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.&nbsp;



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.&nbsp;



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. 



<h2 class="wp-block-heading">How to Measure Debt Collection Performance</h2>



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]:



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



<ul>
<li>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.&nbsp;&nbsp;</li>
</ul>



<ul>
<li>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.&nbsp;</li>
</ul>



<ul>
<li>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.</li>
</ul>



<ul>
<li>Profit per Account [PPA]: How much overall revenue is made by each account.</li>



<li>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.</li>



<li>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.</li>



<li>Amount collected per collections employee: This is an average if the total amount collected across all collections employees measuring work quality and productivity.</li>



<li>Delinquent accounts per collections employee: The total number of delinquent accounts divided by the total number of employees in the Collections department.</li>



<li>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.</li>
</ul>



<ul>
<li>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.</li>
</ul>



<ul>
<li>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.</li>
</ul>



<h2 class="wp-block-heading">Recovery Methods with Adverse Effects</h2>



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.&nbsp;



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



<ol>
<li>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.</li>
</ol>



<ol start="2">
<li>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.</li>
</ol>



<ol start="3">
<li>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&#8217;s contacts. Some carry out their threats and circulate a defamatory poster intended to shame the debtor.</li>
</ol>



<ol start="4">
<li>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.</li>
</ol>



<h2 class="wp-block-heading">3 ways to Improve Loan Collection</h2>



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



<h3 class="wp-block-heading">1. Streamline Communication with Borrowers</h3>



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. <a href="https://www.getconfigure.io/" target="_blank" rel="noreferrer noopener">Configure loan management software</a> simplifies the process of automated reminders using multiple communication channels such as email and SMS.&nbsp;Configure also sets up automated messaging. Lenders can choose the frequency and other criteria.&nbsp;



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. 



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1024" height="536" src="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Contact_Borrower-1-1024x536.jpg" alt="" class="wp-image-249" srcset="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Contact_Borrower-1-1024x536.jpg 1024w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Contact_Borrower-1-300x157.jpg 300w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Contact_Borrower-1-768x402.jpg 768w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Contact_Borrower-1-1536x804.jpg 1536w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Contact_Borrower-1-2048x1072.jpg 2048w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Contact_Borrower-1-1200x628.jpg 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure>







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.



<a href="https://blogs.worldbank.org/allaboutfinance/do-relationships-matter-evidence-loan-officer-turnover" target="_blank" rel="noreferrer noopener">Personal relationships are crucial to reduce credit constraints and improve entrepreneurs’ incentives to repay.</a> 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.



<h3 class="wp-block-heading">2. Leverage Technology and Data Analytics</h3>



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.



<a href="https://www.getconfigure.io/">Configure</a> 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.



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1024" height="536" src="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Repayments-Page-1-1024x536.png" alt="" class="wp-image-251" srcset="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Repayments-Page-1-1024x536.png 1024w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Repayments-Page-1-300x157.png 300w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Repayments-Page-1-768x402.png 768w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Repayments-Page-1-1536x804.png 1536w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Repayments-Page-1-2048x1072.png 2048w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Repayments-Page-1-1200x628.png 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure>



Insights Into Payment Behaviour and Trends&nbsp;



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.&nbsp;



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.



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1024" height="536" src="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Configure-Dashboard-1024x536.png" alt="" class="wp-image-252" srcset="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Configure-Dashboard-1024x536.png 1024w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Configure-Dashboard-300x157.png 300w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Configure-Dashboard-768x402.png 768w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Configure-Dashboard-1536x804.png 1536w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Configure-Dashboard-2048x1072.png 2048w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/03/Configure-Dashboard-1200x628.png 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure>







<h3 class="wp-block-heading">3. Cultivate a Collaborative and Empathetic Culture</h3>



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.&nbsp;



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.



<h2 class="wp-block-heading">Conclusion&nbsp;</h2>



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



By setting up clear procedures, creating&nbsp; 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.

3 ways to improve loan collection process

Persistent inflation which has increased the cost of funding and made repayment difficult [for consumers] has affected the margins of most lending operations, forcing them to explore alternative ways to grow their profit. Exploring measures to drive up profits is commendable but some of the measures lenders adopt chieve the opposite. An example is lower interest rates and non-adherence to the stipulations of the lending policy in order to get more customers. There are measures lenders can adopt to increase profitability, especially in an uncertain economy. In this article, we’ll share two of them which are reduced PAR and strategic cost-cutting.



<h2 class="wp-block-heading">What strategies can lenders [MFBs, MFIs, Digital lenders] adopt to ensure they remain profitable in an uncertain economy?</h2>



Before we share practical ways to run a profitable lending operation in an austere economy, let’s briefly share how economic, social and political factors affect the ability of lenders to thrive.



Political Factor: In some countries, the government (or party in power) set up and manage microfinance banks. This is not surprising as microfinance banks are vehicles the government utilize to extend credit and other financial services to underserved communities. However, most microfinance banks are not used for this purpose. Instead, they are used to advance the agenda of the administration in power, which more often than not, is contrary to how an MFB should operate. For instance, a state may have thirty non-functional MFBs. These banks remain in operation because they intend to sell their licenses.



Economic Factor: Economic factors like high and prolonged inflation make it difficult for borrowers to repay their loans. This prolonged economic hardship combined with the lack of consequence for default increases NPLs (Increased NPLs threaten the continuity of lending business. This is because the lender will run out of money to lend and may not be able to pay for operational costs). It is common industry knowledge that borrowers are unwilling to pay their loans. But this unwillingness to repay a loan is addressed through severe consequences that force the borrower to repay. Unfortunately, these consequences and their enforcement are absent in emerging economies. This emboldens serial borrowers who devise different ways to defraud borrowers.



Social factors: When borrowers use the loan for the agreed or specified purpose, they can easily repay the loan. But most times, the reverse is the case. Borrowers divert the loans, going as far as using them for frivolous activities like hosting parties.&nbsp;



As mentioned previously, one of the drivers of this behaviour is the lack of consequences for default. For instance, in developed economies [which operate primarily on credit], the ability to access loans and other forms of credit relies on a good credit score. This being the case, borrowers are careful and avoid situations that will put a dent in their credit scores. Another factor that points to a lack of consequence is the absence of legal actions. Nigeria for instance set up a small claims court to address issues like loan default. But these courts are not decisive in their rulings and borrowers seldom abide by the rulings of the court.



P.S. Another way lenders can thrive is to reconsider their approach to portfolio management. In most organizations, loan officers manage the portfolio. When these officers leave, the bank or lending business loses the portfolio because there’s no one managing the portfolio. Once a customer knows that the account officer is not in charge of the loan, they lose the willingness to repay. Therefore, every lending business needs to restructure the process so that in the event that a loan officer is unavailable, someone else takes charge of the loan. The loan should not be the responsibility of the loan officer, but that of the business.



Now that we’ve shared some of the challenges that impede the progress of lenders, here are some actionable strategies you can adopt to grow the profitability of your lending business.



1. Create loan products you’re knowledgeable in. To succeed, you need to become tactical. This means creating loan products you have deep expertise in so that you can recover the loans easily. For instance, some lenders may offer business loans because they heard it’s lucrative even though they don’t have the required skills nor sufficient understanding of the SME sector.



Creating loan products that you’re experienced in is important because the economy is unstable. <a href="https://tradingeconomics.com/nigeria/inflation-cpi" target="_blank" rel="noreferrer noopener">Inflation is currently at 21% up from the usual 10%</a>. This is an indicator that people may not have money in the near future. So creating loan products for sectors you’re familiar with is a way to minimize risk as you’re sure of a high recovery rate and the interest will cover the losses. In a period of economic uncertainty, it is inadvisable to explore new markets or unfamiliar loan products. Instead, create a plan that ensures that your risk criteria can accommodate unexpected losses.



2. Strict monitoring of portfolio performance. We cannot overemphasize the importance of loan monitoring. Have a process for identifying high-risk portfolios as well as an action plan to mitigate this risk. In addition to portfolio monitoring, ensure you have an experienced collection team that constantly follows up with customers. This is necessary because most borrowers are unwilling to repay their loans.



