How to create a loan recovery strategy for a lending business
January 27, 2023

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.

What is a loan recovery strategy?

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.

Examine your current loan recovery methods

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. 

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. 

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.

3 shortcomings with most loan recovery plans

  1. 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.
  1. 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.
  1. 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.

Developing a loan recovery plan

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. 

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.

Steps to creating an effective loan recovery plan

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.

Identify clear metrics to track your progress

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. 

Your loan recovery policy should contain:

  1. Details on the loan
  2. Loan recovery team 
  3. Loan recovery procedure
  4. Precautionary measures for loans
  5. Categorisation of debtors
  6. Collateral management
  7. Remedial procedures for delayed payments
  8. Responsibility of remedial team
  9. Types of letters to be issued to debtors

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.

Strategies and useful tactics

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. 

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. 

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

Implementing your loan recovery plan

Once the plan has been developed, it’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:

  • Good negotiation and persuasion skills
  • Experience working with targets
  • Experience in the microfinance industry
  • Ability to be thorough especially with regard to locating debtors 
  • Debt collection skills
  • Strong analytical and problem solving skills

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.

Monitoring and evaluating progress

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. 

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.


Loan recovery is a crucial aspect of any lending business. It’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.

January 27, 2023
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