Craft Consumer Lending - complete series

02
DOWNLOAD NOW, FREE RESOURCE:
“ESSENTIALS OF CONSUMERFINANCE”
(15 KILLER MODULES, 195 PAGES)
ACTUA RI AL
MANA GE MEN T
PRIN CI PLES
PRODU CT
PROGRA M
APPROA CH
PROCESS
AUTO M ATI ON
PORTFOL IO
MANA GE MEN T
RI SK-RE WA RD
TRA DEOFF
Produ ct
Devel op ment
Process
Portfol io
Management
Process
Eval uation&
ApprovalProcess
AccountServicing
Process
Coll ection&
RecoveryProcess
Loss Recogni ti on
Process
6 P’S OF CONSUMER CREDITCONSUMER RISK PRINCIPLES
PR AKAR S ATRAI NING© 2019

FREE RESOURCE
INTRODUCTIONTO CONSUMER
CREDIT RISK MANAGEMENT

©2019 Prakarsa Training 3
6 P’S OF CONSUMER CREDIT
Product
Development
Process
Portfolio
Management
Process
Evaluation&
ApprovalProcess
AccountServicing
Process
Collection&
RecoveryProcess
Loss Recognition
Process

CONSUMER LENDINGCHARACTERISTIC
Large Customer base
Large volume, small loans
Products tied to customer life cycle needs
Reliant on indirect business sourcing
Limited/poor financial data available
Process dependent, volume approval process
Portfolio management by aggregate
performance statistics

COMMONRISKS FOR CONSUMERLENDINGBUSINESSES
Credit/Direct
Lending Risk
Documentation Risk
Operation/Process
Risk
System Risk
Fraud Risk
Collateral Risk
Interest Rate Risk
Legal/Regulatory
Risk
Political (Sovereign)
Risk
Disaster/Even Risk

FREE RESOURCE
CONSUMERCREDIT RISK
ManagementPrinciples

CONSUMER CREDIT RISK MANAGEMENTPRINCIPLES
 Actuarial Management
 Product Program Approach
 Process Automation
 Portfolio Management
 Risk And Reward Trade-off

ACTUARIAL MANAGEMENT
 Based upon actuarial methods, statistical
quantification of probabilities
 Reliable and precise quantification of
repayment probabilities and credit-worthiness
 Attempt to predict overall profit and loss but
not individual loss
 A tool to maximize risk/reward

PRODUCTPROGRAM APPROACH
 An effective management tool to prevent
subsequent problems
 The program analyzes all the key process of
the consumer risk management
- Product Development Process
- Evaluation & Approval Process
- Account Servicing Process
- Loss Recognition Process
- Management Information Process
 A fully loaded profitability model with
minimum 3 years projection

PROCESSAUTOMATION
Because of the enormous transaction volume,
automation is crucial in the following areas :
 Evaluation & Approval
 Account Servicing
 Collection & Recovery
 Loss recognition
 Management Information & Reporting

PORTFOLIOMANAGEMENT
 Through good and reliable management
system
 Identify the potential areas of concern in
order to take early remedial actions
 Control quality and limit undue exposures
 Manage and diversify credit exposures
 Measure the risk/reward profile of extending
credit

RISK & REWARD TRADE OFF
 For all benefits there is an inherent risk
 Credit officers should not be risk aversive
 The purpose of consumer risk management is not
to be eliminate, but to limit, control and reduce it
 Optimization of profit is the ultimate goal

CONSUMERCREDIT RISK MANAGEMENTMODEL
 It comprises six processes and links to each other
 All processes are dynamic and interactive
 Information derived from one process strongly
influences decisions being made in other
processes
 The effectiveness depends a through
understanding of all processes and how they
interact
 Our aim in this workshop is to introduce to you
how these processes can be effectively managed
and its applications

FREE RESOURCE
CREDIT POLICY & PROCESS

APPROVAL RULES
Objectives
 To describe types of authority
and delegation of approval
 To maintain the independent of
credit approval
 To ensure appropriate level of
review based on size, complexity
of the credit transaction or
product program
Multiple Initial System
 Any credit approval requires
more than a single approval
initial
 Officers with responsibility and
delegation for granting credit
 Delegation by individual
capability, experience, training,
and skill. NOT BY POSITION
 Officers with a credit authority
equal to or higher than the
amount approved
 Each officer checks different
aspect of each operation
 Each officer adds a different
value to decision criteria

