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Best Practices in

Delinquency Management
The Art of Collections
2008 SACCA Congress
October 24, Banjul, The Gambia
by Jean Thiboutot with support from Jesus Chavez Sr.

Quality Credit Unions for Everyone

Agenda

Effective Collection Program


Written Lending Policies
Written Collection Policies
Written Collection Procedures
Education of Members
Selection and Training of Personnel
Identification of Delinquent Loans
The Collection Department
Methods of Managing Delinquency
Model Credit Union Guidelines on Collections

Introduction
1.
2.
3.
4.

The numbers and amounts of bad debts are increasing;


Laws are being or already passed to protect the debtor;
More difficult to recover collateral and overdue payments;
The art of collections, must operate within
A complex web of statutes, regulations and judicial
standards,
While working on efficiency, organization and
aggressiveness of a debt collection program.
5. A good collection department is more than one, which
complies with existing legal standards or board policy.

It collects money.

Results of High Delinquency


Cooperative operations that are
affected by high delinquency:

CAPITAL
LIQUIDITY
SERVICES
IMAGE

RESULTS OF HIGH DELINQUENCY


Lowers liquidity resulting to credit
rationing, external credit dependence,
reduced ability to provide services
that members want and need
Lowers profitability resulting to
diminishing ability to provide for
operational costs including staff
wages and slow build-up of
institutional capital

RESULTS OF HIGH DELINQUENCY


Negative reaction from the
members, possible loss of good
members, losing credibility
affecting the image of the
cooperative
No liquidity, no capital, another
lost cooperative!

Why the need to analyze loans?

Credit is the main line of the


coops business
How well a coop manages its
loan portfolio depends on how
efficient the analysis is

Loans in the coop are part of


the financial statement
classified as EARNING
ASSETS.
Since loans should be repaid
and considered earning
loans should remain as such.

WOCCU promotes:
An ideal PEARLS financial
structure of
- 95% productive assets
composed of loans (70-80%)
and liquid investments
- 5% unproductive assets

Loan Portfolio Analysis measures:

product performance
profitability
risk
policy effectiveness
market preferences

A sample tool and its indicators:


LOAN PORTFOLIO ANALYSIS
Coop Name

DELINQUENCY CATEGORIES
Amount
Granted

Current
Balance

Totals

0
Distribution of Current Balance
Total Delinquent Loan Portfolio

Non-Del. 1 Day-1 Mo. 1-3 Months 3-6 Months 6-12 Months >12 Months
AA
A
B
C
D
E
0

0
0%

0
0%

0
0%

0
0%

0
0%

PERCENTAGE OF DELINQUENT LOAN PORTFOLIO


REQUIRED LOAN LOSS ALLOWANCES
Percent of Allowances Required
Amount of Allowances by Range
Percent of Allowances by Range

0%
0
0%

TOTAL REQUIRED LOAN LOSS ALLOWANCES

EXCHANGE RATE

50.00

0%
0
0%

0
0%
0

0%
0%
0
0%

0%
0
0%

0%
0
0%

Loan Portfolio Analysis Tool

provides a summary of:


granted loan amount
current loan balance
non-delinquent and
delinquent portfolio by
range
required provisions

WOCCU promotes:
Loan Loss Provisioning of
100% for delinquent
loans of more than 12
months
35% for delinquent
loans of 1-12 months

Importance of Loan Portfolio Analysis:


determines risk exposure and
measures profitability
Loan Volume is Too Low

Loan Volume is Too High

Earning Potential is
not Maximized
High
Collection
Rate

Low
Delinquency
Ratio

Liquidity is
Potentially Low

High
Profitability
Ratio

Effective Collection Program


Must have 3 fundamental goals:
1. The reduction of losses due to delinquency.
2. The reduction of losses due to bankruptcy (insolvency)
of the member.
3. The protection of the credit union from undue
exposure to liability.

Effective Collection Program


1.
2.
3.
4.

Has an effective written collection policy and


procedures.
Low delinquency are one of the best means of sustaining
a sound financial condition.
Provides quality of member services.
This applies to any size credit union, whether it is staffed
by volunteers or a paid professional staff.

