Management of Hardcore Delinquent Accounts
Process and Procedures in Hiring Collectors
I. In-house Collectors
Feature:
· Transfer or promote experienced internal staff
Process:
1. Bank conducts an internal recruiting and hiring process following Personnel Policies & Procedures.
2. Training and orientation provided to collections officers.
3. Delinquent Accounts are classified by the Remedial Management Unit and assigned to collections officers. A collection officer’s portfolio should be structured to follow the policies of the department. For example, if there is specialization for “very difficult to collect” accounts, those accounts may be assigned to a seasoned or senior staff. Alternatively, staff may be allocated a combination of accounts in their portfolio that is allocated by branch or geographic area. Special attention should be placed on recovering loans that are not “very past due” or “soft delinquent accounts” so that the bank can recover as much of its capital as possible.
4. The borrower’s statement of accounts serves as the basis for collection. Statement of accounts should be regularly updated.
5. The branch in which the delinquent loan originated should provide all necessary assistance to collections officers to support loan recover, including retrieving documents including photocopies of application form, ID photo, a sketch of residence/business location and other pertinent documents.
6. The bank should reimburse staff for expenses related to collection efforts (i.e. transportation).
7. Collections received must be remitted on same day of collection except in cases wherein remittance is impossible like collections made after office hours and during weekends. In such cases remittance may be made the next banking day.
8. For the purpose of internal auditing, collections officers should provide provisional receipts to loan payments collected in the field. These receipts should be submitted to the cashier or appropriate personnel at the collection day or the following business day. It is recommended that an internal audit be conducted periodically of all staff responsible for collecting field payments, to prevent fraud. Other internal control policies should be incorporated as necessary.
9. The Remedial Management Unit Head monitors collector’s performance and requests the submission of delinquent borrower’s status report to document collection officer’s activities against targets. This report provides information on a borrower’s current financial condition and whether the loan is still classified as collectible.
:
Advantages:
1. Collection activities are under the direct supervision /control of the bank.
2. This option may have less risk of fraud, because as tenured employees, the employees may have a loyalty to the bank and may not want to jeopardize their position.
3. Collection officers can be assigned other job functions as necessary to supplement collection responsibilities.
4. Disciplinary action can be imposed on internal staff.
Disadvantages
1. Fixed cost on the part of the bank(salary/fringe benefits/retirement fund/bonuses plus incentives)
2. Traveling expenses related to collection activities shouldered by the bank. In some instances the bank provides motorcycle plus gasoline to its collectors.
3. Performance may deteriorate upon permanency of employment due to a fixed salary which is not dependent on the amount of collection (an attitude wherein he will be receiving his salary whether he can collect or not)
4. The bank may be forced to offer additional incentives to collectors in order to prop up or improve collection like commissions on top of their regular salary. This scheme would again entail additional cost on the part of the bank.
5. Limited and non flexible time a collector can work on. Bank office hours normally starts at 8:30 AM to 5:00 PM from Mondays to Fridays which might not fit on some borrowers business/cash cycle, unless the bank will adjust the time shift of some of its collectors or the collector itself on his own initiative would overextend his working hours/days in order to collect from those borrowers.
II. Commissioned Collectors
Features:
· Hire externally rather than transferring or promoting existing staff
· Commission based fee ranging between 20%-25% of total collection.
Process:
1. Bank conducts recruitment process through advertisements and referrals.
2. The number of collectors hired should be proportionate to the number of delinquent accounts assigned (ex. ratio of 1 collector for every 50 borrowers).
3. Bank executes a contract between the bank and the collector. The contract typically has an initial life of three months and is automatically renewed every three months unless terminated by the bank. Renewal of contract should be based upon performance of the collector, as determined by criteria and targets set by the Remedial Maangement Unit, Human Resources and/or Senior Management. The bank may further impose exclusivity of contract (collector is not allowed to offer his services to other banks/establishments).
4. Requires posting of bond. Bank may shoulder the cost of the bond. It is usually in the form of a surety bond.
5. Training and orientation provided to collections officers.
6. Collectors Issue authorization letters to collect as well as identification card (separate from those being used by regular employees). ID/authorization letter must be surrendered/ recalled upon resignation or termination of the collector.
7. The borrower’s statement of accounts serves as the basis for collection. Statement of accounts should be regularly updated.
8. The branch in which the delinquent loan originated should provide all necessary assistance to collections officers to support loan recover, including retrieving documents including photocopies of application form, ID photo, a sketch of residence/business location and other pertinent documents.
9. The bank should reimburse staff for expenses related to collection efforts (i.e. transportation).
10. Collections received must be remitted on same day of collection except in cases wherein remittance is impossible like collections made after office hours and during weekends. In such cases remittance may be made the next banking day.
11. Delinquent Accounts are classified by the Remedial Management Unit and assigned to collections officers. A collection officer’s portfolio should be structured to follow the policies of the department. For example, if there is specialization for “very difficult to collect” accounts, those accounts may be assigned to a seasoned or senior staff. Alternatively, staff may be allocated a combination of accounts in their portfolio that is allocated by branch or geographic area. Special attention should be placed on recovering loans that are not “very past due” or “soft delinquent accounts” so that the bank can recover as much of its capital as possible.
12. Monitor that daily collections are remitted on the same day. In some instances wherein remittance is impossible due to unforeseen events or distance, the latest would be the next banking day.
13. The bank monitors performance regularly and grants commissions on a weekly, monthly, or quarterly basis.
14. Withdraws non moving accounts from collector after the lapse of collection period (time given to a collector to extract payment from a borrower, it usually extends up to 90 days) and assign it to other commissioned collectors. The bank must require the collector to surrender those accounts which they deemed collection is impossible (ex. missing/dead borrower) even before the lapse of the collection period.