3. Increase your risk appetite. Analyse your portfolio to uncover trends. With these insights, you can adopt new strategies that address areas of weakness or strengthen the areas where you’re exceeding expectations. Still on risk appetite, identify viable sectors to lend to. For instance, if you offer salary loans, bankers and telecoms workers are believed to be less risky. Continuously use data to analyze the risks in a given sector, and use this data to make your business decision. Increasing risk appetite is not the same as taking on excessive risks. Rather, it is close and continuous monitoring of how you lend and use these insights to make decisions.



<h2 class="wp-block-heading">3 Strategic cost-cutting measures that don’t compromise growth of the loan portfolio</h2>



<ol>
<li>Accommodate remote work. If you’ve not tried remote work, you may be hesitant to try it because you don’t know how to measure performance. If this is the case, set up recurring check-in with your team where they share what they’re working on. Remote work minimizes the number of times people come into the office, helping you to reduce operational costs</li>



<li>Monitoring of expenses and cost management. Ensure your control unit monitors expenses and develops strategies to minimize costs. Businesses work with a budget streamlined to help them achieve business results for a year, quarter or month. Put control measures that manage costs and ensure that there are no excesses. And also have a plan for managing/accommodating excesses. Another piece of advice for your control unit is to compare prices when choosing vendors and where possible,&nbsp; buy directly from suppliers. The control unit should ensure that the company is following a budget and that this budget is cut to the barest minimum. Finally, appraise your control unit on how adept they are at meeting budget.</li>



<li>Reduce employee turnover. Just like in customer acquisition, it is more expensive to hire new staff than to retain existing ones. Therefore, compensate your staff fairly and create an enabling work environment for them. Finally, employ more people on the revenue side o the business as this will help offset the costs of people in the back office side.</li>
</ol>



<h2 class="wp-block-heading">4 strategies for keeping NPLs to a minimum</h2>



Loan repayment is critical to the success of any lending business. This is because a high repayment rate reduces PAR, increasing your profits and giving you more money to disburse. Therefore, the first step to increase profits is to keep NPLs to a minimum. Here are some ways to do that.



1. Enforce strict adherence to your credit policy. This is important because in order to meet targets, some credit officers ignore the stipulations of your credit policy, forgetting the credit policy defines risks that they can take and ensures that the business or bank can recover disbursed loans.&nbsp;



2. Another way to reduce your NPL, also known as PAR is to look beyond bank statements during the decisioning stage as they are insufficient in determining a borrower&#8217;s character. In addition to <a href="https://evolveblog354019029.wpcomstaging.com/2022/10/19/how-to-choose-the-right-bank-statement-analyser-for-your-lending-business/" target="_blank" rel="noreferrer noopener">bank statement analysis</a>, conduct further research to ensure that the information in the bank statements reflects the true state of the business. Most times, this investigation will reveal that contrary to the bank statement, the borrower is overleveraged and will be <a href="https://evolveblog354019029.wpcomstaging.com/2022/11/28/how-to-determine-a-borrowers-ability-to-repay-a-loan/" target="_blank" rel="noreferrer noopener">unable to repay the loan</a>.



If your lending policy requires physical visits as part of its process, ensure that you have easy access to the borrower’s building. If a borrower lives in a gated community where you require security clearance before gaining access, recovering the loan in case of a default will be difficult as the borrower can easily rescind your access to their residence.



3. Outsource recovery. In the absence of a recovery team, outsource delinquent loans to a collection agency.&nbsp;&nbsp;



4. Don’t assume collaterals guarantee repayment. When collateral seems solid, you’re prone to ignore other checks because you feel that the collateral can cover the loan in the case of a default. This is not always the case. Your primary responsibility is to ensure that the customer does not default and that there’s never any reason to resort to collaterals to recover the loan. To do this, check the customer&#8217;s credibility, capacity, income and financial statement. Collateral does not render these processes irrelevant.



<h2 class="wp-block-heading">How technology reduces PAR and lowers costs</h2>



<ol>
<li>When you adopt technology, ensure that you’re not using it to expedite disbursements as most lenders do. In addition to easy disbursement, choose software that makes it easy to recover loans. For instance, using technology, you can aggregate a borrower&#8217;s data, identifying all the bank accounts they’ve used in applying for loans at different points in time. When the customer defaults, you can periodically attempt to debit all the borrower&#8217;s bank accounts in your system until you recover the loan. You cannot do this without technology.&nbsp;</li>
</ol>



<ol start="2">
<li>Technology, though important, does not eliminate risk and underwriting. Instead, it enhances it. An underwriting process may state that customers need to provide two debit cards or that during the application, a debit mandate is required. With these requirements in place, you’re in a position to choose the best software that supports these requirements.&nbsp;&nbsp;</li>
</ol>



<ol start="3">
<li>Another way technology reduces PAR is through scoring. When borrowers apply for a loan, AI analyses their applications and based on that, score them. This streamlines certain risk criteria for the borrowers and reduces NPL.</li>
</ol>



<ol start="4">
<li>With technology, you can give your customers multiple repayment options, enabling them to repay their loans using the most convenient method. This encourages repayment.&nbsp;</li>
</ol>



<ol start="5">
<li>Technology also speeds up disbursement time. Sometimes, the reason for NPL is slow disbursement time which makes customers unwilling to repay their loans [on time]. Money has a time value. So when disbursement is slow or late, there’s a possibility that the customer will receive the money after the need has been met which makes repayment difficult. Leverage the right technological infrastructure to speed up disbursement time.</li>
</ol>



Any lending business regardless of its size can increase its profits and ensure business continuity. The primary way to do this is to reduce non-performing loans drastically and create strategies that save costs for the business.

How to increase the profitability of a lending business.

Strategies for making your lending business more profitable

Credit checks that reveal a borrowers&#8217; capacity and creditworthiness are part of every decisioning process. However, sometimes, borrowers are unable to repay the loan and default on their payments. Loan default can have serious consequences for the lender.&nbsp;



With a higher potential of non-performing loans [NPL] and a huge amount of portfolio at risk [PAR] leading to loss of business profits, it is important to know how to recover the loan from defaulters. In this article, we will discuss how lenders can recover loans from defaulters.



<h2 class="wp-block-heading">What is loan default?</h2>



Loan default occurs when a borrower is unable to repay the loan according to the terms agreed upon in the loan agreement.&nbsp;



It is important for the lender to take prompt action to recover the loan because the longer the default continues, the harder it becomes to recover the loan.



<h2 class="wp-block-heading">How to prevent a loan default</h2>



Preventing a loan default is essential to maintain the stability of the business. It is also important to prevent incurring additional costs from hiring loan recovery officers or hiring a debt recovery company.



<figure class="wp-block-image size-full"><img decoding="async" loading="lazy" width="900" height="378" src="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/02/steps-to-prevent-a-loan-default_.jpg" alt="" class="wp-image-218" srcset="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/02/steps-to-prevent-a-loan-default_.jpg 900w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/02/steps-to-prevent-a-loan-default_-300x126.jpg 300w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2023/02/steps-to-prevent-a-loan-default_-768x323.jpg 768w" sizes="(max-width: 900px) 100vw, 900px" /></figure>







Some steps to prevent a loan default include: 



<ol>
<li>Provide loans to borrowers who are likely to repay.&nbsp;</li>



<li>Lenders should carry out thorough credit analysis&nbsp; to judge the credit risk.</li>



<li>Banks should scrutinise borrowers to determine how risky a borrower potentially is for loan monitoring, loan repayments and loan renegotiation.</li>



<li>Micro finance institutions should create a monitoring system that highlights loan repayment problems quickly and clearly.</li>



<li>Lenders should conduct thorough appraisals to minimise defaults and ensure a high quality portfolio.</li>



<li>Before making a lending decision, the lender should consider the borrower&#8217;s proposition [that is the borrower’s work experience, references, credentials, overall reputation] and subsequent repayment in isolation from security.</li>



