It could be said that a collections department is only as good as the staff working in it. A well-designed collections strategy weighs the strengths and weaknesses of the institution, addressing general questions such as whether collections should be handled internally or externally through a third party as well as considering what measures should be in place to ensure staff are properly trained, motivated, and measured. Also, it can promote healthy competition among the collections team.
Determine the Appropriate Collections Procedures
Collections activities command an immense amount of time and resources in order to be implemented well. Lenders have a choice to make—whether to hire a specialized collections agency or to create an internal collections unit. Before deciding, however, the organization must analyze its options carefully, noting available resources, costs, and benefits associated with each path and the existence of collections agencies in the market. The following tables list potential advantages and disadvantages of both.
Option 1: Outsourcing to Collections Agencies
- Collections agencies offer trained and specialized staff that are able to dedicate the appropriate time to collections activities.
- Costly control and supervision of collections activities are transferred to the collections agency.
- The client is often intimidated by the appearance of a new collections agent or company - a signal that it is no longer business as usual.
- Where the relationship between the customer and the loan officer is so friendly as to impede collections, a new face might help restore discipline to the process.
- A collection agent might help redeem the process where the relationship with the customer has been so strained and emotionally charged as to impede resolution
- The agency is more prepared to work through a variety of collections approaches, including call centers, collectors, on-site collections agents, and collection points.
- Collection agencies may not be available in all markets or countries.
- They may have little interest in client relationships, making client “reactivation” difficult.
- Communication between the lender and the collections agency may become complicated. There may be duplication of efforts or contradictions presented to the client.
- External collections agents may have less success collecting if the client fails to “acknowledge” them, alleging they have no authority in their case.
- External collections agents may not adhere to the same ethical standards as promoted by the lender when dealing with clients.
Option 2: Creating an Internal Collections Unit
- Internal units have more thorough knowledge of the client and the market.
- They may be more careful to maintain a relationship with the client, leading to possible client reactivation.
- Internal units facilitate internal feedback on the lending process as a whole.
- Staff may feel more committed to the organization and to its objectives.
- The lender’s internal database holds information for the development of predictive collections.
- The lender retains control over the client interface, thus having more direct control over ensuring collections practices remain in line with institution’s ethical standards.
- Internal units require specialized staff training that few lenders have the time or resources to offer. Supervision of collections activities and staff also imposes high costs.
- There is a low personal and professional recognition for collections staff. Collections has a reputation of being not very enjoyable, and, in some cultural contexts, quite negative. In one of the banks we worked for the Loan Recovery Unit was nicknamed "Siberia".
- An internal unit distracts from promotion and analysis activities, especially during periods of expansion.
- Lenders have little experience in collections. Even when a special unit is formed, it is typically manned by staff from operations, legal, risk management, internal control and others who lack relationship management experience and tend to approach their jobs with a negative mindset.
Select and Train Staff Members
Once the decision is made to either create an internal collections unit or work with an outside collections agency, the institution must identify the position and roles in the collections process, if any, that should be filled by internal staff and select accordingly based on the appropriate profile for each position.
It is important to define the roles and responsibilities of each participant in the collections process (e.g. field agents, call center, collections agencies, attorneys). This includes exact levels of participation. For example, call-center staff may contact the client, but should not negotiate payment, as they are not trained to take on this task.
Training is vital to achieving successful loan collections and good customer service. It is important to educate staff members in techniques and strategies, such as how to address the typical arguments of the delinquent client, how to relate to difficult people, what types of clients exist, tips and verbal cues for communication, the typical profile of the delinquent client, and negotiation techniques. Additionally, lenders must ensure staff members have a full understanding of the accurate application of collections tools and knowledge of relevant legal resolutions.
Create Staff Incentives
Incentives are established to motivate staff to direct their considerable talents to obtaining desired results. In addition to improving the effectiveness of collections, incentives may also promote a workplace environment of healthy competition. The incentives could be defined based on results of collections activities, according to changes in percentages of past-due amounts at each different stages of delinquency.
A simple system of “commission for collections” could be designed to include higher commissions for the collections of more delinquent loans. Incentives could be monetary or in-kind, depending on what form best suits the environment. Alternatively, the collections goal could be measured based on the reduction of monthly provision expenses.
Identification of clear and objective targets and parameters are crucial in order to define incentive systems/schemes, design of collections policies and strategies as well as measure success and compliance. In order to comply with these objectives, it is important to use earlier warning signals as preparedness for delinquency, such as a PAR (portfolio at risk) of 1 day or 2,3, and 5 days, rather than the traditional PAR of 15, 30, and 60 days.
Earlier delinquency targets and parameters aid to establish a collections culture of zero delinquency tolerance and also contribute in identifying past-due loans quickly where the possibility of recuperation of delinquent loan are higher during early stage and will help to avoid the masking of an increase in delinquency through portfolio growth, allowing immediate actions to take place.
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