Management of problem credits in our time is becoming more relevant. According to various estimates, the indicators of doubtful and overdue debt on loan portfolios exceed the indicators of banks in developed countries.
In this regard, banks need to improve their risk management system. Below we will consider in detail several basic methods of dealing with problem debts.
Independent work of the bank to recover troubled debts
This method is the most common for Ukrainian banks. Most of the banks consider it to be the most effective, although from the bank such a method requires significant financial and organizational resources. For such work, a bank needs to have a staff of qualified personnel, bear legal and other costs and, of course, cover the costs of automating this activity. Usually the procedure is as follows: if the client of the bank fails to repay the next payment on the loan, he is reminded of this by a call or SMS message. We use letters with a notice of violation of the terms of the loan agreement. Usually, credit goes into the category of troubled debts after 90 days. If during this period the borrower does not make the necessary payment, employees of special divisions of the bank are connected. If this does not work, then after a certain period of time, banks appeal to the court for a claim against the borrower, demanding that the loan be fully repaid.
However, it is also necessary to remember that in connection with financial crises, banks have repeatedly faced massive emergence of arrears. The result was the emergence and use of such a tool as the restructuring of loans. But in fact, restructuring does not improve the real quality of the loan portfolio, but only allows delaying the appearance of delinquency on the balance sheet.
The advantages of this method include the absence of expenses for the payment of the collection company's work and the discount on the sale. The main disadvantages are the need to create a reserve for possible losses on a loan, a negative impact on the quality of the loan portfolio, the bank's expenses in the absence of a guarantee of return.
Work with collection agencies on the terms of an "agency agreement"
This method involves two types of collaborative work: cession - assignment of rights of demand or outsourcing - agency contract. In other words, the bank enters into an agreement with a collection agency, on the basis of which work is conducted with debtors on behalf of the bank. For the collection services from the bank, the commission is withdrawn as a reward - a certain percentage of the amount of the returned debt. The size of the commission depends on several nuances, for example, from the list of services that are provided to the bank. The effectiveness of this method depends on the characteristics of the collection company - its technical capabilities, staff, working methods and the quality of the loan portfolio, which is transferred for agency services. Advantages of this method can be considered the lack of time spent working with bad debts and the fact that financial expenses arise only if the debt is repaid. The only drawback is the payment of the commission to the collection agency.
Sale of troubled debts to third parties
This method is practiced in all developed countries. There are portfolios that contain debts with various delinquencies from 180 days and more. And of course, when selling such portfolios in some cases, discounts are provided. The agreement of cession assumes transition to bank of the right of reception of money resources under contracts on assignment of the rights of the demand. The cost of services under this type of contract should be sufficient to pay off the entire amount of loan debt. The Bank has the right to use the proceeds only to repay the loan and pay all outstanding debts. In the event that, on demand, the amount of money exceeding the debt on the loan is received, the difference is returned to the assignor. The advantages of this method include the lack of time and money to work with problem debts, avoid conflict with the debtor. The disadvantage is the loss of a portion of the portfolio through sale at a discount.
Nowadays, the most common methods are the bank's independent work on recovering bad debts and selling loan portfolios to collection or factoring companies. Most banks use several methods depending on the timing and loan portfolio. In conclusion, I would like to add that there have already been important changes in the structure of the strategy for managing bad debts, despite the absence of fundamental changes to the system.