<li>Lending businesses should reinforce zero tolerance to default to account and collection officers.</li>
</ol>







<h2 class="wp-block-heading">Pre-recovery steps</h2>



Before taking legal action, the lender should take some pre-recovery steps to ensure that they have a solid case and to try to resolve the matter. Some of these steps include:



<ul>
<li>Verifying the default: The first step is to verify the default by reviewing the loan agreement and the borrower&#8217;s payment history. A default only happens when the borrower fails to make repayments according to the initial agreement. This can be ascertained if the borrower has missed several payments in a row. If the borrower is in default, the lender should try to contact the borrower to understand their financial situation and to try to reach a resolution. The borrower should be aware that defaulting on a loan is a civil charge for which they can be charged to court, reported to the credit bureau or even blacklisted.</li>



<li>Reviewing the loan agreement: A loan agreement is between borrower and lender but the burden of the terms of the agreement falls on the lender. In reviewing the loan agreement, you need to understand transaction information [exact amount owed to the lender, what borrower receives after promising to repay], payment information [frequency of repayments, acceptable payment methods], interest information [simple interest, compound interest or fixed interest rate]. If you accept prepayment in your lending business, state it under the loan agreement terms to be reviewed including all the clauses.</li>



<li>Trying to contact the borrower: The nature of the agreement will determine how you contact a borrower who has defaulted on a loan, either as a written agreement or not. Provided that all borrowers have written loan agreements, you need to follow the steps laid out in your loan recovery policy. Otherwise, contact the borrower through phone calls or SMS. If the borrower fails to respond, then the borrower can be served a letter that needs to be acknowledged to the registered address. Alternatively, you can make a report to the credit bureau and blacklist an unrepentant borrower.</li>
</ul>







<h2 class="wp-block-heading">Legal action</h2>



The second step is to serve the defaulters with a legal notice. This should include details of the loan amount and the timeframe for repayment. It should also clearly specify the consequences of defaulting on the loan.



<ul>
<li>Filing a lawsuit: The first step in the legal process is to file a lawsuit. If the court finds in favour of the lender, a court order will be issued for the borrower to repay the loan. However, if the borrower still fails to repay the loan, the lender can garnish their wages to repay the loan. To file a lawsuit, a lender will need a lawyer to obtain a writ of summons or originating summons along with its paperwork. A lawyer will consider the court with jurisdiction to hear the case. In Nigeria, loans less than ten million Naira are treated at the magistrate court. For matters exceeding ten million Naira, the high court will preside.&nbsp;</li>



<li>Obtaining a court order: The second step is to obtain a court order. The court order is obtained if the borrower fails to appear in court or if the borrower does not dispute the debt claim by the lender. To obtain a court order, the lender must be directly affected and must have the capacity to sue. Proper lending business registration affords the lender a right to sue a debtor. However, there is no standard time frame to get a final order from the first application date.</li>



<li>Garnishing wages: This is the last step when legal action has been taken and a lawsuit has been filed. A garnishee order is an option that the lender has to enforce a court judgement that mandates the borrower to pay. If the borrower still fails to repay the loan, the lender can garnish their wages to repay the loan. By enforcing a garnishee order, money is taken out of the borrower’s accounts by the banks so that the lender recovers his money.</li>
</ul>







<h2 class="wp-block-heading">Alternative methods</h2>



Legal action can be time-consuming and expensive, so the lender may consider alternative methods to recover the loan. Some alternative methods to recover loans include:



<ul>
<li>Negotiation and mediation: Negotiation is an important step to recover loan from defaulters. It is essential to listen to their grievances and payment plan before coming to a compromise. It is important to remember that the defaulters are in financial distress, making it necessary to negotiate in good faith. If negotiation fails, then mediation can be the next step. This involves bringing in a third-party mediator who can help both the parties reach an agreement. This can help the borrower come to terms with the lender and come up with a payment plan that is suitable for both.</li>



<li>Debt settlement: Debt settlement, where the borrower and lender agree on a reduced amount that the borrower will repay, can also be an option. Also called debt adjustment, it is the process where a delinquent debt is resolved for far less than the original amount owed. This means that the borrower agrees to pay a substantial amount of money to the lender as a lump sum. A lender can choose to hire a debt settlement firm to act on their behalf.</li>



<li>Selling the debt: A lender can sell the debt to a collection agency or debt buyer, who will then try to collect the debt on their behalf. Debt collectors can be hired to recover loans from defaulters. They have the expertise and knowledge to handle such cases, and can often be successful in recovering loans. It is important to ensure that the debt collection agency is certified and abides by the rules and regulations of the country.</li>



<li>Loan restructuring: Occurring in only when customers are unable to meet their debt obligations, the borrower negotiates with the lender to extend the loan tenure for the payment of the principal. Restructuring happens to alter an existing loan agreement. When a borrower is under financial distress which prevents them from timely loan repayment, debt restructuring is used to ease the borrower’s financial difficulty.&nbsp;</li>
</ul>



<h2 class="wp-block-heading">GSI Mandate as a loan recovery tool</h2>



GSI means Global Standing Instruction and it is a term used in relation to financial institutions. The Central Bank of Nigeria [CBN] introduced a GSI mandate as a way to ensure financial stability, extending its dragnet against loan defaulters.



The GSI mandate is a set of instructions carried out by a borrower who is a bank account holder which authorises the recovery of a loan amount specified by a lending institution across the borrower&#8217;s bank accounts. Commercial banks who are participating financial institutions benefit from this mandate since they can collect money across a borrower&#8217;s account linked by BVN.



According to the guidelines, the aim of the policy is to reduce non-performing loans, improving the credit repayment culture, watchlisting incorrigible debtors, enhancing loan recovery from all eligible accounts and wallets across the banking industry.



This policy applies to individuals and not to corporate entities. It should therefore be noted that the GSI policy is used as a last resort to recover loans from defaulters. When a bank has done all it can to recover a bad debt, then the policy authorises that checks across banks can be conducted to ascertain whether the borrower has money available in other bank accounts. It is at this point that a garnishment is carried out &#8211; after legal action to enforce the payment of an outstanding loan.



However, while the circular makes mention of “implementation by all banks and other financial institutions”, it does not appear to apply to micro finance institutions, Microfinance banks and other alternative lenders.&nbsp;



<h2 class="wp-block-heading">Conclusion</h2>



Loan recovery is an important process for lenders to ensure that they receive the funds that they are owed. By following the steps outlined in this article, lenders can recover their loans from defaulters and protect their financial interests. Prompt action is advisable as it ensures that the recovery process is smooth and effective.

How to recover loans from defaulters

Loan recovery is essential to every lending business. When loans go into default, it has a significant impact on the stability of the business. It is therefore necessary for lending businesses to have a solid loan recovery strategy that in place that minimise losses and ensures the overall growth of the loan portfolio. This article will uncover every part of a loan recovery strategy and what a loan recovery strategy should cover.



<h2 class="wp-block-heading">What is a loan recovery strategy?</h2>



A loan recovery strategy is a set of tactics and techniques used to recover unpaid loans. It includes debt collection policies, loan repayment techniques, and other debt collection strategies. A solid loan recovery strategy ensures the overall success of the business.







<h2 class="wp-block-heading">Examine your current loan recovery methods</h2>



The first step in creating a loan recovery strategy is to assess the current situation. This includes identifying areas of concern in the current loan portfolio, analysing default rates and trends, and identifying high-risk loan segments.&nbsp;



By identifying areas of concern, lending businesses can target their efforts and focus on the loans that are most at risk.



By default, though, some sectors are considered high risk sectors. Some of the businesses that fall within these category include electronics, online gaming, gambling, agriculture, travel and vacation services, event ticket brokers among others.&nbsp;



If a business has a chargeback rate over 1%, caters to the vulnerable or a global population, has recurring monthly charges and has very high sales volume, then the business is usually considered high risk.



