We all know the global financial crisis changed retail banking as usual. Investor confidence and credit availability plummeted. Consumer debt levels rose. Economies flattened worldwide.
Yet, one effect of the crisis was particularly damaging: The rise in non-performing loans. Non-performing loans on the books threaten retail banks’ profitability and stability everywhere—from banking giants to emerging market players. The problem is particularly acute in Europe.
Regardless of geography or size, retail banks need to improve their collections and recovery processes to handle non-performing loans—and the business and regulatory hurdles they cause. After all, the problem isn’t going away.
However, there are ways to address it. First, understand the problem.
Non-Performing Loans: The Problem
Non-performing loans affect both bank balance sheets and regulatory requirements. For every US$100 million of loan loss provisions, a bank’s lending capacity is reduced by US$6 to $7 billion, depending on the quality of collateral held.
In concert, regulations require that banks keep a close eye on non-performing loans. As such, auditors are under both self-imposed professional obligations and regulatory pressure to ensure banks prudently approach loan write-downs and write-offs.
Inefficient collection and recovery processes only exacerbate these serious problems, leaving banks with:
- An increasing number of delinquent loans.
- Less profit.
- More risk, especially if too many loans go bust concurrently.
- Increased regulatory pressure to account for more non-performing loan risk.
Banks are already struggling with these very problems—especially in Europe. Non-performing loans and general customer indebtedness rose 17% by the end of 2013 in southeastern Europe alone.
So, What’s a Bank To Do?
Banks have a three-pronged job ahead of them when it comes to dealing with the prevalence of non-performing loans. They need to:
- Use credit risk assessments to plan ahead, and avoid damaging credit risks later.
- Evaluate existing processes and their inefficiencies to improve both regulatory standing and shareholder expectations.
- Re-think and embrace modern loan repayment procedures and best practices, including collection scoring, segmentation and specialized collection software.
To get started, formally review existing policies and procedures using the following questions as a guide:
- Is your staff trained and dedicated to precise collection processes?
- Do you have a single collection management authority and one centralized collection organization?
- Have you developed strategies that favor strong client-to-lender relationships at both account and customer levels?
- Have you developed multiple contact channels for improved recovery opportunities?
- Do you leverage technology to its fullest potential for increased collections efficiency and simplicity?
Airtight policies and procedures that your whole team can get behind are crucial to success. You’ll also need to identify holes in processes that expose your company to greater risk. Reduce flaws, patch the holes and work on stringent collection practices that will quickly identify and work against problem loans and recurrent delinquencies. By doing so, you’ll:
- Identify potential problems sooner.
- Maximize the number and performance of self-cure accounts.
- Improve management of loan write-offs, losses and general systems.
- Establish greater transparency with customers for improved confidence.
It’s time for banks everywhere to lower the risk and return to the reward. How do you plan to help your organization get there? Let us know in the comment section below.
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Deal with Non-Performing Loans Through Enhanced Collections and Recovery
Returning to the reward starts with excellence in collections and recovery. Learn how to start improving your collections and recovery operations today by downloading our free whitepaper, Collections and Recovery: Meeting the Needs of a Changing World.