Leveraging effective Collection Systems and Predictive Analytics to combat delinquency in Australian housing market
Rising bad debts in Australia – A call for action
In our previous article (refer to http://blog.nucleussoftware.com/lending/rising-bad-debts-in-australia-a-call-for-action/), we have discussed about the rising bad debts in Australia and how an impending doom is predicted in Australian market in the form of upcoming Housing Loan NPLs.
This article is a continuation of the above mentioned blog, and would be discussing about the effective delinquency management systems and how it can enable the market to counter the bad debts and also be regulatory compliant.
The upcoming section discusses about how an effective delinquency management system works and how predictive analytics adds value to the process.
Workflow of an effective Delinquency Management System
These measures are taken by the financial institution as a preventive measure before the occurrence of delinquency of loans.
Even before loans accounts get delinquent, an ideal loan servicing system populates Customer Repayment Details, which are used by the predictive analytics application to identify the list of customers who could probably default in their upcoming repayment. This list is generated based on the past repayments done by the customer, his/her credit history and other factors. This list is supplemented with appropriate communication strategies which can be deployed to remind the customer about his/her upcoming EMI. Most of the cases, the customer would be paying the dues. In case of his/her inability to pay the dues, the financial institution can initiate debt restructuring, through which the customer can either modify the EMI / duration or settle the loan for a fixed amount.
These measures are taken by the financial institution as a reactive measure when delinquency of loans occur.
When a loan account gets delinquent, the delinquency management system triggers a set of activities to counter delinquency. Starting with Sourcing, the application collects the details of all delinquent customers, which is then grouped into cases based on their similarities. This is called as Case Stamping. Once the stamping is done, these cases are classified based on the DPD, due amount, and other factors and are assigned to Collection agents. Here, predictive analytics plays a crucial role by providing scores to the application, which is used in processes like classification. These scores act as major factors during prioritization and assignment of delinquent account cases to agents. Once these assignments are done, agents try to communicate with these assigned customers through tele-calling, SMS, emails. They try to get the customers do their due payments, and if it still doesn’t happen, they visit them personally at their residences and collect the payments directly. These agents are enabled through Mobile apps, which help them in viewing case details, generation and printing of receipts on payment, and also is equipped for enabling card payments.
In case, the face-to-face interaction between the agent and the customer also fails, and the customer does not do the payment, the financial institution proposes for a settlement process in which the customer may either opt for debt restructuring or a full settlement (agreeing to pay a fixed amount and close the loan dues completely). This settlement is done to ensure both parties, the customer and the financial institution are agreeing on same conditions.
When settlement negotiations fail, the financial institution moves towards legal actions, where they engage a law firm / lawyer to start legal proceedings against the customer on non-payment of loan dues. A case is filed in the court (adhering to the laws of the country in which the loan is taken and both the financial institution and the customer are present) and the proceedings are maintained. Based on the final verdict of the court, the bank would reclaim the property or collateral on which the loan is sought and will get the amount by auctioning the property / collateral.
Debt collection guidelines – Regulatory requirements by ASIC & ACCC
Every financial institution is expected to uphold the guidelines of regulatory bodies of Australia. Along with being efficient and effective, Delinquency management systems should be well equipped to handle the regulatory risks.
Need to contain regulatory risks
Regulatory bodies, Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) have jointly produced “Debt collection guideline: for collectors and creditors”2 explaining the application of the Commonwealth consumer protection laws, which are relevant to debt collection and are applicable for:
- Debt collectors (including a debt collection agency, debt buy-out service, in-house collection department of a business or government agency, solicitor and other)
- Creditors who uses external collection agencies to collect debts or sells or assigns debts to third parties
To contain the regulatory risks, banks will have to focus on supervising their collections process by maintaining efficiency, customer centricity, and flexibility while minimizing their risk of breaching the commonwealth consumer protection laws. These can be achieved through the below mentioned means.
Capabilities of effective Collection Systems
Maintaining efficiency, customer centricity and flexibility in collections process can be addressed by adopting collections and collection analytics systems which can:
- Structure and automate the entire business process flow of collections from sourcing of cases to case curing
- Provide a flexible communication strategy to accommodate customer’s requirements and flexible case curing support functions
- Improve supervision of management through case escalations, reports and comprehensive MIS suites
- Recognize debtors who are vulnerable and experiencing financial hardship using predictive analytics capabilities
- Recognize debtors who have number of debts owing to different creditors
- Help collection agents have meaningful financial consultation with customers to enable sustainable repayment arrangements of the debt through mobile collections solutions
Process/System Implications of key Regulatory guidelines
- Minimizing risk of breaching consumer protection laws can be addressed by understanding the process implications of the debt collection guidelines and adopting them in collections systems. Some key guidelines and their system implications are mentioned in the table below:
|ACCC & ASIC Key Guidelines||Process/System Implications|
|Take legal action to collect a debt if necessary||Legal collections supporting legal case marking, lawyer/law firm allocation, case filing, document collection, court proceeding etc.|
|Conducting legal repossession activities||Dedicated repossession module with support of capturing repossessed asset details, stockyard and its insurance details, valuation details along with its disposal details|
|During initial contact, provide the debtor with basic information||Comprehensive case view, contact recording screen and stat card (for field collectors) facility to provide necessary information about customer’s account|
|Contact and attempted contact tracking||Any type of debtor contact can be easily captured and segregated into contact type; productivity MIS report (standard) to track metrics such as number of attempts, contact %|
|Discuss multiple accounts with a debtor during the one contact to avoid unnecessary communication||System is customer centric. All the accounts of a single customer get classified and allocated to a single collector|
|Collector making a number of phone calls or other contacts in rapid succession may be termed as undue harassment||Define the maximum number of contacts within a day; duration between two consecutive calls can be configured|
|Personal or field visit generally be considered as an option of last resort||Configurable rule engine to define allocation strategy (e.g. case to be allocated to field collection team only after tele-calling team has made an attempt)|
|Maintain accurate up to date and complete records of all communications||Case communication details capturing for reporting and other purposes. Follow up trails available|
|Work with a debtor to adopt to a flexible and realistic approach to repayment arrangements||Provides facility to capture PTP (promise to pay) as well as settlement details (full and final settlement on total outstanding)|
For a fair, flexible and realistic approach towards delinquency management, banks, debt collectors and creditors will have to adopt efficient collections systems and predictive analytics capabilities (discussed above) which can take care of their business interests while adhering to guidelines mandated by regulatory bodies to preempt market and regulatory risks to their business. This presents an opportunity for them to adopt the best practices across the globe by adopting solutions with a global footprint.