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MFI Software: Debt Collection System is in the Crossfire

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.

Coronavirus outbreak is a test for debt management collection system 

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.

Debt management software: an anti-downturn tool for microcredit loan industry 

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:

  • Significant interaction with the client.
  • Careful analysis of the client’s situation.
  • Omnichannel contact over the duration of the loan.
  • Appropriate payment alternatives for clients.
  • Recording, monitoring, and following up on all collection activities.
  • Client compliance with negotiated agreements.

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.

Global Digital Payments Transactional Value in USD billion Forecast Period 2018 2024

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: 

  • Adopt proactive strategies to quell delinquency.
  • Improve the internal productivity of the collection area.
  • Ensure the quality of information gathering and management.
  • Develop well-defined strategies for the collection of delinquent loans.

Does microfinance have micro-problems?

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.

Debt collection software: a soft problem solution at a challenging time

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.

FinTech adoption rates across our 20 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:

  • Debt management and collection system improvement. A comprehensive collection system is critical to keeping your company solvent. Debt collection software will improve data connectivity, decisioning, workflow, and self-service capabilities that can be managed by business users. The result is a more effective, customer-focused collections process that turns even hard-to-find and difficult debtors into valuable customers while increasing recoveries and reducing costs.
  • Advanced debt monitoring helps you be the first to know when a debtor’s ability to pay has improved. It provides the opportunity to monitor an account’s credit score and use patterns, so you can act quickly to collect the debt before the competitor does. You can monitor unpaid debt in your portfolio and track your accounts and get notifications of new contact information and changes that indicate financial improvement or ability to pay.
  • Focusing on accounts with the greatest debt recovery potentialIt maximizes debt collections efforts and helps you make more profitable decisions. By scoring, segmenting, and prioritizing accounts, you can develop better strategies to collect more debt. 
  • Locate hard-to-find debtors to obtain up-to-date contact information for your most hard-to-locate debtors by frequently refreshing extensive databases of consumer and commercial information, enabling you to locate elusive debtors, make contact, and collect unpaid debt.
Advanced Capabilities Of ABLE Collection
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Actions speak louder than words, or A piece of our experience in a case study 

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.

The Conclusion 

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?

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