Clients who pay promptly are not a problem. But those who can’t pay or won’t pay, cause trouble for themselves and for your business. For
this reason, an efficient lending institution needs a simple but
effective system to identify problem loans quickly and to deal with
them early on.
Identifying Problem Loans Early
1. Why is it Important to Identify Problem Loans Early?
Problem loans must be identified early because they can affect your
profitability. Repayments with interest are the primary income source
of lending institutions. If repayments are not made regularly, then
your ability to make a profit is severely affected.
1.2. Client Support
If you identify a problem loan early you are able to take steps to support
a client to pay. For instance, you may call them and offer them the
option of paying part of the repayment immediately and part later. Or
you may arrange to take double repayment next month. If you only
identify problem loans when they have been in arrears for a few months,
it will be much more difficult to make a supportive arrangement with
the client. They will have much more to pay back and will be even less
likely to make arrangements to pay.
1.3. Lending Institution Image
If you are slow to identify and follow up on late repayments you send a
specific message to borrowers. You send the message that you are
‘soft’, that you will not take immediate action, and that late payment
or non-payment is a viable option for them. To work towards zero
delinquency you must avoid this image at all costs.
2. Cost / Benefit Analysis of Regular Vs Irregular Payments
This table gives you a useful comparison of the benefit to your lending
institution and your borrowers of regular payments – and the cost
associated with irregular payments
|Cost / Benefit Analysis of Regular Repayment Vs. Default|
|Benefits of Regular Payment||Cost of Irregular Payment|
|Benefits of regular payment||Cost of irregular payment|
|To lender:||To lender:|
Written off loans require decapitalisation of the institution.
3. Ways to Identify Problem Loans
Since identifying problem loans early is so important, what are some ways
that loan management staff can use to identify problem loans?
Some ways are:
- Checking age analysis (the amount owed by debtors, classified by age of debt) daily
- Checking month end status
- Use credit bureau data and tools to monitor account – Get up to date credit
bureau reports in batch format on your accounts or use tools like
Compuscan’s CompuWatch to monitor your borrowers’ movements within the
Dealing with Problem Loans
There is no point in identifying problem loans if you have no intention of
doing something about them. Problem loans cause delinquency and loss to
your lending institution. Having identified which loans are
problematic, you need to do the following:
1. Create Policies and Procedures for Dealing with Problem Loans
A policy is set of decisions about how your company operates. Policies
are written guidelines that help operations. Policy informs the
procedures you develop. Procedures are written instructions that tell
staff how to implement policies. Just as each lending institution must
have policies and procedures for maintaining information, each lender
must have its own policy for:
- Identifying problem loans
- Dealing with problem loans
You need to spend time with the management team deciding on the policy that
will guide you. Then you need to translate those policies into a set of
instructions to staff. These instructions are the procedures that will
tell staff what to do to identify problem loans early. Sound policies
and procedures protect you from loss. It is advisable that you treat
every repayment that is one day past due as a cause for concern and the
beginning of loss to your company.
2. Distinguish Between Can’t Pay Versus Won’t Pay
It is important to distinguish between borrowers who won’t pay, and those
who can’t pay. If borrowers can’t pay you are wasting time and
resources sending letters. If borrowers won’t pay, you are wasting time
offering soft options, when in fact a more assertive approach would be
For borrowers who can’t pay consider the following:
- Find out whether they have relatives or children who can pay
- Be assertive in finding a source of repayment
- Be firm and unshakeable – borrowers must feel it is not worth missing a repayment
For borrowers who won’t pay consider the following:
- Put in place procedures that protect you from these types of borrowers from the beginning of the loan process
- Get a list of assets up front so you have some collateral to fall back on if the borrower won’t pay
- Avoid lending to ‘won’t-payers’ if at all possible
- Do not get trapped in a cycle of sending letters with no intention of following up
- Take legal action earlier rather than later
- Make quick use of garnishee orders and emolument attachment orders
Emolument Attachment Order
|An emolument attachment order is a court order obtained by the lender /
any creditor, which instructs an employer to make deductions from the
borrower’s salary on a monthly basis until the debt has been settled.
|Garnishee Order||A garnishee order allows the lender to attach money from the debtor’s bank account|
3. Develop a Relationship with the Client Up-Front
It is worth taking the time at the beginning of the loan process to
establish a good relationship with the borrower. You need to make it
part of your procedure to sit down with the borrower and explain what
she / he must do to be accepted by your institution.
This sets the tone for future relations. You need to establish from the beginning
that no late payments will be tolerated and that your lending
institution will take swift and firm action to deal with late-payers.
If you leave an explanation like this to the point where the borrower
has already defaulted, then you will most likely ruin the relationship,
lose the client, and lose any future payments you were expecting from
him / her.
4. Prompt and effective follow-up is key
The trick in identifying and dealing with problem loans is when you choose
to take action, and what action you choose to take. As soon as a
repayment is one day past due some action needs to be taken. That
action needs to be effective in securing the repayment. You need to
make sure you do not devise procedures that waste your resources
without securing payment. For example, sending a letter to a rural
client, who cannot read, is not an effective procedure. It would be
more effective to identify someone who lives nearby to visit the
non-payer and secure payment.
Compuscan Academy has developed a learning programmes on this subject, called Credit Control & Collections and Effective Debt Collections Under the NCA! If you want to learn more about this topic, please contact Compuscan Academy at Tel: 021 888 6000 or e-mail us at email@example.com