APPROVAL HIERARCHY
Credit PolicyCommit tee
CEO & IntegratedRisk Head
ConsumerCredit Officer/
Signer
Consumer Head
ConsumerSegmentHead
Product/Funct ional/Specialists

BASED ON TYPE OF CREDIT
Requirement for Approval
Focused to grant credit to group of clients
 With similar characteristics
 With similar product requirements
 With similar risk profiles
 Subject to standard terms and conditions

REQUIREMENTFOR APPROVAL
Approval Rules for
Product Programs
For new & exiting
product programs, the
following approval
requires:
 President Director/Integrated
Risk Head
 Consumer Banking
Head/Consumer Segment
Head
 Product/functional Specialists
Approval rules for
Individual Transactions
For Individual
transactions within a
product program, the
following approval
requires:
 Credit Risk Management
Head
 Credit Committee Members
 Credit Officers
 Credit Signers

FREE RESOURCE
PRODUCT DEVELOPMENT
PROCESS
 n

OBJECTIVES& KEY ASPECTS
Objectives
 Determine feasibility of
product in term of :
- Revenues / Earnings
- Net Credit losses
- Profit
- Return on total
assets
 Respond to business
needs
 Anticipate
environmental changes
Key Aspects
 Market analysis
 Competitive
environment
 Target market
 Product features
 External influences
 Internal influences
 Product profitability

PRODUCT DEVELOPMENTPROCESSKEY ASPECTS(1/5)
1. MarketAnalysis
 Size/Growth rate
 Competition
 Demographics of the market i.e., customer needs
and preference

2. CompetitiveEnvironment
 Identify competitors
 Market share
 Products and terms
offered by competitors

4. Productfeatures
 Term/Revolving
 Direct/Indirect
 Secured/Clean
 Recourse/Non-recourse
 Pricing
 Interest rate
 Fees
 Terms
 Minimum/Maximum
amount
 Late charges
 Appraisal requirement

TYPICALCONSUMERCREDIT PRODUCT
Consumer
Revolving
Indirect(a)
Unsecured
Direct
Unsecuredsecured
Term /
Installment
Indirect (a)Direct
UnsecuredUnsecured securedsecured
Credit Type
& Source
Typical
Credit
Products
-1st
Mortgages
-2nd Mortgage
-Home
Improvements
Personal Loan
Tuition Loans
Auto Mobil
Mobile Homes
Recreational
Vehicle
Boats
Student loans
Loans(B)
Large line of
Credit secured
By 1st
or 2nd
mortgages
Bankcards
T&E Cards
Large line of
Credit
Card driven
Private
Label
Retailers
Cards
a. May be recourse or on-recourse
b. Usually guaranteed by the federal Governm

5. Externalinfluences
 Economy
 Employment trends
 Legal regulatory
6. Internalinfluences
 Current products
 Operation capacity
 Sourcing channels
 Growth resources

PRODUCT DEVELOPMENTPROCESSKEY ASPECTS
Questions to consider
 Is the market saturated ?
 What can we do to enhance our product or usage?
 Can we make a profit?
Questions to consider
 Do you have a good monitoring system tracking
on the product profitability regularly ?
 When will the product be profitable? Is it realistic ?
 Is the projected credit loss in line with the industry?
 Is the return justifiable versus the risks taken on the
product?
 Does the return meet with the corporate hurdle
rate?

PRODUCT DEVELOPMENTPROCESS KEY ASPECTS
7. Productprofitability
 Must understand key revenue and expense drivers
 Marketing and acquisition expenses precede booking
 Net customer revenues on installment products begin
at a peak and decline; revolving products build up
over time
 Credit extension costs occur in the initial period
 Collection costs are small initially but rise as accounts
become delinquent
 Set benchmark levels of credit losses
 Determining break-even point

