Bad debts are the proportion of an amount or receivables owed to an organization by a business or a person that can no longer be collected, generally through Accounts Receivable or Loans.
When a borrower is unable to repay a bank or a financial institution within the time frame specified, the bad debt recovery procedure begins. The receivable may be recovered by the lender as a partial payment or as equity. Bad debt can also be recovered by selling the borrower's collateral.
Suppose a borrower obtains a vehicle loan but fails to repay it on time, the lender may repossess the vehicle, sell it, and recover the debt.
1. Debt Analysis
A debt analysis is manually examining each applicant's credit behavior using one's own credit risk rating system or credit agencies from third parties. Accept low-risk candidates while rejecting high-risk clients. Increase the credit evaluation requirements for medium-risk borrowers.
2. Touch base with disengaged customers
Pass the debtor's data to the desk collector for follow-up, and employ a field collector to follow up on more debtors. (Typically used in the banking industry.)
3. Debt Recovery
If the debt is not collected, the lender will use a third party known as a collection service to collect the debt and report delinquent if the debtors or customers do not pay.
1. Inadequate workforce and insufficient time
Manual credit analysis takes time and may result in incorrect approvals due to human error. In manual debt collection processes, relying only on human resources to follow up on all debtors and monitor payments, there may not be enough resources when there is an unexpected increase in debtors.
2. One-size-fits-all Communication strategies
Because not all debtors have the same profile, background, and behavior, a cookie-cutter strategy, which is frequently used by lenders, may not have a substantial impact.
3. Inappropriate tone and approach
With annoying calls and written messages at inappropriate times, debtors may feel harassed by desk collectors or field collectors.
4. Inability of the customer to pay
In the absence of a guided solution, mass phoning or texting debtors who are in financial difficulty will not inspire consumers or debtors to make on-time payments.
To better understand your customer's behavior, a data-driven customer process is required.
Gathering data across all lines of business, including structured and unstructured data, may create a comprehensive customer picture while removing the issue of data barriers.
This approach allows debt collectors to discover important features of debtors as well as trends and patterns of debtors who are at high risk of default.
Using internal data, both structured and unstructured, from all departments will improve analytical findings, as will relying on web data sources, particularly those offering indicators of actual events.
External influences should not be ignored since they might have a direct impact on the debtor's or customer's behavior. As a result, while doing big data analytics and predictive analytics, external data such as market trends, gaps, and dangers should be considered.
To achieve near-real-time data aggregation and increase prediction accuracy for a more effective gathering procedure, artificial intelligence must be included in this process.
This approach is no longer effective enough to give lenders timely insights, particularly in this fast-changing era.
Because it is a lagging indicator that cannot capture the most recent change in trend and patterns of debtor's credit risk.
Using advanced technologies such as automated debt collection software, downstream operations can classify debtors into various segments in near real-time.
An early warning system can be used to notify rapidly and detect red flags for proactive outreach.
Debt Recovery in a reasonable timeframe can reduce bad debts and maintain banks and other organizations in good shape. To do this, lenders can utilize debt collection software to automate the early-stage debt collection process and successfully recover the majority of bad debts that have been outstanding for a long time. This saves you a lot of time and allows you to focus on high-risk debtors, which instantly lowers your bank's or organization's bad debt rate.
The debt collection process is no longer as simple and clear as it once was since the number of debtors will not decrease with time and debtor behavior will alter from generation to generation. How do you ensure that the debtor pays you first, and how do you optimize your resources to increase collection efficiencies?
Here's the answer. With our automated debt collection software, Maxyfi, you can automate your bad debt recovery process and recover the majority of your bad debts. To learn more about us, read our debt collection automation articles.