<h3 class="wp-block-heading">3 shortcomings with most loan recovery plans</h3>



<ol>
<li>Lack of thorough analysis of current borrower picture: Many lenders are reducing their standards due to lender proliferation in the ecosystem. Hence, they sometimes do not carry out proper checks of their borrowers in their haste to lend. Without a clear and current borrower picture, it will be difficult to place the borrower within the repayment quadrant and know if they have the capacity and the willingness to repay a loan.</li>
</ol>



<ol start="2">
<li>Use of threats/ unethical methods: Due to pressure, many loan recovery officers employ unethical methods thereby sidelining the loan recovery policy. Using threats have sometimes yielded unpleasant results and does not always yield loan repayments.</li>
</ol>



<ol start="3">
<li>Lack of understanding of loan recovery policy: Lenders will benefit from providing thorough training especially to loan recovery officers. Without an in depth understanding of the loan recovery policy, it will be impossible for loan recovery officers to follow the principles already laid out.</li>
</ol>







<h2 class="wp-block-heading">Developing a loan recovery plan</h2>



Developing a loan recovery plan means setting clear goals and objectives for loan recovery, identifying key metrics to track progress, and developing a list of strategies and tactics to be implemented.&nbsp;



The plan should be specific, measurable, achievable, relevant, and time-bound (SMART). It is important to establish a clear roadmap and set achievable targets that are aligned with the overall goals of the business.



<h3 class="wp-block-heading">Steps to creating an effective loan recovery plan</h3>



Step 1: Establish Good Lending Practices



The first step to creating an effective loan recovery strategy is to establish good lending practices. This includes setting clear credit criteria and policies, creating a well-defined loan application and approval process and making sure customers are aware of the specific terms and conditions of their loan. This will help to ensure that customers understand what they’re signing up for and that they’re able to meet their obligations.



Step 2: Monitor Loan Performance



The next step is to monitor loan performance. This includes tracking payments, keeping an eye on delinquencies and evaluating creditworthiness. This will help you identify any potential issues early and take steps to address them before they become major problems.



Step 3: Follow Up on Late Payments



If a customer is late on a payment, it’s important to take action quickly. This could include sending out reminder emails or letters, calling the customer, or sending a representative to the customer’s premises. Taking prompt action is key to ensuring the customer pays back the loan on time.



Step 4: Develop a Repayment Plan



If a customer is unable to make their payments, it’s important to develop a repayment plan that works for both parties. This could involve offering the customer lower interest rates or extending the loan term. It’s important to ensure that the repayment plan is realistic and that the customer is able to adhere to it.



Step 5: Seek Legal Assistance



If all other efforts fail, it may be necessary to seek legal assistance. A good lawyer will advise you on the best course of action to take, such as filing a lawsuit or seeking a court-ordered garnishment. It’s important to remember that legal action should always be a last resort.



<h3 class="wp-block-heading">Identify clear metrics to track your progress</h3>



A lending policy details how your lending business operates. In like manner, your loan recovery policy should be detailed and contain specific ways to track your loan recovery progress.&nbsp;



Your loan recovery policy should contain:



<ol>
<li>Details on the loan</li>



<li>Loan recovery team&nbsp;</li>



<li>Loan recovery procedure</li>



<li>Precautionary measures for loans</li>



<li>Categorisation of debtors</li>



<li>Collateral management</li>



<li>Remedial procedures for delayed payments</li>



<li>Responsibility of remedial team</li>



<li>Types of letters to be issued to debtors</li>
</ol>



These are some of the metrics that your loan recovery policy should cover among other things. The more detailed your loan recovery policy, the more efficient your recovery team will be.



<h3 class="wp-block-heading">Strategies and useful tactics</h3>



Recovering loans quickly and efficiently is a challenge for many lenders. To increase your chances of recovering loans quickly and efficiently, you need to have the right set of tools and strategies in place.



This includes loan portfolio analysis tools, portfolio analytics tools, and data collection tools. These tools can help you identify trends in loan repayment patterns, analyse the risk associated with each loan and collect data that can be used to make informed decisions about how to manage your loan portfolio. With these best practices in place, you will be able to recover loans more quickly and efficiently.



Another useful strategy is using technology in the form of artificial intelligence (AI). Automation and AI technologies have revolutionised the loan collection process. With these technologies, lenders can now easily manage their loan collections and automate the entire process.&nbsp;



Automated payment reminder systems, AI debt collector software and automated debt recovery processes are just a few of the tools that lenders can use to leverage automation in their loan collection efforts. By using these tools, lenders can reduce manual labour costs while still achieving successful debt collection.&nbsp;



Additionally, automated processes can help to ensure accuracy in data collection and provide better visibility into customer accounts for more effective decision-making.







<h2 class="wp-block-heading">Implementing your loan recovery plan</h2>



Once the plan has been developed, it&#8217;s time to implement the strategy. This includes hiring the right people, communicating the plan to the relevant teams, training employees on new procedures and best practices, and implementing systems and tools to support the plan.



Some important skills for loan recovery officers include:



<ul>
<li>Good negotiation and persuasion skills</li>



<li>Experience working with targets</li>



<li>Experience in the microfinance industry</li>



<li>Ability to be thorough especially with regard to locating debtors&nbsp;</li>



<li>Debt collection skills</li>



<li>Strong analytical and problem solving skills</li>
</ul>



It is essential to have the right team in place to execute the plan and provide clear communication about the plan throughout your organisation. Training and education are key to success, and the right tools and technologies can support the process.







<h2 class="wp-block-heading">Monitoring and evaluating progress</h2>



Ongoing monitoring and evaluation are essential for the success of any loan recovery strategy. Regularly review progress and make adjustments as needed, measure success using key metrics you have defined, and identify areas of improvement and make necessary changes.&nbsp;



The loan recovery process is dynamic, and your lending business should be always ready to adapt and make the necessary changes that the market demands.



Further, a periodic audit of your business will provide areas where you can make necessary improvements in your loan recovery strategy based on real results.







<h2 class="wp-block-heading">Conclusion</h2>



Loan recovery is a crucial aspect of any lending business. It&#8217;s essential for lending businesses to have a solid loan recovery strategy in place to minimise losses and ensure the overall success of the organisation. It is important to establish good lending practices, monitor loan performance, follow up on late payments and develop a detailed loan recovery policy.

How to create a loan recovery strategy for a lending business

The success of every lending operation lies on its ability to identify its ideal customers and know their ability to repay. However, predicting a borrower’s capacity is difficult. This is either due to the absence of required data or limited knowledge of the data needed to determine a borrower’s repayment capacity.



In this article, we’ll cover how lenders can accurately predict borrower’s ability to repay.



<ol>
<li> Define your ideal borrower</li>
</ol>



Every lending institution has sophisticated data that define who its ideal customer is. Regardless of the sector or niche a lender focuses on, an ideal borrower should meet the five Cs of credit. They should have the capacity to repay the loan which is determined through the borrower’s DTI, debt-to-income ratio. An ideal borrower should also have capital, collateral and meet the conditions of the loan.



In addition to these, it is pertinent that they are creditworthy. There should have a repayment history acting as proof that they have taken some loans in the past and have repaid them successfully. Finally, an ideal borrower should possess the character and willingness to repay the loan.&nbsp;



<ol start="2">
<li>Determine a borrower’s cash inflow</li>
</ol>



In addition to the 5Cs of credit, another dimension used to define an idea borrower is cash flow. cashflow is important because capital and capacity most times, don’t translate to cash. A customer can have capital and capacity but no cash flow. This lack of cash flow is an impediment to repayment.&nbsp;



In consumer lending for instance, If the applicant is not employed, meaning that he does not earn a salary, regardless of character and willingness to repay, the applicant cannot meet the obligation. The same applies to SME lending. Business owners who have little or no stock and no cash inflow will be unable to repay even though they have character and are creditworthy.



Another non-financial criterion to consider when mapping an ideal customer is if the borrower meets the condition of the loan. The condition is so extensive and beyond interest rates. It answers the question “how does the applicant manage the business?”&nbsp;



When exploring the non-financial criterion, inquire about the time the business opens, its closing time, how it uses cash and the borrower’s experience managing that kind of business.



