Bank credit management

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Question: Differentiate between the collection function and recovery function of a financial institution. The collection function collects payments from accounts which are delinquent, that is those who make payments later than their contractual due date. This is happened when the loan not yet turns bad; the problem is not so serious. The recovery function collects money still owed on accounts after the financial institution has classified the account as non-performing or has written off the account as a loss. This is happened when the loan turning bad; and the problem is considered very serious.

Depends on the marks and explain both collection process and recovery process The functions of collection and recovery also help the financial institution evaluate the effectiveness of its lending policies. Therefore, these functions help preserve the quality of the consumer loan portfolio and avoid unnecessary write-offs or bad debts. The objectives of a debt collection process involve: First, Efficiency in efforts made to bring loans back to a regular or current status. This means to make the borrower to pay on time.

Second, maintaining delinquencies thin acceptable limits. This is to limit the bank losses and to avoid the problem becoming even worst. For example, maintaining the delinquencies within 2% or 3% depends on the financial institutions itself. Or for example, the customer now delay payment for 2 weeks, bank should make sure them won’t delay for 3 weeks or even a month. Third, is to manage collection costs efficiently. This means that to minimize the cost in the collection process. The cost involves salary of the bank officer; cost of paper works for example letter send to customer and so on.

The collection function just be smoothly operated with the following: (how bank help loan officer in the collection process) First, a highly automated system for detecting and tackling delinquencies in its early stages. That is the computer will generated a report indicate which customer delay to make repayment, so officer no need to check one by one and it will save their time. Second, a system to track consumer contacts and follow up on overdue repayments. That is the bank has a database that will store all customer contact, so the officer can contact them easily and follow up on the overdue payments.

Third, the development of adequate information base for the collectors to work on. That is the bank can develop more comprehensive or adequate information that may help bank officer in the collection process. Question: List some of the stages of a collection cycle. The behavioral approach of the collector towards a delinquent borrower goes through a cycle. The cycle can generally be classified into four stages. For example the stages of a delinquent housing loan account is 1 . Early stage 2. Personal contact stage 3. Serious delinquency 4. Non-performing or write-off

For early stage, toner Is one-Mont Installment overdue. It Is mainly automated winner a standard computer generated reminders are sent. This standard computer generated reminders sent is Just to remind the customer they have delay their repayment because sometimes the customer may forget it. Besides, the phone reminders are another option at this stage. The officer can call the customers and remind their housing loan is overdue by one installment. In this stage, the loan collection method is short and simple; the letter sent and a phone call is Just a mild reminder to the account holder.

For personal contact stage, there is a two months installment overdue. The collector becomes more involved in the account to determine why the delinquency is deteriorating and why the borrower is facing difficulty. All personal contacts should be documented until resolution. Stronger letters of demand may be sent. That is the collector can either call the borrower to demand repayment or to send letter to demand the repayment. However, the letter is harsher, indicate that the bank will take action against customers if they still delay their repayment. In this stage, the collector is to motivate prompt payment.

For serious delinquency, there are three to six months installments overdue. The collector’s approach to the delinquency should become more serious. If the customer still not yet settles their overdue installments, the collector will be preparing to proceed with litigation by preparing all the documents and evidences and prepare to take legal action. For non-performing or write-off, there is more than six months’ installments overdue. At this point, the collector has decided that the account will be a loss to the financial institution as the chance of collect bank is very low. The collection will pass on to the recovery function.

The recovery officer can take legal action or enforce security to recover the amount due. The objectives of a debt recovery process involve: First, maintaining loan losses within acceptable limits. This means to minimize the bank losses, and to avoid the problem becoming even worst. Second, generate loss recoveries at desired levels. This means try to recover the loan amount as much as possible. Third, to counsel customers who are experiencing difficulty handling debt. This means to help or advice the customers who are facing financial difficulty to make them unable to handle the debt.

This will help to increase the chance of repaying the loan. Forth, ensure consistency with the financial institution’s objectives. This means the recovery officer’s actions must consistent with bank policy in the process of recovery. Lastly, manage collection and recovery costs efficiently. This means that to minimize the cost in the collection and recovery process. (1) CLASSIFICATION OF LOANS The classification of loans and advances is provided for in Bank Engage Malaysia’s BAN) guidelines GAP (Agrarians Panda 3). As they are guidelines, the classification of individual accounts is determined on a case-to-case basis.

Broadly, the classifications are as follows: Current – The payment of installments is up-to-date. Means that the customer is always paid on time. Delinquent – For delinquent, there is one installment not paid. Non-performing Loans – the loan is more than 6 months in arrears The non-performing loans are further classified for purpose of provision: – Sub-standard: For sub-standard, the period of default is 6 months but sees than Y months. I en provision Tort write-TOT Is 2 Dull: For adult, ten period of default is 9 months but less than 12 months.

The collection doubtful and there is high risk of ultimate default. The provision for write-off is 50%. Bad: For bad, the period of default is 12 months and above. The debt is unconvertible, worthless and recovery chances are nil. The provision for write-off is 100%. Question: List some ways to reschedule and restructure a loan (2) When a borrower is deemed temporarily unable to repay his loan installments or et his payment commitments on time or fully, the financial institution should consider rescheduling the loan to within the repayment capacity of the borrower, provided the request appears genuine.

A request is considered when a borrower is faced with an unexpected situation like retrenchment. The rescheduling of loans always relate to time where the structure of loan still remain the same. That is you are not changing the type of the loan, you Just reduce the monthly installments or change the payment period. The method/alternatives of rescheduling of loan are: First, lengthening the repayment period so that the monthly installments will be reduced to within the repayment capacity of the borrower.

For example, a 10 years loan lengthen to 15 years loans, so the monthly installment will be lower. Second, postponing the payment of installments for a short period. For example, postpone the payment of installment for 1 or 2 months. Or in the case of customers lose it Job, it can postpone the payment of installment until he find the Job. Third, Tiered or stepped-up repayments where the installment amount is reduced for an agreed period, and gradually increased.

This means that instead of paying fixed amount of installments, customer can pay REARM for first 6 months, then ROOM for remaining period. This is happened when bank expect customer’s financial position is very bad now but will be better in future. (3) Restructuring of a loan is a common remedy in early attempts to negotiate an acceptable solution for a delinquent loan to be regularities or for a non-performing loan to be resolved. The restructuring of loans is completely changing the structure or type of the loans.

For example overdraft changes to term loan. For example, a lenient borrower of an overdraft account can be offered the alternative of restructuring the overdraft into a term loan with a fixed monthly repayment. This refer to short term loan change to long term loan where it would be more affordable to customers as amount of repayment will be lesser as they have longer repayment term. The benefits of rescheduling and restructuring of loans to the lender are the lenders able to improve his loan portfolio and reduce the level of delinquent and non-performing account.

This will result in the avoidance of loan loss provision which will impact profitability. (Q: What cross default clause, what action can be taken Day a H when cross adult napped. A cross adult Is a Emma adult Day a borrower as a direct result of another default. A cross default clause covers the all the indebtedness of the borrower with ALL financial institutions. The financial institution will incorporate such clauses to enable it review the situation and to provide it with the right to remedies even though the account may not be technically in defaults.

That is a default of its other loans allows the financial institution to take accessory action. For example, commencing legal action or litigation to avail itself to the remedies provided for in the loan agreement even though there may not be any delinquency in payment. This may allow the financial institution to do some damage control before it is too late. In order words, when cross default happen, this may indicate that the borrower conducted a breach of terms and conditions (covenants) of the offer letter.

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