Question: Differentiate between the collection function and recovery function of a financial institution. The collection function collects payments from accounts which are delinquent, that is those who make payments later than their contractual due date. This is happened when the loan not yet turns bad; the problem is not so serious. The recovery function collects money still owed on accounts after the financial institution has classified the account as non-performing or has written off the account as a loss. This is happened when the loan turning bad; and the problem is considered very serious. Depends on the marks and explain both collection process and recovery process The functions of collection and recovery also help the financial institution evaluate the effectiveness of its lending policies. Therefore, these functions help preserve the quality of the consumer loan portfolio and avoid unnecessary write-offs or bad debts.
The objectives of a debt collection process involve:
First, Efficiency in efforts made to bring loans back to a regular or current status. This means to make the borrower to pay on time. Second, maintaining delinquencies within acceptable limits. This is to limit the bank losses and to avoid the problem becoming even worst. For example, maintaining the delinquencies within 2% or 3% depends on the financial institutions itself. Or for example, the customer now delay payment for 2 weeks, bank should make sure them won’t delay for 3 weeks or even a month. Third, is to manage collection costs efficiently. This means that to minimize the cost in the collection process. The cost involves salary of the bank officer; cost of paper works for example letter send to customer and so on. The collection function must be smoothly operated with the following: (how bank help loan officer in the collection process) First, a highly automated system for detecting and tackling delinquencies in its early stages. That is the computer will generated a report indicate which customer delay to make repayment, so officer no need to check one by one and it will save their time. Second, a system to track consumer contacts and follow up on overdue repayments. That is the bank has a database that will store all customer contact, so the officer can contact them easily and follow up on the overdue repayments. Third, the development of adequate information base for the collectors to work on. That is the bank can develop more comprehensive or adequate information that may help bank officer in the collection process.
Question: List some of the stages of a collection cycle.
The behavioural approach of the collector towards a delinquent borrower goes through a cycle. The cycle can generally be classified into four stages. For example the stages of a delinquent housing loan account is 1.
Personal contact stage
Non-performing or write-off
For early stage, there is one-month installment overdue. It is highly automated where a standard computer generated reminders are sent. This standard computer generated reminders sent is just to remind the customer they have delay their repayment because sometimes the customer may forget it. Besides, the phone reminders are another option at this stage. The officer can call the customers and remind their housing loan is overdue by one installment. In this stage, the loan collection method is short and simple; the letter sent and a phone call is just a mild reminder to the account holder. For personal contact stage, there is a two months installment overdue. The collector becomes more involved in the account to determine why the delinquency is deteriorating and why the borrower is facing difficulty. All personal contacts should be documented until resolution. Stronger letters of demand may be sent. That is the collector can either call the borrower to demand repayment or to send letter to demand the repayment. However, the...
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