Effective Collection Program


Benefits of Effective Collections:

Procedures include:

1. Cash flow and funds provided to make additional loans


and to improve member services.
2. A high level of interest income will be maintained.
3. Improved financial condition of your credit union reserves and earnings will not be drained to offset
collection problem loans.

Essential Elements Of delinquency Control


1.
2.
3.
4.
5.

Written lending policies,


Written collection policies and procedures,
Education of members,
Selection and training of personnel,
Identification of delinquent loans (adequate and timely
management information system),
6. Correct computation of delinquency,
7. Schedule (report) of delinquent loans to be reported to the
board of directors,
8. Documentation, documentation, documentation.
9. Controlling delinquency.
10. Knowledgeable collectors in the laws and regulations and
authority to enforce credit union policy and procedures.

Effective Collection Program


Essential Elements Of Delinquency Control
11. Constant and consistent collection actions.
12. All collection information should be in one place.
13. Knowledgeable collectors of collections available outside
of the credit union.
14. Collection activity should continue after a loan has been
charged off.
15. Loan protection and disability insurance can improve the
amount collected.
Loan protection pays the loan should the borrower die
and disability insurance makes the loan payments if a
member is disabled due to an accident.

Written Lending Policies


Principles of safety and soundness require that the
board of directors establish written policies for loans
and lines-of-credit consistent with the relevant bylaws,
and other applicable laws (rules) and regulations of the
applicable country.
Credit committees and loan officers with strict lending
policies, can discourage all but a select few from
applying for loans,
Few delinquencies is preferred occasionally while
serving the members.
Lending policies should establish criteria for conditions
where collateral is required.

Written Lending Policies


1. The types of loans to be granted;
2. The maximum amount to be loaned on each
type of loan to an individual or regarding a
specific loan category in the aggregate;
3. The maturity limits on each type of loan;
4. The collateral requirements on each type of
secured loan;
5. Market based interest rates

5 Cs imbedded in Credit policy


1.
2.
3.
4.
5.

CAPACITY to repay
CHARACTER (members reputation)
CAPITAL (steady Asset & Savings Growth)
CONDITIONS (economy)
COLLATERAL It is a means of gaining
control over some of the borrowers assets or
capital

Written Collection Policies


The principles of safety and soundness require the
board of directors to establish and supervise an
effective loan collection program.
The collection policy should define the
following:
The objectives,
Personnel involved,
Procedures, and.
The means of measuring and controlling
delinquency.

Written Collection Policies


The collection policy should define the following:
1. Who is responsible for collecting the loans? Are
they the same people who make loans?
2. When a loan is considered delinquent (normally
7 to 10 days of the 1st missed payment.
3. Frequency of a delinquency report to the board
(monthly).
4. What information is contained in the delinquency
report?
5. When the delinquent borrower will be contacted
after a missed payment and the types of contact
used (letters, personal contact, phone calls).

Written Collection Policies


The collection policy should define the following:
6. Documenting the collection efforts of the
collector.
7. When the borrower should be contacted again if
there is no response and what should be done in
this situation.
8. When the co-maker will be contacted (normally
after the 1st missed payment).
9. The need for all collection information, contacts,
promises to pay, etc., to be placed in writing.
10. When collateral will be repossessed.

Written Collection Policies


The collection policy should define the following:
11. How collateral will be sold after repossession and the documentation
of the bids and the sale required.
12.

When loans can be extended or refinanced.


a. Loan extensions are an extension of the payment date and are to be
used for unexpected emergencies such as: death in the family,
hospitalization, family crisis, payroll problems, etc.
b. Refinanced loans should be granted based on the 5 Cs credit,
collateral, character, conditions of the loan, capacity to repay).
c. If the loan is co-made, the co-maker must sign the extension form.
d. Under no circumstances, are refinances used to reduce delinquency

Written Collection Policies


13. When loans will be charged-off and recoveries
accounted for.
14. Who will analyze delinquent loans and how often
15. Delinquency fees and when to stop accruing interest
on delinquent loans (after 2 months delinquent).
16. Do collectors receive a commission for loans
collected? If yes, how is commission paid and
monitored. Who is going to pay?
17. 3 ways to remove a loan from a delinquency list:
a. Pay the loan current.
b. Charge the loan off, or
c. Change the terms with a loan, or refinance.

Written Collection Procedures should include the following:


1.

2.
3.
4.
5.