Another non-financial criterion is collaterals. When it comes to collateral, most lenders limit themselves to physical collateral. In addition to or in the absence of physical collaterals, lenders can hedge on other non-physical collaterals lenders like guarantors and social capital.&nbsp;



<ol start="3">
<li>Calculate the borrower’s debt-to-income ratio and obligations. </li>
</ol>



In some countries, the law stipulates that a loan should be 33.3% of a borrower’s earnings. To abide by this regulation,&nbsp; examine the borrower&#8217;s obligations including the loans they have with other lenders. It is also important to consider their savings as an obligation. A borrower may have a saving scheme or a standing order that is debited from their account at every particular time. It is important to tie repayment to this savings deduction.



For SME lending, the approach is slightly different. Stock taking and investigation into the borrower’s business and sector help to determine viability.&nbsp;



<h2 class="wp-block-heading">How to determine the repayment capacity of SME borrowers</h2>



<ol>
<li>In SME lending, it is imperative that the lender understands the business model of the customer. They need to understand the cash flow; What generates revenue for the business? what are the business&#8217; expenses? For example, the lender needs to understand if the business owner diverts for personal consumption or if all earnings are reinvested into the business.</li>
</ol>



<ol start="2">
<li>Every lender has to be cautious when analyzing an SME’s capacity. This is because the continuous inflow and outflow in the income statement account don’t always reveal the true state of the business. They need to be aware that there is bank cash flow and business cash flow. If these two are not separated,&nbsp; it is difficult to track the money that belongs to the borrower. To track the business cash flow, ask SME owners key questions about receivables and debtors. These questions are important because a business may have cash flow yet 80% is debt that will not be due in 30 days. This will affect their ability to repay.</li>
</ol>



<ol start="3">
<li>Another determinant of an SME’s ability to repay is supplier credit. For instance, A business owner&#8217;s revenue maybe 10 million. Out of this revenue, what actually belongs to the business is just 5 million but the lender has mistaken the 10 million contained in the bank statement as belonging solely to the business and has appraised the business owner based on that. This wrong appraisal will affect the business owner’s ability to repay.</li>
</ol>



This is called overfunding. Going back to our previous example, a borrower who is worth 5 million will appear to be worth 20 million contained in their bank statement while in the real sense, they are only making a commission on those sales, not the actual profits.&nbsp;



<ol start="4">
<li>The next consideration is payables. Payables provide insight into how often borrower pays for their purchases. If they have an extension of time to pay vendors to supply products It’s proof that they have enough liquidity to sustain repayment. On the other hand, if the borrower has high receivables and early payables, the borrower will be cash-strapped and won&#8217;t be able to meet up with their obligations. To lend successfully to SMEs, lenders need to pay attention to these key metrics that show the liquidity of the business and the asset turnover of the business.&nbsp;</li>
</ol>



Asset turnover applies to service-based businesses where inventory doesn’t apply. In that case, lenders have to ascertain how the available assets generate income for the company. This is where the asset turnover activity ratio becomes important.- Here, you list what an asset will help the business produce and how that product will generate profit for the business.&nbsp; These show the financial parameters of that business.&nbsp;



<ol start="5">
<li>Character plays a key role in lending. To understand the value of character in lending, consider the repayment quadrant. It shows 3 categories of customers: those who have the capacity and willingness; those who have the capacity but don&#8217;t have the willingness, however with the right coercion, they will pay because they have the capacity; those who have the willingness but have no capacity. This group will source money to repay; finally, there is the group who have no willingness and no capacity.&nbsp; If you lend to them, you are ready to write off that loan.&nbsp;</li>
</ol>



When lenders categorize these customers based on their repayment behaviour, they can identify who their ideal customers are, the sectors they play in and the optimal amount to lend to them.



Finally, SME lending is tough. It is difficult to predict a customer’s behaviour. Therefore it is advisable to trust your instincts even while working with data.



<h2 class="wp-block-heading">Bonus Section: How can new lenders determine customers&#8217; capacity considering that they have no historical data to benchmark?</h2>



Macroeconomic indicators provide the information new lenders need to determine creditworthiness. In addition to macroeconomic indications, new lenders should cap the obligor limit they extend to borrowers. This is necessary as the first loan they disburse is used to give borrowers a credit journey with their lending outfit. 



They should collect as much information as they can from the borrower, and use this data to build a profile for the borrower which is in turn, measured against generalized industry data. This data include the business sector, the performance of that sector, business location, predominant risk in that sector, the customers age and marital status.



Some lenders also consider the borrower’s ethnicity. This is based on the belief that certain ethnic groups excel in certain businesses. That being the case, it is less risky to lend to people who own this kind of business.



New lenders should pay attention to where the borrower’s business is situated. This helps to estimate the number of sales they can generate to accommodate the loan repayment. Others are where they source their goods from, the risk of logistics from point of purchase to point of sale, and the operational expenses within the movement of the product. These are all important as it influences the margin of the business and may affect the gross profit.  Pay attention to other statutory expenses like savings and bills as these also affect the residual income



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Lending is a risky business. While a 100% repayment rate may not be feasible at all times, lenders can greatly increase their repayment rates when they have an accurate model for determining borrowers’ repayment capacity.

How to determine a borrower's ability to repay a loan

How to Determine a Borrower’s Ability to Repay a Loan

There are many requirements for starting a lending business but the most important is finance. Despite its importance, accessing finance is difficult, especially for lenders who’re new in the market.



The value of financing cannot be overemphasized. Without it, it’s impossible to grow a lending business. It hinders loan portfolio growth and makes profitability difficult. With the right information, lenders especially those new to the market can access the financing they need.



This article covers how new lending businesses can access the funds they need to grow their business.



<h2 class="wp-block-heading">Sources of funding for a new lending business</h2>



<ol>
<li>Personal Savings: The primary source of funding for a new lending business is personal savings. It is advisable to start with personal savings, reinvest the profit and at a later stage, structure the business in such a way that it is easy to get equity or funds for onlending.</li>
</ol>



<ol start="2">
<li>Deposit: Microfinance Banks can do full financial intermediation. This means that they have borrowers as well as depositors. Regardless of their license and minimum capital, they can solicit funds from the public as a deposit, which they in turn, lend. Considering that most MFBs don’t have the same brand recognition commercial banks enjoy, the challenge therefore, is how to convince the public people to trust them enough to deposit their money with them. Newer MFBs however, have harnessed marketing and branding to attract such deposits in a short time.</li>
</ol>



It is imperative to add that a lender’s license determines the form of funding they can access. A lender with an MFB license can solicit savings in form of a deposit from the general public. A fintech lender, on the other hand, cannot do so because they don&#8217;t have the license to mobilise savings from the general public.



<ol start="3">
<li>Debt: Another source of capital is debt. If a lender collects debt for onlending and has good credit policy in place, they&#8217;d find it easier to access debt because the debt taken for on-lending is cash-generating. This is different from other types of debt which may be used to cover overhead costs, raising the question of how the borrowers will make the money they need to repay. </li>
</ol>



When considering debt, a key question is what type of debt to consider. Some commercial banks have programs that give smaller lenders money for onlending. The major shortcoming of this program is collateral, which is not flexible. Most times, the collateral commercial banks require is landed property. 



In addition to commercial banks, some international institutions (who are not venture capitalists) give lenders money for onlending. The problem with this option is the forex rate. It is risky to take a foreign exchange liability with a local currency revenue as the interest may not cover it. 



Individuals are another source of debt. This is not a demand deposit for savings. Instead, it is a debt to the lender without equity in the business. This is the approach most small-scale lenders use. To access debt from individuals, lenders must ensure that they have transparent processes that elicits trust.



<h2 class="wp-block-heading">When should a new lender to source for external funds?</h2>



The best time to explore onlending depends on the lender’s experience and pedigree.  If the lender is highly experienced, they’d find it easier to get external funding from the onset as more people are willing to take a risk and give them the money they need.



