster a collaborative and empathetic culture in the following ways:

Promote Open Communication and Transparency

Lenders should promote open communication and transparency with their borrowers. This can include explaining the loan repayment process, answering questions, and being upfront about any potential consequences of defaulting on a loan. A lack of borrower education can lead to more losses. Borrower education, on the other hand, helps to improve collection since the borrower knows how the loan product works, the benefits of paying on time and the implications of obtaining a new loan. 

Provide Training and Support for Collection Teams

Collection teams play a crucial role in the loan collection process. Lenders should provide their collection teams with adequate training and support ensuring that they have the skills to handle collections based on the borrower characteristic. Some essential skills required for a collection officer include good negotiation and persuasion skills, experience working with targets, experience in the microfinance industry, debt collection skills, strong analytical and problem solving skills.

Encourage a Solution-Oriented Approach to Loan Collection

Lenders should create loan recovery policies that encourage solutions. This could involve creating a repayment plan that works for both parties or temporarily suspending late fees. Creating a solution-oriented approach will limit friction between lenders and borrowers and promote goodwill. With this approach, loans are more likely to be repaid in full and on time.

Conclusion 

Improving the loan collection process is daunting, but it is an important part of any successful lending business. 

By setting up clear procedures, creating  efficient communication channels and utilising technology to automate processes where possible, lenders can increase their collection rate with minimal effort.

Unethical collection methods can harm a lending business. Thus lenders should avoid any tactics that could be regarded as a shady means of loan retrieval. Lending businesses will thrive with proper communication and relationship management with borrowers.