The objectives making the recovery in cash, not the


collateral, establishing the reason for the delinquency, and
a repayment plan.
Who is responsible for working the delinquent loans on a
daily basis?
How often a delinquency report is produced (weekly).
What type of contact (letters, phone calls, personal
contacts) will be used and when.
When the 1st, 2nd, and 3rd contacts are to be made after the
missed payment(s). Combination of phone calls &
personal contacts.

Written Collection Procedures


6.

Establish a collection card for the delinquent borrower


when the 1st contact is made which includes all actions
taken to collect the loan (documenting the collection
efforts).
a. The documenting process is in case someone else
(volunteer, new employee, board member) assists
in collections, the history of the member is known
on one collection card. (A sample of a collection
card next!)

Sample Collection Card Page 1


ATTACHMENT #4 SAMPLE DELINQUENT BORROWER COLLECTION CARD

DELINQUENT BORROWER COLLECTION CARD


Member Name_______________________________________ Account #_____________________________________________
Address____________________________________________

Name of Co-signer______________________________________

Telephone Number___________________________________

Account Number of Co-signer______________________________

Place of Employment_________________________________

Address of Co-signer_____________________________________

Employment Address_________________________________

______________________________________________________

Employment Telephone_______________________________

Telephone Number of Co-signer____________________________

Original Amount of Loan_______________________________

Name of Co-signer's Employer_____________________________

Loan Purpose_______________________________________

Employer's Address______________________________________

Original Loan Maturity (date)___________________________

Employer's Telephone Number_____________________________

Original Loan Period (in months)________________________

Member Share Balance___________________________________

Frequency of Payments_______________________________

Co-signer's Share Balance_________________________________

Form of Loan Payment:

Collateral Description_____________________________________

(Payroll deduction, cash)______________________________

Collateral Value_________________________________________

Location of Collateral ________________________________

Condition of Collateral____________________________________

Observations________________________________________________________________________________________________
__________________________________________________________________________________________________________
Description of any modifications to the original loan contract__________________

Sample Collection Card Page 2


COLLECTION PROGRESS AND INFORMATION
Date of Collection Action

Type of Collection Action Taken

Results from Actions taken and any Observations Date of Next Action

Written Collection Procedures


7.

How the collection card system is to be organized (by day of


the month). The best collection programs follow-up daily.
8. What is done and what type of contact is used when there is
no response after the contact(s).
9. Immediate follow up after a missed promise to pay or a
collection letter in which the borrower did not respond.
Constant and consistent follow up is the key the squeaky
wheel gets the grease.
a. The member will always pay the institution that asks for
their payments rather than the one that never requests
payment.

Written Collection Procedures


10. Co-signer to receive all the contacts, calls,
and collection notices that the borrower
receives.
11. Collection procedures will have specifics for
making loan extensions, loan refinances and
repossessing collateral.
12. Collection staff must be allowed to collect
after-hours and on weekend.
a. Collections should not only be performed
during the workday but also after working
hours and on weekends.

Education Of Members
1. The collection of a loan begin prior to the
member obtaining the loan proceeds.
2. If the credit union attempts to advise the
member of their responsibilities on the
repayment of the loan, after they have obtained
the proceeds of the loan, it is too late.
3. All of the specifics and responsibilities need to
be spelled out in person to the member prior to
the loan proceeds being advanced.

Education Of Members
When loan is granted, the member and co-maker
reminded of the following:
1. Their obligation is to repay the loan in accordance with
terms of the note, and
2. The money they are borrowing belongs to the members;
3. Members are to notify credit union if their financial
situation changes or if the member has problems meeting
the repayment schedule.
4. If loan is repaid by payroll deduction, members
instructed that the credit union is accepting repayment of
the loan by payroll deduction for their benefit, but it is
still their responsibility to ensure that payments are made
on time.

Selection And Training Of Personnel


Collectors must:
1. Must be given the necessary authority so that
they can collect the loans.
2. Receive and review the delinquency report on a
weekly basis.
3. Start collection procedures - send collection
letters, make phone calls, and/or personal
contacts 7 to 10 days after the missed payment.
4. Review the collection card file daily 1st thing
each morning.
a. Find the members that have promised to make
payments and follow up to ensure that
payments have been made.
b. If not follow-up with a personal phone call to
find out why the payment was not made.

