Question

Describe the key steps of the debt recovert process

Answer 1

There can be many types of agents involved in the lending process, each type of such diverse agents can not adopt the same procedure for debt recovery, due to regulation or otherwise.

A few example of types of Debt Recovery based on agents could be -

1. A retail customer taking a loan/mortgage from commercial bank

2. A corporation taking a working capital/ financing from commercial banks

3. A retail customer taking a micro loan from microfinance institutions

Assuming that the questions refers to the debt recovery process followed by a commercial bank lending to a retail customer -

a> Proactive approach is to send a gentle reminder about payment due date approaching at least a week/10 days before, repeating the same with 3 days remaining in to due date.

b> making an attempt to make contact with the clients via prefferred contact methods within a few days after due date.

c> send a final overdue notice for payment about a week after due date

d> Attempt to personally establish a contact with customer

e> Consider using a debt recovery agent

f> Taking the collateral under banks' protection and starting to liquidate the same

e> If the collteral is not sufficient and loan due amount is large, banks may explore legal actions too.

For corporate sector the debt collection process is little different, as lenders usually tend to establish a close co-operation with corporates using dedicated relationship managers who are in direct contact with company CFOs.

In between making a contact and taking help of debt recovery agency, there could be a renegotiation of the terms of payment, conducive to the current debt service capacity of company. Changes may include extension of tenure (loan payment period) and/or lower interest rate.

As coporate loans are large and ussually given in syndicated manner (several large commercial banks putting together the entire loan amount) usually there is larger stakes involved for corporates to default on their committments, and of course there is final step of litigation which both parties tries to avoid. Recovery from litigation is usually after a very long period and the cost of recovery may not make the process viable, if the judiciary is not credible.

Debt recovery process in microfinance industry is usually slightly more different than normal commercial loan. Microfinance institution can not take any legal action on their customers, estimated cost of default is usually factored in cost of loan (interest rate) upto certain level (decided by management of course). Recovery process usually involves recovery agents making several contacts with customers and may involve employing a recovery agency..

Had the question mentioned type of loan recovery, more specific details could have been outlined.