PRODUCT DEVELOPMENTPROCESS
 Credit product are offered based on : PRODUCTPROGRAMS
 All relevant aspects of Product Development must be submitted for
approval in this document
 Actual performance can be regularly tracked versus :
- Forecasting volume, revenue and expenses
- Forecasting delinquency and losses
- Forecasting RORA ; ROE etc
 All NEW programs must be reviewed at least annually
 For MATURE programs, review can be extended
 An earlier review may be required when :
• Significant adverse changes in performance
• Significant changes in terms and conditions
• Significant changes in forecasting volumes, i.e.peak
outstanding or peak number of accounts
ProductProgram

PRODUCTPROGRAM
 The document should cover the following areas :
 Executive summary
 Product description
 Target market and competitive environment
 Principal terms and conditions
 Evaluation and approval process
 Account servicing process
 Collection and loss recognition process
 MIS, portfolio performance and commentary
 Funding strategy
 Functional organization chart
 Product profitability model

 We should establish policies and guidelines governing
the level, scope and timing of product review
conducted by an independent party
 The purpose of product reviews are :
 To evaluate product program performance
 To alert management to potential risks
 To take action to prevent product performance
deterioration
 To assess continual strategic fit
 Product reviews are based on different approved
product programs
PRODUCTPROGRAM REVIEW

FREE RESOURCE
PROFITABILITYANALYSIS

PROFITABILITYANALYSIS
 Identify and analyze RISK and REWAR
components
 Segment Customers ‘based on objectives’
 Track the Timing of ‘financial component’
 Define Products that ‘satisfy objectives’
 Manage/Maximize Profitability

PRODUCTPROFITABILITY
Purpose
 Control
 Predictability
 Maximize profitability; NOT minimize loss
Need to understand the components which make a product profitable over time :
 Acquisition Cost
 Receivables Trend Revenue
 Evaluation & Approval Cost
 Operation Cost
 Early settlement/Attrition Expenses
 Collection Cost
 Loss Wave
 Recovery Trend Net Credit Loss
 Others

EXAMPLES OF A PRODUCT PROFITABILITY MODEL

STAGES OF IMPACT ON FINANCIAL COMPONENTS

PRODUCTPROFITABILITY– COST SEQUENCE
Fixed Costs : Distribution & Delivery
Operation Variable Costs
Credit Losses &
Collections ExpensesMarketing
0 1 2 3
Time
Rp

PROFITABILITY“DRIVERS”
Manage key ‘Drivers” to achieve profit
objectives :
 Rp CPA ( Cost per account acquired)
 % Approval
 % Activation or Loan Take-Down
 % Line Utilization (for revolving products)
 % Attrition or Early Settlement
 % Net Credit Loss

PORTFOLIOPROFITABILITY
 A portfolio P & L is Built from a series of
vintage product models. Any acquisition plan
must reflect what the portfolio can support
reasonably over time
 Vintage measures performance from the date
of booking

PRODUCTPROFITABILITY- SUMMARY
 Exiting and new product planning tool
 Budget and forecast formulation
 Reference for measuring and monitoring product
performance
 Identification of area for profitability improvement
 Price assessment and product funding
 Product analysis by vintage and acquisition source
 Differentiation of products by contribution to profit
 Provide basis for expense distribution
 Provide basis for performing stress tests/sensitivity
analysis

FREE RESOURCE
EVALUATION & APPROVAL PROCESS

ESSENTIALELEMENTS
 Meet the volume and market penetration
targets of the specific credit products
 Able to predict risk, and to control it
 Estimate the cost of acquiring new customers
 Comply with laws and regulations
 Achieve a risk / reward balance

KEY CONSIDERATIONS
Products
UnsecuredSecured
Mortgage
Aut o
Car d
Cleanline of credit
Pl
Businesschannels
Direct Indirect
Walk-ins
Mail solicitation
Take ones
Pr omotions
Branchreferr al
Sales/ Telemar keting
Cr oss-sell
Portfoliopurchase
Credit Evaluation
Type of Evaluation
Degree of Evaluation
COST

5 BASICFRONT-ENDEVALUATIONSTEPS
Application
Complete
Mee tcredit
Scree ning
cr iteria
Mee ts
Debt burden
requir ements
Credit
Checks
Ver ification
Returnfor
completion
Yes Yes Yes Yes
No
Decline DeclineDecline Decline
No No No No
Customerapplies
For credit
Offer credit
To customers

COST BENEFITOF EVALUATION
Screening cost factor : risk vs. return
Risk
Higher
Loan
Size
How much should you spend for
Different product types?
*
*
*
*
*
*
*
Mortgage
Low cost High cost
Screening Cost