Selection And Training Of Personnel


5.

IMMEDIATELY, contact all delinquent borrowers in


which no payment or arrangement has been made.
Constant and consistent follow up is key to successful
collections.
6. Have as objectives
a. To be repaid in cash,
b. establish the reason for delinquency
c. A realistic repayment schedule that takes the
borrowers cash flow in mind, the value and life of
the collateral, and the impact on the credit union.

Selection And Training Of Personnel


7.

8.

9.

With personal contacts ask: how and who will make the
payment, when will the payment be made, and for how
much.
Place all collection information on the collection cards,
which have been organized by the day of the month:
letters and date sent, promises to pay, information about
co-signers, etc. All information should be in one place,
on this collection card.
Contact the co-signer every time the borrower is
contacted. Use them to assist with the collections of
the loan.

Selection And Training Of Personnel


10. If the borrower is unwilling to work with the credit
union, use other available alternatives such as:
collection agencies, lawyers, bailiffs, and repossession.
11. Follow through on any actions that are disclosed to the
borrower. Do not make idle threats.
12. Collect loans not only during working hours, but also
after work and on weekends.
13. Start collections on the most recent delinquent accounts
and large balance accounts.
a. When a loan becomes delinquent an immediate
response can make the difference between collecting
and not collecting.

Selection And Training Of Personnel


14. Below are the percentages that show the longer the loan
becomes delinquent and the probability on collecting
becomes less.
Past due in Days
Recovery Rate
30 days
95%
60 days
89%
90 days
80%
120 days
70%
240 days
50%
360 days
10%
15. Collectors through their actions establish the
culture and the members attitude towards timely
loan repayment!

Management And Officials Must:


1. Use collectors and lawyers instead of volunteer
collection committees.
2. Give collectors the authority needed to collect
loans.
3. Ensure that the workload is distributed fairly
among collectors and that collectors have the
necessary transportation to make collection
contacts.
4. Analyze the causes of delinquency, and make
changes in the lending process as needed.
5. Approve all loan extensions and refinances.
Under no circumstances are these to be used to
reduce delinquency.

Management And Officials Must:


6. Increase collection staff immediately if there is a
rapid increase in delinquency!
7. Charge off all loans when they are determined to
be uncollectible. They are no longer assets of
the credit union. However, collections should
continue on these loans.
8. Adequately fund the Allowance for Loan Loss
for all potential and current loan losses.
a. For any delinquent loan that has been
refinanced and becomes late again (> 1
month), they should be provided for in the
Allowance for Loan Loss account.

Management And Officials Must:


Make Collections easier by:
1.

2.
3.
4.
5.

Obtaining all necessary information on the loan


applications (how the member can be found personal
and credit references, street address, telephone numbers,
place of employment, supervisors name, etc.)
Determine borrower creditworthiness.
Verify the income, debt and credit references.
Establish a credit bureau or informal system with other
local credit unions.
Loan interviews should be conducted for all loans that
pose a risk to the credit union.

Management And Officials Must:


Make Collections easier by:
6. Do not over lend on collateral ask for
additional security or co-borrower.
7. All co-signers should have a financial position
that is stronger than the borrower. The same
information obtained for the primary borrower
should be obtained for the co-signer.
8. Loan terms should not exceed the useful life of
the collateral.
9. All delinquent borrowers should be contacted
early and often. The borrower must understand
you are serious about collecting.

Successful Collections:
1.
2.
3.

4.
5.

6.

Do not threaten delinquent borrowers. Credit union must


do what they say they are going to do.
Have accurate management information system MIS to
measure delinquency accurately.
Charge competitive loan rates and terms so the credit
union can attract quality borrowers. Charge different
interest rates on loans depending on the risk involved
(i.e., longer the maturity the higher the interest rate; older
the collateral the higher the interest rates).
Smaller loans should be granted to new borrowers so
they can establish a credit history with the credit union.
Have established written quarterly goals for the
delinquency and charge off ratios.
a. Management and employees should be appraised
based on the attainment on these goals.
Require adequate insurance on all collateral

Successful Lenders:
1.
2.

3.
4.
5.

Know their borrowers,


Maintain close contact with borrowers (frequent
payments, visit businesses, through other services
offered),
Provide appropriate credit products,
Offer competitive rates and terms.
Are fanatical about collecting on delinquent loans.