For a lender with little or no experience, it is best to start with savings or money from friends or family. This is because external investors are sceptical and need proof that the lender can lend money and recover it. They’d like to see traction backed up with figures between 6 &#8211; 12 months. They need to ensure that there is a process in place to disburse loans and recover them. 



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Getting the finance required to grow a lending business is tough but with the right information, a lender who&#8217;s new to the market can successfully find the funds they need. They need to first start with personal savings, create transparent processes and &#8211; after careful analysis, select the funding that is best for their business.

How to Secure Additional Financing for Your Lending Business

A high default rate threatens the sustainability of a lending business. This might seem unimportant until we realize that when a lending business goes out of operation, the credit gap widens further, making it more difficult for SMEs &#8211; especially those at the bottom of the pyramid and in financially excluded communities &#8211; to access the financing they need to grow their business and rise out of poverty.



For many lenders, addressing the risk of default starts during collections. This is ineffective. The critical job of reducing the default rate should start in the loan process. This is because the default rate will shrink if lenders work hard to identify indisciplined borrowers who don’t intend to repay right from the origination process.



In this article, we will share practical ways to identify indisciplined borrowers who don&#8217;t intend to repay their loan.



<h2 class="wp-block-heading">Effective Measures for Identifying Indisciplined Borrowers</h2>



1. Choose a market: A proactive approach to protecting yourself from indisciplined borrowers is to decide on a niche and focus on it. Focusing on a specific market has its risks but you gain leverage as you deeply understand the market. With this knowledge, ou to understand the borrowers, why they need a loan and the type of loans they want. With this insight, you can create a solid customer profile that will enable you to identify unreliable borrowers and steer clear of them.



2. Adopt a group lending strategy: A group lending strategy is another way to guard against unreliable borrowers. The task of finding dishonest borrowers is delegated to the group, which is incentivized to select the most disciplined members as they bear the liability of default.



Group lending model does not eliminate the need for credit officers to conduct background checks and other verification, but you can trust the decision of the borrower group because they consist of people who are in the same line of business or reside in the same community. This level of familiarity enables group members to choose people who are disciplined and who will repay their loans.



3. Adhere to your lending policy: As effective as group lending is, all lenders may not adopt it. There are lenders whose niche is consumer lending or payday loans and record impressive repayment rates, sometimes as high as 90%. The reason for this is clear: they have adopted a lending principle. They’ve carved a niche for themselves and defined the intricacies of the area they play in. They meticulously follow a recorded checklist of things to watch out for when lending to those in this specialized market.



But for certain lenders, this is not the case. In order to meet their targets, credit officers ignore the stipulations of their credit policy and bring in customers who don’t fit the credit policy. The organization suffer consequences of this decision which are short-term growth of the loan portfolio, quickly followed by an increase in the portfolio at risk.



Your credit policy is based on your risk appetite and market insights. Therefore to reduce the incidence of indisciplined borrowers, always adhere to the credit policy and have defined consequences for staff who deviate from it.



4. Credit Checks: In Africa, some countries are still in the process of establishing functional credit bureaus while others have tech-enabled credit bureaus with APIs that can be integrated securely into core lending platforms. Despite these improvements, credit bureaus still have some limitations which is not the focus of this article.



Ideally, a credit bureau should provide basic KYC about the applicant,as well as information regarding previous loans. Some also provide a credit score. In addition to conducting credit checks, <a href="https://evolveblog354019029.wpcomstaging.com/2022/10/19/how-to-choose-the-right-bank-statement-analyser-for-your-lending-business/" target="_blank" rel="noreferrer noopener">examine borrower&#8217;s bank statements</a>. This is because credit bureaus are not always comprehensive as some lenders don’t submit information to the bureau.



So when examining a bank statement, look out for frequent outflow to a particular account. This is because some borrowers have multiple bank accounts for different loan applications. When this is the case, it may be an indicator that the borrower is not being forthright nor are they presenting an accurate picture of their financial history.



Another tip for analysing bank statements is to look out for frequent bank statement requests. This is an indicator that the borrower has a lot of active loans or maybe a serial borrower which increases the risk of default.



<h3 class="wp-block-heading">PRO TIP: </h3>



<ol>
<li>When you spool a report, look below a credit report for recent searches made by other lenders. If manay lenders are conducting credit checks on a borrower, it&#8217;s an indicator that they are seeking for loans from multiple lenders or that they have multiple active loans.</li>



<li>When a loan has been disbursed, it is advisable to check the credit reports throughout the loan life span and not only in loan origination. best to check credit reports on a quarterly basis so that you are aware of any additional loans or liabilities that the borrower has taken on. You can then contact them to find out how they plan to incorporate these into the repayment of their current loan.</li>
</ol>



There are different ways to reduce default rates but the most effective is to take a preemptive approach. This approach requires that you have a process for identifying serial borrowers who are out to defraud lenders. This precautionary measure is important because without it, all other collection strategies will not yield the desired results.

How to protect yourself from indisciplined borrowers.

How to Protect your lending business from indisciplined borrowers and reduce default rate

Bank statements are an integral part of the decisioning process. They reveal a borrower’s cash flow and spending patterns, which helps you determine their creditworthiness and capacity.



While a lot of lenders, especially, digital lenders have automated this process, many credit providers such as cooperatives, offline lenders and microfinance institutions still review this process manually. The consequence is a tedious and time-consuming process that is prone to human errors.



In this post, we explain what a bank statement analyser is, explain the benefits of automating the analysis of bank statements and compare some of the providers in the market.&nbsp;



<h2 class="wp-block-heading">What is a Bank Statement Analyser?&nbsp;</h2>



A bank statement analyser is a software, usually an API that enables a financial provider to connect to a user’s bank account, retrieving key information like bank statements.&nbsp;



With many providers entering the market, bank statement analysers have improved over the years. And what started merely as a way to retrieve a customer’s bank statements securely has evolved to include other features such as an analysis of the statement, verification of BVN (bank verification number) and additional KYC information.



<h2 class="wp-block-heading">What to consider when choosing a bank statement analyzer</h2>



Bank statement analysers are not standalone tools that you can use independently. They are integrations that are embedded into different&nbsp; financial products like core lending platforms.



Therefore, it is critical to ensure that a core lending platform integrates into multiple providers, enabling you to choose one that best fits your business needs.



Thus there is no straightforward answer to the question because each provider addresses a specific need. As a lender, you get to choose a need that directly impacts your business. Having a core lending platform that integrates with many providers is critical because it gives you the option to choose from multiple providers.



<h2 class="wp-block-heading">Benefits of Using a Bank Statement Analyser</h2>



Bank statement analysers are invaluable tools for credit decisioning.&nbsp;They remove the drudgery associated with analysing numerous pages of bank statements and increase the productivity and efficiency of credit risk analysts.



They also cut down the time required to review a bank statement, improving credit decision time.&nbsp;



Here are some other benefits of automated bank statement analysis over manual analysis:



<ol>
<li>Less human errors. An automated analysis examines a borrower&#8217;s inflow, outflows, dues and other data, revealing key insights into a borrowers spending pattern and financial wellbeing. Manual scrutiny of these data points is tedious and makes the process vulnerable to errors. The consequence is wrong credit decisioning that leads to higher default rates and lower profits.</li>
</ol>



<ol start="2">
<li>Better customer experience. Another benefit of an automated process is that it makes loan applications easier. Instead of visiting the bank or using a mobile app to generate bank statements, borrowers can immediately generate and submit statements while applying for a loan, without leaving your app or web page. This is more convenient for borrowers and also reduces the incidence of drop-offs.</li>
</ol>



<ol start="3">
<li>Increased accuracy. Compared to manual submission, a bank statement analyser retrieves the bank statement directly from the bank. This makes it difficult for borrowers to falsify, reducing the incidence of fake bank statements that do not reflect the true finances of the borrower.</li>
</ol>



<h2 class="wp-block-heading">Types of Bank Statement Analysers</h2>



There are different bank statement analysers but for this post, we’ll focus on two: Mono and MBS [My Bank Statement].