APPLICATIONFORM
The first formal contact with customer
The key data source about the customer
for credit evaluation
A permanent business link
 Servicing
 Collection
 Marketing
A legal contract

APPLICATIONFORM DEVELOPMENTCONSIDERATIONS
 Business
Management
 Credit
 Marketing
 Legal
 Collections
 Operat ions/ Legal
 CustomerService
Target Market
Time Cost
Acquisition
Source
Product

EVALUATION& APPROVAL‘TOOLS’
 Judgmental
 ApplicationScore

EVALUATION& APPROVALTOOLS-JUDGMENTALAPPROACH
 Evaluation based on THREE Cs of Credit
 Character
 Capacity
 Collateral
 Must follow a decision path based on
 Documented acceptance criteria
 Exceptions
 Highly dependent on the experience/intelligence of evaluators
 Is adequate when scoring does not apply
 Achieves a best estimate that repayment likelihood is high

EVALUATION& APPROVALTOOLS– APPLICATIONSCORE
Statistical credit evaluation method based on
actuarial information of past credit experience
Scoring quantifies repayment probabilities of “ good”
or “ bad” accounts
Utilizes a combination of
 Application data
 Credit bureau data
 External data
Evaluates new customers
Calculated at time of credit request

DEBT BURDEN ANALYSIS
Quantifies customer’s
ability to pay, not
willingness
Can be considered as a
guideline in the credit
decision process
Purposes
 Reduces risk
 Determines the loan
amount that can be
afforded
 Applicable to regular
installment payment
products
Type of Analysis
Minimum income
requirement
Debt-to-income ratio
Disposable monthly-
income ratio

DEBT BURDEN ANALYSIS
 Limitations
 Data of debts and income are not always
complete and accurate
 People’s situation changes very quickly
 Expenses vary according to lifestyle and
region
 Not statistically derived
 Should only be used as a guideline, not as a
reason to approve

CREDIT BUREAU
Agencies that provide
information about debts,
and individuals’ credit
behavior
They are dependent on
subscribers ‘input and
public records
Quality of information is
inconsistent
Do not contain all credit
and debt information
Limitations
 Number of subscribers
 Opportunity and frequency of
information update
 Not all individuals are registered
 Legal constraints
 Costs

CREDIT BUREAU
Early
Bureau
Check
Time
Late
Levelof
risk
CreditEvaluation
Process
Low
Risk
High
Risk Judgmental
Evaluation Method
Scoring

VERIFICATION
 Final step in extending credit; help to minimize fraud
 Tries to verify some information supplied by applicant
 Should be handled by experienced professionals
 Should have specific procedures to follow
 Often difficult for self-employed applicant;need to
look at trends
 Benefits of verification must be weighed against cost

METHOD OF VERIFICATION
Method RelativeCost Used To Verify
Check ID Number Low Identity
Telepho neinformation Low Residence;residencephone
Payrollstubs Low Emplo yment; income
Tax return Low income
Credit bureau report Moderate Identify;residence,employment
Contactcompany Moderate Emplo yment
Retail commoditycheck Moderate Dealers(for indirectsourcing)
Visit to residence High Residence,collateral
Visit to dealers High Collateral

AUTOMATEDVERIFICATIONPROCEDURES
Work with information from application
Program identifies “exceptions”
Matching of characteristics predictive of fraud or
false information
Examples :
Age vs. years on job
Age vs. income
Tear of birth as stated; year of birth as coded in ID
number

EVALUATION& APPROVALPROCESS- SUMMARY
Obtain  Tools to obtain
information
 Application form
 Credit bureau
 Evaluate for credit
decision
 Judgmental/Scoring
 Debt burden analysis
 Verification
 Customer data
 Collateral existence &
value
Evaluate
Verify Information

EVALUATION& APPROVALPROCESSSUMMARY
Credit
Evaluation = Risk
Control
Striking the right risk/reward balance

FREE RESOURCE
INTRODUCTIONTO CREDIT SCORING

CREDIT SCORING
 A statistical model of a financial institution’s past credit
experience
 A mirror image of the past
 A predictor of expected risk
Scoring quantifies repayment probabilities of “ good” or “bad”
accounts
Utilizes a combination of
Application data
Internal data
Credit bureau data
External data
Evaluate new customers (application score)
Evaluates exiting customers (behavior score)

