Are your borrowers often delaying payments? Are your delinquency buckets always reaching their threshold limits? It is important for lenders to provide knowledge on credit control techniques for borrowers. It is human nature that some borrowers will always delay repayments and will not pay unless reminded. Similarly, some individuals are often short of cashflows or are overleveraged. Some borrowers delay for no reason at all. While the reasons for non-timely debt servicing can be many, the end result is the same. It leads to increased delinquencies and portfolio at risk figures for lenders making their risk matrix appear troubled. However, there are ways of tackling and encouraging discipline among borrowers so that they pay timely. These are:
- Maintain a healthy relationship with borrowers: Maintaining a healthy relationship with borrowers is the key for any business growth. While this is known to all businesses, however, it is easier said than done. Especially, in cases of consumer driven businesses where the number of customers are large, lenders find it hard to reach out to them. in such cases they can reach out to them either by keeping an inbound customer relationship team or by outsourcing it to a call center. The conclusion is that lenders need to regularly reach out to their customers, maintain a congenial relationship, and regularly educate them. This education can be imparted by holding regular seminars or web conferences. These seminars should be focused not only towards new products but also on programs like credit discipline and timely repayments.
- Inform the clients on all payments terms and conditions: While most lenders have well drafted, legally binding, structured documents and facility agreements, however, it is a known fact that most of these are never read by the borrowers. Thus, it is always advisable that the clients should be well informed by a company’s representative at the time of onboarding itself about repayment terms, date of instalments, amounts, rate of interests, prepayments, charges and penalties. Apart, customers should also be informed of penal interests, repercussions of overdues.
- Charge promptly and send reminders: Since lenders always offer credit to their customers, they should invoice their clients promptly. Further, they should keep sending them monthly messages and reminders about due dates and amounts. These invoices can be generated automatically and can be sent out to the customers without much effort.
- Keep a credit check: It is important for lenders to keep a track of credit repayments history on their borrowers. Data from credit bureaus, repayment track record, and default history can help lenders in identifying stressed borrowers. In case of new borrowers, this past repayment track record analysis should be more stringent so that such borrowers are red flagged. For existing borrowers, especially in case of long term loans, real time data analytics, advance AIs should be applied to study customer repayment track records. The analysis can be used to bucket borrowers into red, yellow and green categories based on their loan delay and default pattern. Such analysis might not guarantee timely payments but can help in early identification of higher risk borrowers who need more personalised treatments.
- Communicate and support: Whenever borrowers delay their repayments lenders should immediately connect with them on issues and reasons for delayed payments. Once the reason has been identified, it will be easier for borrowers to come up with solutions also. For instance, if the borrower feels that the customers’ business has slowed and cash-flow issues or income reduction is likely to persist, restructuring solutions like EMI moratoriums, reduction in installment amounts, tenor repayment stretch can be provided to help them overcome such problems. Timely support can help borrowers and make them long-term partners.
- Make payments seamless: Repayments and collections should be automated and as seamless as possible. Methods and measures like auto debits, digital payments, banking channels, credit card or online payment system make it easier for borrowers to pay. While some customers are digitally equipped, others still prefer direct deposits and checks. Hence, multiple payment options should be made available to customers. Opening up payment options gives borrowers a solution to pay on time. Timely and digital payments should be free and should not be charged.
- Prepare and inform about penalties: It is not easy to prevent borrowers from missing the occasional payments. There can be many reasons for non-repayments, however, the end result of such indiscipline is that it impacts the bottom lines of financers. Thus, both borrowers and lenders should always have a contract, a written agreement clearly outlining the terms, deadlines, fees and other essentials in place. When such delays start, additional payments, interest charges, late payment fees, penalties, etc should be reminded to the borrowers. Other than the contract, regular reminders, calls, messages can make them more aware and proactive and they can become regular in payments.
- Financial literacy: Even after taking all the measures, in certain times, some borrowers might still not pay. Despite repeated attempts, endless calls and messages to contact them, they might still not be traceable or contactable. In such cases, it’s time for backup actions from lenders: Collection agencies specialising in recovering late payments as well as overdue payments. These agencies use advance analytical steps, call center facilities to collect delayed or bad debt. Collection agencies and their professional services also at times help in debt settlements. Agencies should not be using forceful tactics to collect monies from clients. Thus trustworthy and reliable agencies should be hired to save on cost and improve collection efficiencies.
Borrowing and credit growth is important for the expansion of financial markets and economies. The progress of financial markets is generally hampered by the lack of basic financial infrastructure such as functioning credit bureaus, uniform disclosure rules, lack of financial literacy among borrowers or delayed and late payments from customers.
These limitations can substantially increase the cost of lending for banks and financial institutions since there is a price involved for a delayed payment. Educating the borrowers, proper disclosures, financial literacy programs and a well-organized credit market is of utmost important to ensure timely repayments and thus enable economic development.