<h3 class="wp-block-heading">Mono</h3>



Mono is a new way to get everything related to financial statements quickly from borrowers without long wait times. Mono creates an API financial platform that helps lenders collect and manage bank statements. They also provide account verification, initiate bank-to-bank payments and BVN verification.



Features&nbsp;



<ol>
<li>Bank-grade security and encryption for the safety of a borrower’s bank statement</li>



<li>Access to financial data in minutes</li>



<li>Identity verification before bank statement is issued</li>



<li>Requires OTP for confirmation before bank statement is generated</li>



<li>Bank statement analysis</li>
</ol>



Strengths



<ol>
<li>Flexible pricing model</li>



<li>Collects direct payments</li>



<li>Retrieves bank statements for lending to eliminate manual uploads by borrowers</li>



<li>Accesses transactions, identity and income data on behalf of lender and presents results</li>



<li>Most banks are integrated for easy statement retrieval from these banks</li>



<li>Fast verification time</li>
</ol>



Weaknesses



<ol>
<li>Works only with internet access via mobile app or internet banking</li>



<li>Without API access, BVN cannot be verified</li>



<li>Too many fields for borrowers to fill&nbsp;</li>



<li>Only the lender has access to the Dashboard</li>



<li>Strict keyword analysis that may omit key information</li>
</ol>



<h3 class="wp-block-heading">My Bank Statement &#8211; MBS</h3>



MBS is a third-party service provider that enables borrowers to send bank statements directly from their bank. They function by creating a one-page ticket generated by the borrowers&#8217; bank to replace traditional paper applications.&nbsp;



Features



<ol>
<li>MBS provides a basic document for the indicated period</li>



<li>Access to financial data</li>
</ol>



Strengths



<ol>
<li>Bank statements can be generated in a minute</li>



<li>Ensures the authenticity of bank statements by sending the statement directly to the lender</li>



<li>Permits multiple bank statements from different banks to improve requests</li>



<li>MBS does not require internet connectivity to generate bank statements</li>



<li>Bank statement looks great and easy to digest</li>



<li>Requires less information for bank statement generation &#8211; uses only registered phone number and full name</li>
</ol>



Weaknesses



<ol>
<li>Not all banks are integrated</li>



<li>Their website advertises only bank statements for visa services</li>



<li>It is more expensive. It charges per page for every statement generated</li>



<li>Does not have add-on features</li>
</ol>



<h2 class="wp-block-heading">Conclusion</h2>



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1024" height="371" src="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2022/10/Mono-vs.-MBS-1024x371.png" alt="" class="wp-image-115" srcset="https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2022/10/Mono-vs.-MBS-1024x371.png 1024w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2022/10/Mono-vs.-MBS-300x109.png 300w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2022/10/Mono-vs.-MBS-768x279.png 768w, https://evolveblog354019029.wpcomstaging.com/wp-content/uploads/2022/10/Mono-vs.-MBS.png 1056w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure>



Compared to Mono, MBS requires less information to retrieve bank statement. It requests for account name and mobile number while Mono requires users to share their mobile banking details. Borrowers may be unwilling to share this information . It is therefore best to have an alternative.



Mono is a better option if you prefer the insights from a bank statement. If you prefer to analyze the bank statement in-house, MBS is the best option as it simply retrieves the statement without any analysis.



MBS appears to be a better choice for borrowers who use internet and mobile banking while Mono works best for borrowers who rely on USSD for bank transactions.



In summary, Mono and MBS are great tools for retrieving bank statements. However, what should influence your decision is what you are optimizing for: quick statement retrieval or analysis of retrieved statement and other add-on services.

How to choose the right bank statement analyzer for your lending business

How to Choose the Right Bank Statement Analyser for Your Lending Business

Loan repayments make a lending business sustainable.



For a lending business to thrive, there has to be a high repayment rate and a portfolio at risk [PAR] not greater than five percent.



However, lending is easier than collection and as a result, loan collections require a lot of effort. Clearly then, collection methods need to evolve to minimise loan defaults thereby reducing portfolio at risk.



This article will examine loan collection in depth, tools that aid loan collection, and things to consider when deciding on a collection method.







<h2 class="wp-block-heading">What is Loan Collection?</h2>



Loan collection is the process of retrieving loans paid to borrowers.&nbsp;



For loan collection to be successful, a lender has to establish a payment schedule, monitor the repayment of the debt, and the borrower’s compliance with the set schedule.



Lenders have to broaden their collection methods beyond manual collection methods since default rates for manual collection is on the rise.&nbsp;



<h2 class="wp-block-heading">Implications of Inadequate Collection</h2>



A high default rate negatively impacts your lending business directly. When a lender is unable to retrieve loans from borrowers, it increases the portfolio at risk and can lead to eventual closure of the business. 



Realistically though, not all loans can be retrieved. Nevertheless, it is essential for credit risk analysis to be carried out on every borrower to ensure that a borrower has the ability to repay the loan when due. 



Investing in a core lending platform and monitoring the borrower at certain intervals can be helpful in loan collection.&nbsp;







<h2 class="wp-block-heading">How to Automate Loan Collection</h2>



Automating loan collection might seem like an obvious choice.&nbsp;



Yet, to successfully automate loan collection, there are a number of considerations involved.&nbsp;



As a lender, your current needs will assist you to determine the method to try or if you should try multiple methods based on a segmentation of your borrowers.



A loan collection method that is simple to use, easy to maintain and reliable should suit most lenders.







<h2 class="wp-block-heading">Benefits of Automating Loan Collection</h2>



Below are some benefits of automated loan collection over manual collection:



<ul>
<li>Reduction of cost</li>
</ul>



Automation can be done at the click of a button. Manual collection requires more logistics than automation in the form of staff training and the dedication of loan collection officers.



<ul>
<li>Reduces errors and speeds up processes</li>
</ul>



Without a doubt, automated loan collection speeds up processing and reduces the incidence of risk related to theft and human error. Automation ensures that all borrowers can be debited on the same day without wearing thin resources related to manpower. Fewer discrepancies result from inaccurate manual errors such as counting cash.&nbsp;



<ul>
<li>Easy record-keeping</li>
</ul>



Record-keeping becomes easier when lenders know how much debt they expect repayment for and the amount received. In most cases, automation provides a single-page view of loan repayment across borrowers making it easy to keep track of loan health performance.&nbsp;



<ul>
<li>Safety</li>
</ul>



Automation ensures that cash does not change hands. The debited amount goes into a holding wallet or the company’s accounts. There is thus elimination of loss of cash or dishonesty by loan officers or borrowers.



<ul>
<li>Reduces manpower</li>
</ul>



Since automation is digital, there is a significant reduction in the use of manpower to collect loans. This further saves time and stress leading to a further reduction in overall expenses of the lender on direct costs that will be incurred traveling to a collection point.&nbsp;







<h2 class="wp-block-heading">Types of Automated Loan Collection Channels</h2>



There are two types of loan collection channels discussed here, the Remita debit mandate and tokenised debit cards.&nbsp;



<h3 class="wp-block-heading">Remita Debit Mandate</h3>



Remita is a CBN-licensed e-payment gateway used to receive payments. As a business owner, Remita allows you to conveniently receive payments from your customers more quickly. Using nine payment channels, they are trusted by millions of customers including the Federal Government of Nigeria as the default payment gateway.



Remita empowers your customers so that they can pay easily over a period as you grow to include other services. This puts the power in the hands of your customers when they authorise deductions from their bank accounts. When borrowers approve Remita for collections, they agree to be debited on a specific day each month until the loan is completely paid for.



