Another Side of Client Management: Achieving Excellence in Debt Collections and Recovery

Another side of
Client Management:
Achieving Excellence
in Debt Collections
and Recovery
Manos Margaritis
Deputy CEO

The 2 sides of customer management
Servicing
the
customer
Managing
the
stressed
customer

The stressed environment
10 Steps to best practice
What is coming

European Banking Federation, 2012 report
Cyprus 2013: 39%
Spain 2013: 17%
The European Landscape

Ring-Fencing
bad assets remain in the bank
Stand-alone Bad Banks
option A: New Bank gets the Bad Debt
option B: Bad Debt remains in the Original Bank
‘SAREB’ & NAMA’ model
bad assets transferred to nationalized financial institutions

governments establish the extent
to which they will assume the risk
of the bad assets
choices about the assets to be
transferred, the structure, the
business case, the portfolio
strategy, and the operating model

Vertical Approach
Special units in ‘Traditional’ Banks and new ‘Specialist’
Servicing ≠ Owning
Debt Buying more visible as an opportunity
at 3~10% of nominal value
Asset Management / Real Estate

Vertical Approach
Restructuring
Accelerated Recovery
Soft
Hard
Early
Segmentation

Why should other areas care?
Date Title Presentation 11
GCC NPLs :
1,5 % - 10%

a. the approach can be
transferred

a. the approach can be transferred
Date Title Presentation 13

“Bank of China Is Selling Bad
Loans to Investment-Bank Unit”
The Wall Street Journal, March 27, 2014
Bank of China , one of the country's big four state-owned banks, has
started a new strategy of unloading soured loans to its investment-
banking unit, which then would try to restructure the debt with the hope
of recovering more than it paid for the loans, according to bank
officials.…, the problem loan would no longer stay on the bank's
balance sheet after the sale under Chinese accounting rules,

b. every aspect of the
Collection Process is
optimized

Collection
Assessment
Framework
CAF

Collection Assessment Framework CAF
Area
Area
Single authority / organization
Phased management, rule based
progress
Dedicated collection staff
Capacity planning
Account or Customer Level ?
The right offer to the right customer at
the right time
Pool vs Ownership
Centrally defined collection tools
& communication scripts
Measure & Motivate your collector

Area
Area
progress
Capacity planning
the right time
Pool vs Ownership
Best
Practice

Area
progress
Capacity planning
the right time
Pool vs Ownership
Best
PracticeArea Clues

Area
progress
Capacity planning
the right time
Pool vs Ownership
Best
PracticeArea Clues GAPS

Area
progress
Capacity planning
the right time
Pool vs Ownership
Best
System
Support

Area
progress
Capacity planning
the right time
Pool vs Ownership
Best
System
Support ( Y/N/ Partial )

Area
progress
Capacity planning
the right time
Pool vs Ownership
Best
System
Support ( adapt fast )

Area
progress
Capacity planning
the right time
Pool vs Ownership
Best
System
Support
Prioritize
& Plan

progress
Area Best Practice Clues GAP System
Support
(Y/N/Parti
al)
System
Support
(can you
change the
implementatio
n fast?)
Plan
Phased
management,
rule based
progress
Clear Separation
between Phases,
consistent
treatment
Do you have a
communication and action
plan for customers in the
early delinquency stage and
litigation phase?
Is pressure applied
progressive?
Do you divide management
into phases?
Do you have a defined
consistent collection
approach applied by a
specialized unit within the
bank’s organization for each
phase?

Are the right communications and
actions for customers in the early
delinquency stage followed? Are
they different from those required
when litigation is involved?

Is pressure applied
progressive?
1kg
3kg
5kg
10kg

Is treatment spilt into phases?

Management phases
Soft
Pre-litigation
Litigation
Recovery

Define a consistent collection
approach applied by a specialised
unit within the bank’s organization
for each phase

During early phases,
Is the focus on working out a
solution in cooperation with the
customer, giving high priority to the
protection of the customer
relationship?
aim is to minimize the
number of cases
moving through to the
later stages

During late phases,
does focus shifts from protecting the
customer relationship to protecting
assets and minimizing losses?

Is moving from phase to phase
predefined and clearly stated?
Not based only on DPD but
factor in risk information

Do you allow some space for ad-hoc
management but with close monitor
and control?

Support
(Y/N/Partial)
System
Support
(can you
change the
implementatio
n fast?)
Plan
Dedicated
collection
staff
Employ dedicated,
well trained staff.
The internal
organization of the
collection department
directly affects its
performance
Do you employ
dedicated collection
staff?
Do you train them?
roles and job
descriptions (from
collection manager to
skip tracing agent)

The right offer to the right
customer at the right time
Support
(Y/N/Parti
al)
System
Support
(can you
change the
implementation
fast?)
Plan
The right
offer to the
right
customer at
the right
time
Segmentation,
Collect by
objectives
Do you segment
the portfolio
using
customer/accoun
t analytics?
Do you Use Static
AND Behavioral
metrics ?
Do you increase
self-cure?
Do you avoid
customer
irritation?

The next wave of technology as a
catalyst
Machine learning & Data science

Challenge
Current Status
At each collection stage several actions
are possible.
Currently, the Collection Manager
decides which actions to apply – and
describes that in terms of a static
strategy related to segments
Goal
Find which collection actions should be
applied at each collection stage in
order to optimize the revenue* of the
collection process
*revenue incorporates fees, interest, payments, collection
cost

Even for simple modeling
State in our solution are defined using three attributes
Bucket
Number of months
Percentage of unpaid debt / total debt
Discretized in ten categories: [0..10], [10..20], .. [90..100]
Risk level
{N/A, low, medium, high, very high}

MDP formulation
S4
S1
S2
S5
S6
S3
S8
S7
S9
a1, 0.5
R=10
a4, 0.1
R=9
a2, 0.15
R=20
a3, 0.25
R=7
a7,0.5
R=-100
a6, 0.1
R=-10
a4, 0.5
R=-10
a5, 0.4
R=-14
a6, 0.1
R=-10
a4,0.1
R=-100
a7,0.5
R=10
a7,0.5
R=100
a1,0.3
R=10
a3,0.4
R=7
a7,0.5
R=10
a7,0.4
R=19
a7,0.1
R=-10
a3,0.1
R=-100
41
Goal is to find π: 𝑆 → 𝐴:
max Eπ(s) = { 𝛾ℎ 𝑟ℎℎ
𝑖=1 } =
𝑇 𝑠, π 𝑠 , 𝑠′ (𝑟 𝑠, 𝑎, 𝑠′ + 𝛾 Ε𝜋 𝑠′ )𝑠′
0 < 𝛾 ≤ 1
Model the system as the tuple:
(S,A,T,R) where:
S: states of the system
A: actions list
T: Transition probabilities
R: rewards

Why this is not easy
Non-trivial representation
Shortage in know-how
Paradigm shift

Collecting under stress
10 Steps to best practice
What is coming

end-to-end solution
embedding best practices
fully parameterisable
quick deployment
A new generation of software

Another Side of Client Management: Achieving Excellence in Debt Collections and Recovery

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Another Side of Client Management: Achieving Excellence in Debt Collections and Recovery