According to RBI financial stability report, released in December 2021, banks’ gross non-performing assets (GNPA) could decline from 6.9% in September 2021 to 8.1% by September 2022 in the baseline scenario, while in the severe crisis, they could reach 9.5% percent. While the NPAs might not reach extreme levels due to stakeholder actions and economic recovery, they would still be at levels where comprehensive action would be needed.
Reasons for higher NPAs include inadequate credit risk assessmentexcessive exposure to insolvent segments, deficiencies in monitoring the health of the portfolio, lack of analysis of delinquency patterns, encourage lending to priority sectors, impulsive decisions by borrowers, ineffective early warning systems, inadequate documentation, lack of proper data management, irregular communication with borrowers, faulty credit risk management and many more.
Borrowers are unaware of the implications of loan defaults
In many cases, borrowers are unaware of the serious consequences of defaulting on loans – a factor that minimizes their chances of easily obtaining loans in the future. It is critical that banks and other non-bank financial companies consider a holistic approach to mitigating and resolving NPAs.
According to a KPMG reportthe digital lending sector is expected to be the highest penetration sector through digital channels in India by 2023 with a growth rate of 48% and a valuation of $350 billion from its valuation of $110 billion in 2019. The digital push as seen during the pandemic, will continue to increase the preference for digital banking and communication channels.
The rapid rise of the FinTech ecosystem and digitization initiatives in banking indicate a holistic push towards digital. But what needs to be seen is the willingness of the banking and non-banking financial ecosystem in India to tap into the growing digital momentum in loan collection and debt collection.
Does the traditional approach to collections work?
The traditional approach to collections includes a heavy reliance on manual intervention, crude tactics to force customers to pay, outsourcing of collections to agencies with questionable credentials, relentless calling of customers, and intimidate with strong messages. However, today’s customers are more mature and sensitive. They have experienced and adopted 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 growing customer demand for change have been among the main triggers for the FinTech revolution and the emergence of disruptive banking models.
Artificial intelligence makes debt collections more human
AI-powered technology platforms provide the answer to a more human approach to debt collection. They bring 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, improve customer experience and reduce NPAs in the process. It has been observed that more than 50% of personal loan collections can be successfully achieved through digital and automated mode. This potential is not yet fully exploited.
Advanced customer segmentation helps categorize borrowers into multiple groups, which can then be approached differently for better results and greater efficiency. For example, borrowers in the maturity phase may simply need to be reminded or nudged about their upcoming due payments. Automating these reminders and adding customer-specific information, using digital channels and relaying them according to customer preferences, can make a big difference. Likewise, digital lenders, FinTechs and the BNPL segment, where loan ticket sizes are small but volumes are high, need a bespoke digital collections strategy that is completely aligned with the customer category. .
Strategic adjustments in customer communication make a big difference
Communication channels have evolved a lot today in terms of reach, intelligence, integrability, personalization and flexibility. Using a comprehensive communication approach across all channels including WhatsApp, SMS, Voicebots, Chatbots, IVR and emails can be a good start. After customer segmentation, communications should be personalized with appropriate information and explored for vernacular adaptation. It is essential to also take into account the preferences of the borrower in terms of time, place, responsiveness and mode of communication for better response and conversions.
AI-powered chatbots can contact customers, streamline payments, and automate callback communications without human intervention. Pre-programmed and intelligent voice bot calls are much better because they allow borrowers to choose when and how they can repay their loans. The customer’s response to the call can automatically trigger the text messages with digital payment links and the bot stays on the call to help complete the transaction successfully.
Big data analysis helps determine behavior patterns and identify the most appropriate communication strategies. In fact, the entire communication journey can be pre-planned and pre-programmed as a matrix where all possible responses are considered and the next step is triggered automatically based on the customer’s response to the previous step. Communications become completely human-free, automated, meaningful and intelligent.
Push, don’t push; empathy not aggression
The AI engine can continuously tweak the communication strategy based on the results and refine actions accordingly. Support for AI and data science that focus on behavioral analysis, predictive models, improving segmentation efforts and implementing personalized communications with customers can help make collection strategies more effective. Lenders can use insightful data to identify warning signs of delinquencies and likely defaults, predict when payments may be missed, and offer tailored solutions.
Postponing the digital transformation of debt collection while embracing digital in other banking functions can lead to significant gaps in a comprehensive and effective digital strategy. The experiences that customers take with them to collections are long-lasting and contribute significantly to customer loyalty. Therefore, it is relevant that banks and other non-bank lenders start working on a future roadmap to transform collections. The seamless combination of financial services and emerging technologies in the collections will help build a robust digital economy, drive a holistic transformation of the banking industry and set a new benchmark for customer experience.
The opinions expressed above are those of the author.
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