Identification Of Delinquent Loans


1. The first step in any collection program is the
computation of delinquency and identification
of the delinquent borrowers.
2. Data processing systems and some accounting
machines automatically calculate delinquency
and generate reports, which provide an aged
history of delinquent accounts. All other credit
unions must compute the amount of
delinquency and prepare a schedule manually.
3. How to Compute Delinquency - There are
several methods available for computing
delinquent loans. The discussions on the
computation of delinquency that follow fall into
two broad categories.

Identification Of Delinquent Loans


Delinquency Calculations:
This method is used by credit unions that have a manual
accounting system and calculate the interest owed and
collected and maintain the information on Individual
Share and Loan Ledgers.
This method can be utilized for both level payment and
non-level payment loans.

Identification Of Delinquent Loans


Delinquency Calculations:
The following procedures should be followed:
1. Run an amortization on the loan with the loan, interest
rate, maturity and payments.
a. Sight-check to compare the unpaid balance of the
loan with the balance shown on the amortization
schedule.
2. Determine the amount in arrears. Subtract the amount
for the specified date from the unpaid balance of the
loan.
3. Count number of delinquent payments. The arrears
divided by the amount of the scheduled monthly
payment - determine number of installments missed.
a. A part of an installment missed is considered to be a
whole installment missed.

Identification of Delinquent Loans


Delinquent Loan Report
A report is prepared monthly and given to the board of
directors, this report is called - Schedule of
Delinquent Loans
It should provide sufficient information to classify
delinquent loans on a monthly basis
A copy of the monthly schedule should be kept on file.

Delinquent Loan Report


At a minimum the delinquency report include :
1. Members account number,
2. Name of the borrower,
3. The date the loan was made,
4. The original amount of the loan,
5. The current loan balance of each delinquent loan,
which indicates the age of the delinquency (the
amount shown should be the unpaid balance of
each loan is the total unpaid principal,
6. How delinquent the loan is,
7. The date of last payment (excluding savings
transfers) should be entered in the designated
columns for each delinquent loan.

Delinquent Loan Report


FRM3C

SUMMARY
UNPAID

DELINQUENT
CATEGORIES

SAVINGS AND CREDIT COOPERATIVE INC.

NUMBER

BALANCES

2 < 3 MOS
3 < 6 MOS

ACCOUNT NAME OF BORROWER


NUMBER

TOTALS

DATE OF
LOAN

ORIGINAL

Loan

AMOUNT
OF LOAN

Refinanced
(yes/no)

TOTAL UPAID BALANCES OF DELINQUENT LOANS


TOTAL NUMBER OF DELINQUENT LOANS

UNPAID BALANCES OF LOANS DELINQUENT

DATE OF

1 MOS TO

2 TO LESS

3 TO LESS

6 TO LESS

12 MONTHS

< 2 MOS

THAN 3 MONTHS

THAN 6 MONTHS

THAN 12 MONTHS

AND OVER

$0.00
0

$0.00
0

$0.00
0

35.0% $
100.0% $

6 < 12 MOS
12 MOS & OVER

AS OF:

Amt in Allow.
Loan Loss

0.0% $
35.0% $
35.0% $

del < 2 mos

SCHEDULE OF DELINQUENT LOANS

Amt in Allow.
Loan Loss

$0.00
0

LAST
PAYMENT

SHARE
BALANCE

COMMENTS

Analysis Of Delinquency Report


The delinquency report should be analyzed with the
following in mind:
1. The trend of the number and the total loan amount in
each category.
2. The total number of delinquent loans,
3. The original date of when the loan was granted.
4. Who granted the delinquent loans? (Perhaps the credit
committee or loan officers are granting a lot of
delinquent loans).
5. Are there enough collectors in the office and in the field
to handle the level of delinquency?
6. Are lawyers and collections agencies being used
appropriately?

The Collection Department


1. A good collection department must be the right
mix of procedures, policy and people;
2. The procedures must be effective (and legal);
3. The policy must be realistic and humane, and
4. The people performing the collections must be
special.

