Strengthening Collections: A Vital Aspect of Financial Health

As December arrives, bringing with it a season of merriment and a slowdown in pace, especially in the southern hemisphere, it’s crucial for businesses, particularly in lending and collections, to maintain vigilance and careful preparation.

Understanding the Volatility in Lending and Collections

In the lending sector, the reliance on application scorecards to assess risk is substantial. These scorecards, while effective, come with an inherent unpredictability in default rates. For example, a through-the-cycle default rate of 1% can fluctuate significantly due to various factors, including the efficacy of collection strategies. This volatility is even more pronounced in higher-risk bands, where a 10% default rate could swing between 5% and 15%, having a more substantial impact on businesses.

The Unpredictable Elements and Collections Operations

Various factors, including macroeconomic changes and the effectiveness of collections operations, contribute to this volatility. It’s essential to recognize that the process of lending doesn’t end with disbursing loans. Ensuring repayment is equally crucial, and this is where strong collections analytics, strategies, and technology play a pivotal role.

The Underinvestment in Collections

Despite its importance, collections often suffer from underinvestment in terms of resources, technology, and talent. As a non-driver of new growth, it tends to become an afterthought. However, strategic collections demand significant investment in analytics, processes, and technology, much like originations.

The Holiday Season: A Unique Challenge

The holiday season presents unique challenges. There’s a different cohort of customers seeking loans, often for seasonal spending, followed by a surge in loan demands in January for expenses like school fees. This period also sees reduced collections capacity due to staff leave and customers being less responsive.

Key Considerations for Managing Collections

1. Analytics: Investing in analytics is crucial. It helps unlock insights that drive strategies and reduce write-offs.
2. Reporting: Effective reporting is foundational. It provides insights into operation performance and helps fine-tune strategies.
3. Segmentation: Tailoring collection methods based on customer behavior and arrear stages is essential.
4. Technology: Embracing technology streamlines the collections function. Tools like diallers and collections engines are invaluable.
5. Process: Efficient processes are vital. They should be integrated with core banking systems for operational efficiency.

Investing in collections capability is not just about reducing write-offs; it’s about setting your business up for scalability and success. As the festive season approaches, it’s time to review and reinforce your collections strategies.

Happy holidays, and here’s to a well-deserved rest and a robust start to the new year!