TYPES OF SCORES
 Two primary types of score models
 Credit scoring
 Behavior scoring
Credit scoring models deal with new
applicants (demographic)
Behavior scoring models deal with
exiting customers (behavioral)

1 What is your age
Under 25 (7) 25-29 (16) 30-34 (10) 35-39(6) 40-44 (13) 45-49(11) 50+ (8)
2 How many year have you lived at your current address
Less than1(-10) 1-2(-3) 2-3(0) 3-5(4) 5-9(14) 10 or more(25)
3 Do you own your own home or rent
Own (30) Rent (-20) Others (18)
4 How many years have you hold your current job
Less than 0.5(-12) 0.5-1.5 (0) 1.5-3(15) 3-10 (18) over10 (10)
5 Do you have a current bank loan
Yes (5) No (0)
6 You Gender
Male (0) Female(+20)
7 You marital status
Single (-5) Married (+10) Other (-7)
8 Do you have a home telephone
Yes (8) No(0)
9 How many T&E and Bankcards do you hold
(0) 1-3(12) 4-6(10) >6(-5)
1 What is your age
Under 25 (7) 25-29 (16) 30-34 (10) 35-39(6) 40-44 (13) 45-49(11) 50+ (8)
2 How many year have you lived at your current address
Less than1(-10) 1-2(-3) 2-3(0) 3-5(4) 5-9(14) 10 or more(25)
3 Do you own your own home or rent
Own (30) Rent (-20) Others (18)
4 How many years have you hold your current job
Less than 0.5(-12) 0.5-1.5 (0) 1.5-3(15) 3-10 (18) over10 (10)
5 Do you have a current bank loan
Yes (5) No (0)
6 You Gender
Male (0) Female(+20)
7 You marital status
Single (-5) Married (+10) Other (-7)
8 Do you have a home telephone
Yes (8) No(0)
9 How many T&E and Bankcards do you hold
(0) 1-3(12) 4-6(10) >6(-5)
-These are 9 of the typical questions to ask new applicants
-Possible points are shown in parenthesis
-Add up the total number of points obtained
Questi ons
Poi nts

JUDGMENTVS. SCORING
Judgmental Scoring
Impact of changing Unknown Precise
Credit policies
Criteria Subjective / Empirical
biased

SCORECARDDEVELOPMENT
 Descriptions and product
record
 Portfolio size
 Volume of application
 Sample selection
 Systems capacity and
support
 Legal/regulatory
environment
 MIS
 Assign project manager and form
project team
 Understand product history and
future plans
 Develop and design sample
 Determine sample size
 Select score characteristics
 Develop model based on
statistical methodology
 Validate result and set cut-off
 Develop monitoring MIS

OVERRIDES
Decisions contrary to score
 High-side
 Low- side
Should be allowed
Must be tracked
Withdrawals

HOW ARE SCORES MANAGED
MIS !!

KEY FUNCTIONSOF MIS
Measure efficiency : Ensure score effectively
separating bad customers from good customers
Check stability : Validate the recent through the door
population similar to the sample on which the
development was done
Override analysis : Validate the cut-off score being set
properly
Error rate analysis : Make sure the quality of the
underlying data good
Bade rate analysis : Track actual bad rate at different
scores versus the bad rates of development sample

REQUIREDREPORTS
 Through-the-Door Analysis (T-T-D)
 Short term Delinquency Analysis
 Delinquency Analysis
 Bad rate Analysis
 Override Analysis

BEHAVIOR SCORING APPLICATIONS
 Marketing Applications
 Revolving applications
 Collection Applications

MARKETINGAPPLICATIONS
 Can help business to formulate its risk
adjusted pricing strategies
 Can use data to market low-risk accounts
 Can help decision to seek out different type of
customers
 Can help determine whether product is being
positioned correctly

RISK & PROFITABILITYMATRIXFOR NEW PROMOTION
No Not Sure
Not Sure Absolutely
No Not Sure
Not Sure Absolutely
Low Profitability High Profitability
High Risk
Low Risk