The Collection Department

A good collection officer is a master of time, self-control


and persistence. They must know the following:
1. When to push (and when not to) and.
2. How to pursue their quarry without personal anger,
3. How to negotiate a fair repayment arrangement, and.
4. How to recognize a loss when they see one so that
valuable time will not be wasted before the account is
turned over to an attorney.

The Collection Department


The internal, administrative policies of a collection
department play an important role in shaping and
improving staff performance.
Punctuality,
Organization - strict procedures for handling
files,
Weekly meetings to iron out problems, talk off
frustrations and express gripes, and.
Periodic review of staff performance can, when
taken together, create an atmosphere of
professionalism conducive to good results.

Methods of Collecting Delinquent


Loans

Setting Up and Handling of Files When a collection


file is opened, all of the relevant information must be in
it, including the following:
1. Copies of the note,
2. Security agreement, if any,
3. Previous correspondence to or from the debtor in
connection with the delinquent indebtedness,
4. And any special information that may aid collection
effort (such as a comment from a board member that
the debtor is ill, unemployed, etc.).

Methods of Collecting Delinquent


Loans
The collection officer should verify accuracy of the
balance, the amount in arrears, and the payment record.
File arranged for ease of reference, with documents and
correspondence chronologically arranged on one side, and
a running diary or contact information sheet on the other.
Everything that occurs in the course of the collection
effort should be noted in the file, dated and initialed.

Methods Of Collecting Delinquent Loans


Collectors Approach to Borrowers Explore
the circumstances of the debtor.
1. Try to determine the reasons for nonpayment
without making negative assumptions about the
debtor.
2. Chances are great that the debtors problem is
real, and that the debtor is not attempting to
evade payment.
3. Once you know the reason for nonpayment,
consider alternatives offer the debtor, such as
refinancing, reduced payments, credit
counseling, etc. Let the debtor know that their
dilemma is resolvable, and that you will help.

Methods Of Collecting Delinquent Loans


Initial Contact
Whether your initial contact is by letter, telephone
or in person, remember, never resort to personal
insult, threats or angry tirades.
First of all, such conduct would expose to the
credit union to unnecessary liability.
Secondly, the first impression the debtor receives
will often shape the entire relationship.
If you turn the debtor off immediately, that is what
he will do to you.

Methods Of Collecting Delinquent Loans


Let the debtor know:
1. You are a professional.
2. You are willing to help.
3. You are taking action and will take any and
all measures possible to collect the debt.

Methods Of Collecting Delinquent


Loans
1.

2.

Impressions must be made simultaneously, in your


attitude, in the tone of your message, in the
suggestions you make.
Start off with an expression of concern, state the
problem frankly, get right to the point, and express
your willingness to help.

Methods Of Collecting Delinquent Loans


Subsequent Contacts Escalate your message quickly if a
debtor fails to satisfactorily respond, be sure to wait no
longer than that to send a second message.
1. Consistency and following through on what you
say is an important part of the overall message you
want to convey.
2. In your second letter, say only what you mean.
Mean everything you say.
3. Continue to avoid threats and insults. Make a
concrete suggestion for resolving the problem.

Methods
Of
Collecting
Delinquent Loans
If the debtor
fails
to answer,
do what you said,
when you said you would, do it.
If you think its too early to bring suit, or recovering
collateral, phrase the letter differently, and
If it is not answered, direct your attorney to send a letter
on his stationery giving the debtor a final opportunity to
contact the credit union. Many debtors respond at
this point.

Methods Of Collecting Delinquent Loans


1. Partial Payments may be an effective
means of assisting a debtor in bringing up
an arrearage.
2. Some debtors fall behind in the transition
from one job to another, or in times of
illness or other time-limited hardship.
3. Partial or reduced payments take the
pressure off the debtor while allowing the
credit union to continue collecting
something.

Methods Of Collecting Delinquent Loans


4. Partial payment arrangement, be sure in
writing to make it clear that the
arrangement is not a precedent and that it
is being extended purely because of the
temporary hardship faced by the debtor.
5. Include in the letter the date beyond which
payments shall resume in their full
amount.

The Decision For Legal Collection


Criteria to take legal collection action. Factors include:
1. Have effective in-house techniques been exhausted?
2. Can the debtor be found or be served?
3. Are there sufficient assets to satisfy the judgment?
4. If the loan is secured, is the collateral worth
retrieving?
5. Can attorneys fees and costs be recovered from the
debtor?
6. Are any defenses available to the debtor?

