Big Idea: Removing aggression from the debt- recovery equation could reduce banks’ NPAs

As per RBI’s financial stability report, released in December 2021, the Gross Non-Performing Assets (GNPAs) of banks may rise from 6.9 per cent in September 2021 to 8.1 per cent by September 2022 under the baseline scenario, while under the severe stress scenario they may rise to 9.5 per cent. While the NPAs may not reach extreme levels due to the steps taken by the stakeholders and the reviving economy, they would still be at levels where comprehensive measures would be required.

The reasons for higher NPAs include inadequate credit risk assessment, excessive exposure to credit unworthy segments, deficiencies in portfolio health tracking, lack of analysis of delinquency patterns, push for priority sector lending, impulsive decisions by borrowers, inefficient early warning systems, improper documentation, lack of proper data management, irregular communication with the borrowers, faulty credit risk management and many more.

Borrowers Unaware of the Implications of Loan Repayment Defaults

In many cases, borrowers remain unaware of the severe implications of defaulting on loan repayments – a factor that minimizes their chances of securing loans easily in the future. It is essential for banks and other non-banking finance companies to consider a holistic approach for mitigating and resolving NPAs. 

As per a KPMG report, the digital lending sector is forecasted to be the highest penetration sector by digital channels in India by 2023 with a growth rate of 48 percent and a valuation of USD350 billion from its valuation of USD110 billion in 2019. The push for digital as seen during the pandemic, will continue to raise the preference for digital banking and digital communication channels.

The rapid rise of the FinTech ecosystem and digitization initiatives in banking indicate a holistic push for digital. But what needs to be seen is the readiness of banking and non-banking finance ecosystem in India to leverage the growing momentum for digital when it comes to loan collections and debt recoveries.

Is the traditional approach to collections working?

The traditional approach to collections includes a heavy reliance on manual intervention, crude tactics to force customers to pay, outsourcing recoveries to agencies with questionable credentials, calling up customers relentlessly and intimidating them with strong messages. However, customers today are more mature and sensitive. They have experienced and embraced the superior customer service offered by other industries that are at the forefront of innovation and transformation. In fact, the slow pace of digital transformation in traditional banking and rising customer demand for a change were some of the key triggers for the FinTech revolution and disruptive banking models to emerge.

Artificial Intelligence Making Debt Collections More Humane 

AI powered technology platforms are providing the answer to a more humane approach to debt collections. They are bringing together the power of intelligence, automation, digitization and data analytics, which can be a long-term solution for banks to adopt a nudge based approach. AI can help banks determine customer preferences, align collection strategies accordingly, enhance customer experience and reduce NPAs in the process. It has been observed that more than 50% of recoveries in retail loans can be completed successfully through digital and automated mode. This potential hasn’t been fully tapped into as yet.

An evolved customer segmentation helps in classifying borrowers into multiple groups, which can then be approached differently for better outcomes and higher efficiencies. For example, borrowers in the pre-due stage may need to be just gently reminded or nudged about their upcoming due payments. Automating these reminders and adding customer specific information, using digital channels and relaying them as per customer preferences, can make a lot of difference. Similarly digital lenders, FinTechs and the BNPL segment, where the loan ticket sizes are small but volumes are high, need a tailored digital-collections strategy, which is completely aligned to the customer category.

Strategic Tweaks in Communication with Customers Make a Big Difference

Communication channels have evolved extensively today in terms of reach, intelligence, integrability, customizability and flexibility. Using a comprehensive communications approach across channels, including WhatsApp, SMS, Voicebots, Chatbots, IVRs and Emails, can be a good start. After customer segmentation, communications should be personalized with appropriate information and explored for vernacular languages adaptation. It is critical to also consider the borrower’s preferences for time, place, receptivity and mode of communications for better response and conversions.

AI powered conversational voicebots can reach out to customers, streamline payments and automate reminder communications without any human intervention. Pre-programmed and intelligent voicebots calls are much better as they give a comfort to borrowers to choose when and how they can repay loans. Customer response to the call can automatically trigger the text messages with digital payment links and the bot stays on the call to help them complete the transaction successfully.

Big data analytics helps in ascertaining behavioural patterns and identifying the most suitable communications strategies. In fact, the entire communications journey can be pre-planned and pre-programmed like a matrix where all possible response are factored in and the next stage gets triggered automatically based on customer response to the previous stage. The communications becomes completely human intervention free, automated, meaningful and intelligent.

Nudging, not pushing; empathy not aggression 

The AI engine can continually keep tweaking the communications strategy based on the outcomes and fine tuning the actions accordingly. Support from AI and data science that focus on behavioural analysis, predictive models, improving segmentation efforts and enabling tailored communications with customers can help in making collection strategies more effective. Lenders can use relevant data to identify warning signals for likely delinquencies and defaults, predict situations where payments can be missed, and offer customized solutions.

Postponing digital transformation in debt collections while embracing digital in other banking functions can lead to prominent gaps in a comprehensive and effective digital strategy. The experiences that customers carry with them during collections are long-lasting and contribute significantly towards ensuring customer loyalty. Hence, it is pertinent that banks and other non-banking lenders start working on a future roadmap for transforming collections. The seamless combination of financial services and emerging technologies in collections will contribute towards building a robust digital economy, drive holistic banking industry transformation and set a new benchmark for customer experience.