15. Require collectors to submit status of delinquent borrowers which includes information as to whether the borrower has/or no more capacity to pay ,missing ,dead and other pertinent information which would help the bank in its decision making .This report must be required at least on a monthly basis
16. For the purpose of internal auditing, collections officers should provide provisional receipts to loan payments collected in the field. These receipts should be submitted to the cashier or appropriate personnel at the collection day or the following business day. It is recommended that an internal audit be conducted periodically of all staff responsible for collecting field payments, to prevent fraud. Other internal control policies should be incorporated as necessary.
17. The Remedial Management Unit Head monitors collector’s performance and requests the submission of delinquent borrower’s status report to document collection officer’s activities against targets. This report provides information on a borrower’s current financial condition and whether the loan is still classified as collectible.
18. Terminate non-performing collectors. Upon termination, accounts managed by these staff are assigned to other collectors. Borrowers are properly informed.
19. File necessary criminal case against erring collector if warranted in order to set an example to other collectors.
20. Apply /claim bond posted by erring collector against his accountability with the bank.
Advantages:
1. No fixed cost on the part of the bank. Fee is based on a “no cure no pay” policy. In general commissioned collectors are responsible for their own traveling expenses and provide their own means of transportation(ex .motorcycles) except in cases wherein the bank provides initial mobilization expenses .Commission rate is between 20-25% on total amount collected .(present industry practice).
2. Significant increase in past due collections may be achieved. .Intensive collection efforts on the part of the collectors since their income depend on what they can collect. Depending on the selection process and commission rate being offered, the bank can hire skilled/seasoned collectors(those with several collection experiences with several financial or lending institutions)
3. Flexibility of time. In as much as they are not regular employees of the bank they have no permanent time and fixed schedule to follow in their collection activities, thus they can adapt to borrower’s demand.
4. Commissioned collectors (those who are well experienced) can provide inputs to advance collection efforts by the bank In-house collectors can acquire skills/art of the trade from those seasoned commissioned collectors.
Disadvantages:
1. The bank has no direct control and supervision on the manner of collection by commissioned collectors. It may create a negative image on the part of the bank in cases wherein the collector uses intimidation and violence in extracting payment from those delinquent borrowers
2. The bank is susceptible to suit arising from actions committed or inflected by commissioned collectors on delinquent borrowers as they act as agent of the bank..
3. High probability of non remittance of collections as these collectors are not regular employees of the bank .A good selection process plus good internal control measures can minimize these occurrences. Terminate immediately erring collectors and institute criminal case so as to set an example to other collectors.
4. It may entail additional administrative work on the part of the bank like computation of collector’s commission and other related administrative work/reports like monitoring reports and collector’s performance report.
III. Collection Agency/Collection Lawyer
Feature:
· Hire externally rather than transferring or promoting existing staff
· Bank offers a commission-based fee. The minimum commission rate is set at 25% of total collection which may include other incidental expenses like cost of mailing of demand letters
· There may be a fixed monthly retainer’s fee for this type of consultant. Services to be included within the retainer may include legal services plus other fees incurred in filing of cases (this should be negotiated within the contract)
· The bond requirement is shouldered by the collection agency)
Process:
1. The bank solicits the services of a specialized agency or consultant following Personnel Policies & Procedures.
2. The bank executes the contract between the bank and the agency. The contract usually has a period of one year and is automatically renewed unless a notice of termination is served by both parties.
3. This assignment require the posting of bond which may consist of:
a. Hold-out on deposits maintained by the agency with the bank to be withdrawn only upon termination of the contract.
b. Performance bond issued by a reputable bonding company.
c. Other forms of bond which the bank and the agency may agree upon.
4. For the assignment of accounts, the bank should assign accounts classified as “hardened,” typically past due for 90 or more days and accounts previously written off. The contracted agency will classify these accounts and organize collection independent of the bank.
5. The bank should require the contract agency to issue provisional receipts to clients for loan payments. These receipts serve as an internal control mechanism. Unused provisional receipts must be recalled by the bank upon termination of the contract.
6. Issue letter of authorization to collect. Borrowers must be properly informed in the event that contract with the agency is terminated
7. Provide borrower’s current statement of account which would serve as the basis for collection. Statement of accounts must be regularly provided to the agency and updated at least on a monthly basis.
8. Provide necessary documents/information on the borrower/co-maker like photocopies of application form ,photo of the borrower ,sketch of residence/business location and other information which would be useful in extracting payment from the borrower.
9. Monitor that daily collections are remitted by the agency the same day ,unless there is an agreement as to the mode of remittance by the said agency.
10. Compute give commission on agreed schedule It may be weekly, semi-monthly or monthly
11. Review agency performance. Withdraw from the agency non moving accounts after the collection period and assign it to other agency or commissioned collectors if there are any. Performance review would also serve as the basis for renewal /termination of contract.
12. Require agency to submit borrower’s delinquency status report preferably on a monthly basis. This report contains information as to borrower’s current financial condition and assessments of accounts assigned to the agency. It may also contains recommendations on what to do on those accounts and steps to be taken to enforce collection..
13. Institute control measures based on bank’s internal control policy.
Advantages:
1. It is more organized as compared with commissioned collectors as the agency is normally run by professionals/lawyers who gained extensive knowledge on collection matters. Collection agencies sometimes employ the services of free-lance collectors, moonlighting law enforcers, retired military men just to add teeth on their collection efforts.
2. The agency may provide insights, new collection techniques and strategies which may be tailor-fitted on the bank’s delinquent loan portfolio.
3. No fixed cost on the part of the bank except on fees which had been previously agreed upon (ex. skip tracing, mailing of demand letters, filing of cases). Minimum commission rate at 25% of total amount collected based on present industry practice.