COLLECTIONAPPLICATIONS
 Segments high risk accounts
Aids to predict potential losses and
collection costs
Used to
 Reduce mailing and phone expenses
 Improve customer relationships
 Reduces net credit losses

BEHAVIOR SCORING : COLLECTION CONTACT STRATEGY
SAMPLE

“ WHY HAVE SOME SCORE MODELS FAILED ?”
No clear policies or strategies
All functions not involved in the process
Participants not carefully chosen
Lack of training
MIS not ready
Insufficient MIS
Nor reacting to MIS

SUMMARY
Advantages
 Productivity & efficiency
gains
 Consistent credit
evaluation
 Focused management
strategies
 Accurate risk prediction
 Reliable method for
responding to changes
 Better MIS
Limitations
 A tool to HELP
make decisions
 Not applicable in
all situation
 Requires a sizable
portfolio
 Effectiveness
deteriorates with
population
changes
 Cost

FREE RESOURCE
COLLECTIONOVERVIEW

COLLECTION
Collection is the procedure aimed at
obtaining the repayment of a debt after
the obligation has become due
Key concepts
 the collection model
 Basic delinquency definitions / measurements

Product Planning
Target Market
Distribution & Acquisition
Collection
M IS
Control
Risk
Reduce
Loss
Retain
Rehabilitate
CurrentCustomer

Product Planning
Target Market
Collection
M IS
Control
Risk
Reduce
Loss
Retain
Rehabilitate
CurrentCustomer
Legal / Regulatory/ Political

Product Planning
Target Market
Collection
M IS
Control
Risk
Reduce
Loss
Retain
Rehabilitate
CurrentCustomer
Legal / Regulatory/ Political
Economy

COLLECTION
Delinquency definition and measurement
Defaulted credit obligations are called
delinquency
How should delinquency be measured
 By amount / account
 By perioda

COLLECTION – DELINQUENCYMEASUREMENT

0 1 30 60 90 120 150
Measurement of defaulted obligation
COLLECTION – DELINQUENCYMEASUREMENT

PROFIT MODEL BASICS

COLLECTIONMANAGEMENT
Success Factors
 A cohesive front back end
collection strategy
 Striking balance between quality
and productivity
 Maintaining high morale
 Keeping in mind the reputation
of the Bank
Key Aspects
 Collection Strategies and
Processes
 Remedial Management
 Automated Tools of
Collection
 Collection Agency
Management
 Collection MIS
 Collection Resources

FREE RESOURCE
COLLECTIONSTRATEGY
& PROCESS
 n

COLLECTION MANAGEMENTCONSIDERATIONS
Customer
Relationship
Credit Expense
& Credit Losses
Credit
Expenses
Credit
Losses

Att empts
St rategy
# 1
Customer
Contact
No
Contact
Pr omise
Pay ment(yes)
No
Answer
SkipPr omise
Pay ment(No)
Br oke n
Pr omise
Customer
Dispute
RefusalKept
Pr omise
St rategy
# 7
St rategy
# 6St rategy
# 2
St rategy
# 3
St rategy
# 4
St rategy
# 5
Can’t
Pay
Will Not
Pay
Success
7 situations
Every product needs a
Well thought out strategy
COLLECTIONSTRATEGY

STRATEGY 1 – AN EXAMPLE
Strategy Objective
 Retain the customer
Tactics
 Letters for small balances
 Calls for larger balances only, e.g. > IDR 5000.000
 Reminder call
 Low intensity, e.g. one contact per month

COLLECTION STRATEGIES
 How to contact
 When to contact
 Which collectors are responsible
 Where will collection centers be located
 Who are the collectors
 How many collectors are required

HOW TO CONTACT
 Mail
Telephone
Visit
THE CONSIDERATIONIS ‘COST’ VS ‘RESULT’

WHEN TO CONTACT - TIMING
-Costs
-Potential negative customer
reaction
-Already paid
-Intends to pay
-Relationship customer
-Highest payback
-Reach customer ahead of other creditors

WHEN TO CONTACT
Utilizes
• Decision table to prioritize calls
• Behavior score/risk score
Days and hours of operation

WHEN TO CONTACT
10
20
30
40
40
30
20
10
Mon Tues Wed Thru Fri Sat Sun
D
A
Y
E
V
E
Time of
Contact
Percentof AttemptsResultingin Contacts
Contact by Day of Week