Merits



<ul>
<li>Payment can be received anytime as long as there is a mandate on the borrowers account</li>



<li>Remita has wide adoption ensuring that lenders can receive volume payments</li>



<li>This gateway has the most number of payment channels available on a single application</li>



<li>It is easy to monitor transactions from initiation to payment as a lender</li>



<li>The platform is secure&nbsp;</li>



<li>Developer-friendly APIs, SDKs and plugins that can be integrated into your software</li>



<li>Zero activation fee</li>
</ul>



Limitations



<ul>
<li>High usage fees to lenders</li>



<li>The system has led to an increase in charges through fees to the lender making lenders add extra charges to their overall fees</li>



<li>Remita may sometimes experience downtime</li>
</ul>



<h3 class="wp-block-heading"> Tokenised Debit Card</h3>



A debit card is a plastic bank card used for payments in place of cash. Tokenisation refers to the process of replacing the actual card details [primary account number] with a unique code called token. Thus a tokenised debit card is a debit card whose card number, three-digit CVV, name and expiry date has been masked by a random token number to avoid being saved by a merchant platform for security reasons.



Using a tokenised debit card gives your borrowers an added layer of security and confidence. When borrowers are certain that their card details are secure, they will be assured to carry out more transactions. Lenders are less burdened by card security since payment processors have more work to do to ensure that borrower information is secure and encrypted.



Merits



<ul>
<li>Offers enhanced security for both lenders and borrowers</li>



<li>The burden of security rests more on payment processors and banks not on lenders</li>



<li>Tokenised debit cards reduce fraud related to digital payments so that payments reach lenders everytime</li>



<li>Customer data is not compromised in the event of a breach from lender website</li>



<li>Makes transactions more secure by including dynamism with each transaction</li>



<li>Provides more secure in-app payment acceptance</li>
</ul>



Limitations



<ul>
<li>The borrower can block the debit card and request a new one thereby cutting off further payments due to the lender</li>



<li>Adds complexity to infrastructure</li>



<li>A tokenised debit card does not eliminate all security risks, especially where there are third-party token vaults</li>



<li>Tokenisation is not supported by all payment processors</li>
</ul>



 In conclusion, each payment method has its merits and demerits. A high default rate might result from an inadequate collection method. While the lack of a thorough framework for repayments can be identified as an indicator for seamless loan collection, lenders are no longer limited to manual collection methods.&nbsp;



As a lender, you need to decide what collection methods suits your business needs to ensure compliance in addition to other methods you currently employ.



Methods such as daily deductions that borrowers see as negligible and thorough credit checks in addition to physical follow-ups with the customer can be invaluable in ensuring that collections are timely and consistent.



Overall, you will need to consider if your borrowers have debit cards that they can attach to their accounts for tokenised debit card transactions. And if a huge chunk of your borrowers have salaried accounts, then Remita debit mandate might be what you need for collections.



You should also factor in a loan repayment strategy to educate borrowers on their loan responsibilities, to empower borrowers to manage their loans successfully through regular repayments.



Leveraging automation puts you ahead of your competition.&nbsp;



Which collection method have you tried to receive payments from borrowers?

How the right collection methods increase repayment rate

How to Increase Loan Repayment Rates Using Collection Channels

<blockquote class="wp-block-quote">
&#8220;With the manual process, managing the loan portfolio was an arduous task and prone to errors. Remember someone has to write and put those things on the system. Now, we’ve automated these tasks. Another benefit is we do less paperwork. In the past, we had to create a space to file the customer&#8217;s paperwork but now these processes can be done via the loan management software provided by Configure.&#8221; 



Afolabi Hassan, CEO, Ihine Microfinance Institution.
</blockquote>



<h2 class="wp-block-heading">Can you tell us about Ihine Microfinance institution?</h2>



Let me start with the meaning of the word Ihine. It is an Ebira word and it means &#8220;ants&#8221; in English.



You may be wondering why we named our institution after ants. First, let&#8217;s look at the characteristics of ants. They have foresight, they can plan ahead. As small as these creatures are, when they come together, they can do great things.



So the idea behind the name is, if micro customers can get a little support from us, they can do so much more. Some have been in business for the last 15 years selling commodities like pepper. In fact, when pepper is scarce in the market, they know where to source it from. Some of them have paid for their children&#8217;s education through this small business. We believe that if they have more support, they can do more.



<h2 class="wp-block-heading">Have you had any interesting success you’d like to share?</h2>



Yes, even though our business is still young. We have impacted so many micro-women entrepreneurs. We have so many of them around the Ipaja market, that&#8217;s where the business is situated and many of our customers are within this environment, basically the Ipaja market.



Before they came to us, their inventory was very low. At Ihine microfinance institution, we support all business owners no matter how small their businesses are. This is in line with our slogan, &#8220;including all, excluding none.&#8221; We want to be an advocate of financial inclusion, and for this reason, no matter how small your business is, &#8211; so far we see you are serious about your business,- we do our assessment and support you. We have so many people that had little inventory that we supported. They are doing well now.



<h2 class="wp-block-heading">How were you running your lending business before using Configure?</h2>



Basically manual. Although we used Excel to support our process. The truth is, for our customers to apply for a loan, they had to come into our office to fill out the form or our loan officers would need to be in the field will fill the form.



For others far away, we send them a soft copy of the form. Imagine the time it takes for them to print it out, fill it and send it back to us. Then we need to print and file as well. So managing the loan portfolio has not been easy as well while using the manual process. So loan origination to disbursement has been manual. Same for repayment. For instance, if a customer defaults for some days, you have to do the manual calculation of the default charges as there’s no loan origination software in place.



Apart from the fact that it is time-consuming, another downside is the cost. For instance, the customer has to print the form in a cyber cafe. But now, with our loan management form, they can apply online directly, or we send the loan link to their mobile phones. Even though they may not be tech-savvy or have smartphones, our staff are on standby to support them.



With the manual process, managing the loan portfolio was an arduous task and prone to errors. Remember someone has to write and put those things on the system. Now, we’ve automated these tasks. Another benefit is we do less paperwork. In the past, we had to create a space to file the customer&#8217;s paperwork but now that these processes can be done via the loan management software provided by Configure.



<h2 class="wp-block-heading">Why did you choose Configure?</h2>



After my research, I decided to go with Configure because it is a new company and I believe that they have something to offer. This is because if you’re coming into a space like loan management software, it’s because you are prepared. You must have studied other competitors in the space and defined your competitive edge.



I have over 14 years of experience in microlending and SME and in the course of my career, I have spoken to different loan management companies. I’ve discovered that each software has a limitation, especially in respect to flexibility. I chose Configure after discovering that in spite of the eligibility of my clients or risk appetite, they can actually come up with personalized loan management software for me.



After the meeting with your team, in less than 48hours I was live and in that same day, under 1 hour, I disbursed four loans. So I was like if this team can do something this impressive within a limited time, then its a good company to go with.



<h2 class="wp-block-heading">What are the benefits of using Configure? In what ways has it changed your lending business?</h2>



I’ve been using Configure for close to a year now. The first benefit is flexibility. When developing the eligibility criteria for our customers and the risk appetite for our loan product, I discussed with your development team and they told me that they can provide everything I requested for. The fact that they were actually able to do this is a plus.



The other benefit is that it is user-friendly. Someone in secondary school can use it with minimal error. When you compare the cost with others in the same business line, Configure is relatively cheaper.&nbsp;



Another benefit I’ve gotten from Configure is robust reporting and the credit search. I don&#8217;t have to visit another platform to perform a credit search. I like the direct debit mandate too. It makes collection less stressful and gives me multiple benefits from one platform.



I’m also impressed with the team and response time. There was a time when I had an issue around 11 pm. The team did everything within their control to resolve the issue on time.



Still, on flexibility, I like the fact that the team is able to add new features that I need to run my business. This is contrary to my past experience where the vendor said it will take them a year because any change they affect for me will affect other customers in their business line. Admittedly, you may not be able to customize everything for a customer but there are some peculiar features you should be able to make available, especially looking at what is obtainable in the lending space today.



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<h2 class="alignfull wp-block-heading" style="margin-top:0px;margin-right:0px;margin-bottom:0px;margin-left:0px;font-size:54px;line-height:1.2">Digitize your manual lending Process</h2>



Replace paper &amp;pen and spreadsheet with a flexible core lending platform, increasing your efficiency and reducing credit decision time.
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How Ihine MFI digitized its lending operations using Configure

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