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The economic fallout from the coronavirus disease outbreak is expected to hit all lenders. While the coronavirus crisis disrupts operations in every sector, alternative lending companies and microfinance institutions (MFIs) have also been badly hit.
But they are hopeful of bouncing back as the stakeholders feel there will be curbed demand for loans after the lockdown restrictions are lifted. Meanwhile, the problems of a liquidity shortage, credit disbursement, and delinquent loans have the probability to shine like never before.
In the article, we are going to explain how debt collection system improvement can ease negative economic effects caused by the coronavirus pandemic and illustrate it with one of our cases.
Nowadays, risks in financial services are larger in scope and scale than ever before. Along with revenue maximization and operational cost minimization, debt recovery management has moved to the center stage in defining superior performance. It is obvious that financial institutions face enormous credit risks.
With slowing trade and economic activity, fewer loans will be issued, and alternative lending for small businesses will shrink. The combined effect of credit losses from non-performing loans and a shrinking portfolio will lead to serious pressure on equity capital.
The massive increase of overdue debts and delinquent loans forces MFIs to look for improved automated debt collection system and debt recovery management software.
Under coronavirus pandemic conditions past-due or non-collectible loans have become an implicit part of the financial sector. MFIs have to seek to implement new software for debt management. Debt collection automation has become an effective means to carry out more effective collection strategies. They include:
In spite of global recession expectations, digital payments transaction value is going to increase. Digitalization is becoming a trend in the banking industry. The forecast in Fig. 1 proves the tendency.
Fig. 1. Transaction value forecast for MFIs.
But the client should see collections as an ongoing activity, in which the various actors are coordinated and flexible.
Further, collection activities should be directed at all individuals involved in the loan, in accordance with the client’s risk profile and the probability of repayment. Best practices in this area include:
Alisa Noll, the Founder of Ascent Microfinance, gladly agreed to share her personal experience and thoughts about MFIs and the way they work under coronavirus influence.
Alisa Noll says that they have initiated a three-month delay in payment because they realize that many of their clients may have lost their jobs and unable to afford any sort of payments in this period. She also admits that if a client is able to make payment in full within six months, there will be no interest [rate].
According to Alisa Noll’s personal experience, most of the micro-financial organizations she worked for are non-profit and small in size. That’s why they are hesitant to make large investments in software because of its high cost. But she adds that if we speak of larger organizations like Economic Community Development Institute (ECDI) or KIVA, they would be interested in this due to the complexity of their debt payments.
The skyrocketing amount of overdue debts made MFIs take urgent actions in order to reach the safe shore in the upcoming economic storm.
Fintech companies offered a helping hand in providing microloan organizations with sophisticated software for debt collection management and debt collection automation. A combination of their efforts makes it possible to strengthen debt recovery strategies by focusing on cost reduction, saving time, and maximizing resources. Figure 2 reflects how deep Fintech has been adopted across major national banking markets.
Fig. 2. The fintech adoption rate in MFIs. Source: Siegfried Silberman
Combined efforts of Fintech and banks in the sphere of debt collection can cope with the problem by implementing the following steps:
Under current conditions of the coronavirus pandemic, a lot of banks and MFIs have faced the wave of bad debts that overwhelmed them. The situation requires immediate resolution both in qualitative and quantitative aspects.
One of our customers encountered a situation when the existing debt collection system has become outdated and could not effectively resolve its debt recovery function.
By implementing innovative technologies, we updated several debt collection automation services and improved the debt management system. After the first six months of operation, our automated debt collection system made it possible to manage problematic debts 32% faster on average while reducing operational costs and increasing the debt recovery rate at the same time.
MFIs may be forced to make hard decisions about how to support their customers by suspending repayments, restructuring existing loans, and providing liquidity to their customers to manage the crisis. If the solutions were easy, this wouldn’t be a crisis.
It seems likely that without significant support and concerted action, many MFIs are at risk in the coming storm.
The questions are: what steps can be taken now to ensure the industry’s survival and how it can contribute to the eventual economic recovery?
Director of Business Development
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