Bank NPLs (24) - Handling Bad, Delinquent and Recalcitrant Debtors via DiMR


Monday, June 08, 2020 / 06:20 AM / by Debtors Africa/ Header Image Credit:   EcoGraphics

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Bad debts can be a corporate time-wasting distortion for lenders and more importantly they could represent avoidable loss of economic value. The poor behavior of borrowers falls within a framework of measurable values which include expected loss (EL), probability of default (PD), exposure at default (ED) and loss given default (LGD). The historical behavior pattern of the customer enables credit analysts assess the probability of default given other metrics related to the business and the global economic conditions. The amount outstanding at the time of default is a book entry easily obtainable from risk management departments. A digital library of debtors is a technically useful way of providing content to the credit cost equation and establish a risk-weighted price for loans (see illustration and equation below).

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The expected loss framework helps in the analysis and management of credit as it serves as a spoke in the wheel of digital debtor-monitoring and review process. A searchable digital debtor's registry such as debtors should be in a position to provide calculations of the potential cost of credit given a debtor's credit status. The calculations could serve as an indicative assessment tool. The update and monitoring of debtor positions and credit costs would help in managing recalcitrant debtors and selectively revise debtor positions and outlooks based on recent actions.  Digital Monitoring Reports (DiMR) will help the market keep updated records of debtor-status and enable new lenders gain insight into pre-existing credit situations of prospective borrowers.


Anticipated Recovery Strategies After COVID-19.


The post COVID-19 lending era will have the following character:

  • Actions like; Institution of legal actions, prosecution of delinquent customers especially where no collateral exist or are not perfected at all will subsist.
  • For All Asset Debentures, appointment of Receiver Managers would also still be very relevant. Terms of engagement will either be to protect the assets from being run down, to manage the business until the bank is fully repaid, or sometimes to sell off the assets.
  • Use of law enforcement agencies such as SFU, EFCC etc. especially where there is fraud, returned cheque, diversion of funds will also still be relevant, but might not be very effective, especially, when the issue of COVID-19, becomes the basis of default or perceived diversion.
  • Disposal of collaterals: If proceeds is identified as sufficient, the bank would prefer to dispose of assets to recoup the debt. If insufficient, this may be the last resort. However, this could become tricky based on the resources that would be available to the real estate market. There could be glut in the sector.


Additional Alternatives

  • Out of Court Settlement/Integration of Alternative Dispute Resolution (ADR) Channels can become an invaluable tool for delinquent debt resolution. Especially, if financial institutions would choose to pursue resolution of court cases using the fast track window while exploring the possibility of out-of-court settlement for the cases in court.
  • Registration of delinquent accounts with Credit Bureaus, would ensure delinquent customers have difficulty borrowing in future, thereby forcing them to come back to negotiate their indebtedness with the lender.
  • Contracting of debt recovery to Aggressive Recovery Agents.
  • Restructure/Workout/Declassification of major accounts to reduce NPL volume
  • Mirroring the AMCON structure by creating, or sourcing for investors to buy out debts
  • Active management and recovery of Watch-listed accounts. This would prevent further deterioration in the quality of the assets and will drastically reduce the possibility for future provisions.
  • Negotiation of waivers and concessions. This would serve as incentives for debtor customers to pay off their indebtedness.
  • Use of tested and aggressive Property Agents. They should have wide network,
  • Debt Scoring. This is a debt collection strategy, that gives the lender the ability to predict the accounts that are likely to pay sooner, and therefore. you can allow the lender to dedicate more internal resources to collecting on these accounts.
  • Pressure maintained through constant phone calls to the debtors, referees, guarantors and to the branches (in the case of a bank).
  • Moral Suasion: In this case, the lender instead of realizing the assets, would make some peaceful attempt with the borrower for repayment.
  • Contacting contract employers for pending payments (enforce domiciliation of contract proceeds)


The Strategic Loan Recovery Quadrant


It pertinent to mention, that whatever Recovery Strategy is adopted post COVID-19; would be driven primarily by the debtor customer's disposition pre-COVID-19 for the existing customers, as well the location of the new cases in the quadrant.

For willing/Able, and Willing/Unable customers, there should be opportunities for restructuring, extensions, interest waiver, and other palliatives that would allow for soft landings, business revivals, and possibly more credit opportunities. While for Unwilling/Able, and Unwilling/Unable, the most stringent of the recovery options may need to adopted to a logical conclusion (see matrix illustration below).

 Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

The Challenges

  • Weak or no collateral; making alternative sources of recovery difficult or impossible
  • Specialized collaterals that have restricted market/buyers
  • Litigations and fear of possible litigation
  • Relationships that are more complicated beyond the exposure; where the bank just needs to tread carefully
  • Untimely Perfection or non-perfection of our collateral making it unrealizable or prolonging realization.
  • Fraud related accounts that do not have avenues for recovery
  • The lull in the property market that has made the realization of buildings and other landed property very difficult
  • Internal collusion of staff and loans that are not straightforward
  • The Nigerian factor where even security agencies can be compromised
  • Unavailability of social data or any structured identification process
  • The societal knack for protecting the rich even when the wealth is questionable

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Related Reports (PDF)

1.      Download the Full PDF Report - Debtors Africa, May 13, 2020

2.     Executive Summary PDF - Proshare, May 14, 2020

3.     AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018

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