Methods Of Managing Delinquency


1. Accept that most delinquency is caused not by
bad borrowers but by credit institutions that have
not implemented an effective methodology.
2. Create an image and philosophy that does not
consider late payment acceptable. Creating
disciplined borrowers is critical to the success of
the credit union.
3. Members must value the credit service. Loan
products should suit members needs, the
delivery process should be convenient, and
members should be made to feel that the
organization respects and cares about them.

Methods Of Managing Delinquency


1. Accept that most delinquency is caused not by
bad borrowers but by credit institutions that have
not implemented an effective methodology.
2. Create an image and philosophy that does not
consider late payment acceptable. Creating
disciplined borrowers is critical to the success of
the credit union.
3. Members must value the credit service. Loan
products should suit members needs, the
delivery process should be convenient, and
members should be made to feel that the
organization respects and cares about them.

Methods Of Managing Delinquency


4.

There are no bad borrowers only bad loans.


a. Make sure loan sizes and terms do not make
repayment difficult. Do not base loans on
projections, or on the value of the asset, base them
on the members capacity to repay.
5. Establish an incentive system that uses both financial
and non-financial incentives to encourage on time
repayments.
a. Borrower - larger loans, follow up loans, interest
rebates and access to training (micro-enterprise
lending, credit consulting on consumer loans and
how to manage their money)
b. Disincentives penalty fees, no further access to
loans, collection of collateral, and legal action.)

Methods Of Managing Delinquency


6. Ensure the benefits of on-time repayment and
cost of late repayment far outweigh the benefits
of late repayment and cost of on-time
repayment.
7. Develop systems that provide information to
collectors/field workers that enable them to
conduct effective and timely follow-up on loans
and to manage their portfolios efficiently.
8. Develop a portfolio information system that
enables management to conduct timely and
useful analysis of portfolio quality, determine
trends in the portfolio over time, and identify
possible causes of delinquency.

Methods Of Managing Delinquency


9.

Effective delinquency follow-up procedures extremely


important.
10. Develop a policy that lists the steps to take when a loan
becomes past due.
a. Examples include holding frequent staff meetings to
discuss problem loans, visiting delinquent
borrowers, and following-up on promised payments,
etc.
11. Establish a target level of acceptable delinquency
12. Establish prudent loan loss reserves and write off
policies.
13. Ensure that income and assets are accurately reflected
in the financial statements.

Analysis of Collection Program

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COLLECTION PROGRAM CONTROLS


Are accurate determinations of delinquency made?
Does the board regularly review the monthly delinquency reports?
Does the board analyze the delinquency, loss ratio, liquidity and reserve position in
relation to one another?
Is the Allowance for Loan Losses account adequate?
Is the allowance account adjusted regularly as required?
Are lending policies revised to control delinquency?
Are steps taken to ensure that collection is made on insured loans? (Disability,
death, non-filing, etc.)
Are loan protection insurance claims and payments handled by a supervisor not
involved with approving, disbursing, or collecting loans?
Is a register of loan protection claims maintained?
Are in-house collection personnel trained and experienced in proper collection
procedures?
Does management allocate sufficient time for collectors to properly function?
Is the collection department staffed for after-hours and weekend contacts?
Are persons who approve or disburse loans denied work in the collection
department?
Are collectors denied access to cash?
Are collectors required to use pre-numbered cash received vouchers?
Are formal policies in place to determine when legal action, repossession,
professional placement and charge-off will occur?
Does management periodically review the workload/performance of the collection
department?
Are timely initial and follow-up contacts made?
Are collection cards established for delinquent accounts?
Are follow-ups made on all promises for payment?
Are skip traces checked with all possible sources?
Do tellers have "want lists" of delinquent borrowers?
Are debts to be discharged in a bankruptcy checked against those listed by the
borrower?
Are legal actions, including repossessions, taken on a timely basis?
Are cosigners contacted early in the collection process?
Are terminating employees provided with exit interviews and payment coupon
books?
Is counseling routinely offered and provided to borrowers who are responsive, yet
continually delinquent?
Are extensions and refinancing policies designed to avoid future delinquency?
Is the legal collector used when permissible?

Thank you for your attention!