WHEN TO CONTACT
CONTACT/COLLECTOR/HOUR
25
20
15
10
5
0
Bucket1 Bucket 2 Bucket 3 Bucket 4 Bucket 5 Bucket 6
Auto-Dial AutomatedCollections

WHICH COLLECTORSARE RESPONSIBLE
1. “Specialization”
 Different collectors deal with borrowers depending on
stage of delinquency
 Early stage collections – auto-dial environment
2. “Cradle to Grave”
 Same collector is responsible for a specific customer
 Later stage and recovery collections or high risk vintages
 Requires more in-depth training
3. Outside agencies
 Off-load volume
 Provide special service, i.e. skip tracing, visits
 Professional service, i.e. Legal

WHERE WILL COLLECTIONCENTERSBE LOCATED?
Centralized offices usually more efficient
Decentralize to take advantage of :
• Cost effective labor market
• Language
• Proximity to customers and/or courts

WHO ARE THE COLLECTORS?
Collections represents “units of work” – easily divided
Early stage : use part time or temps
 To accommodate shifts and flexible hours
Other collection specialists may be required :
 Later stage experienced collectors
 Skip traces
 Repossession/foreclosure/OREO specialists
 Agency/attorney relationships manager
 Remedial or workout manager
 Outside agencies

HOW MANYCOLLECTORSREQUIRED?
Develop capacity plans to determine the number of
collectors required.
Need :
 Collection strategies
 Productivity standards
 Volume forecasts
Create capacity plans for each product, bucket,
process
Update daily, monthly

CONCEPTUAL EXAMPLE
Forecasted
Delinquencies
Strategy
(Intensity)
Collector
Productivity

FREE RESOURCE
REMEDIAL MANAGEMENT

REMEDIALMANAGEMENT
Remedial management refers to collection of back
end accounts, i.e. 90 days+
Strategies of remedial management
Workout the problem with customers
Repossession of the collateral, if any
Managing the repossessed assets
Sale of the repossessed assets to cover outstanding
balance

WORK-OUT– GENERICSTRATEGIES
Workout strategies are targeted toward customer financial situation
1. Short term problem : ability to catch up
 Forbearance
 Deferment
2. Mid-term problem : income now restored but can’t catch up
 Re-age / curing
 Balloon deferment
 Due date change
 Capitalization
3. Long Term problem : little likelihood of income restoration
 Lower payment – refinance, term extension,rate reduction
 Settlement / short sale/ deed-in-lieu

COLLECTION PROCESSES
Collector work assignment
• Collection management system
Supervisor monitor performance
Define timing and content of various collection
activities
Process to validate behavior scores, if used
Procedures for dealing with bankrupt customers
Change-off policy and procedure
Policy & procedures for handling repossessed assets

COLLECTION PROCESSES
Inbound call management
Outbound call management
Scripting
Performance standards
MIS

COLLECTORPERFORMANCEMEASUREMENT
Calls/hours
Contact/hour
Phone monitoring scores
Promise to pay ratio
Promises kept ratio
Skip finds
Rupiah collected

COLLECTIONMIS
Types
 Portfolio related
 Collector performance related
 Third party agency performance related
Effective analytical review
 Information for credit policy and credit initiation
 Information for collection strategies
 Information for collector managemnet

SUMMARY
“If you don’t make contact, you don’t collect”
 Collection is a balancing act
 Cost vs. Result
 Customer Relationship vs. Asset Protection
 Requires well thought-out/current/documented strategies, and
processes
 Investment in technology should be consistent with portfolio
size/growth
 Continuous/frequent management involvement required in :
 Training staff
 Measuring staff performance
 Monitoring portfolio activity
 Monitoring third party activities

FREE RESOURCE
NON-ACCRUAL
& Wr ite-OffPolicy

NON-ACCRUAL POLICY
 Interest are suspended at 90 DPD for all product
 The only exception will be the Credit Card Business
- can accrue interest until 180 DPD
- Interest will be reversed at the time of write-off
 The proposed policy is commonly used by multi-
national banks purely for operation efficiency purpose
only
 Approval has not been obtained and subject to
clearance from regulation and Internal Financial
Control

MOST COMMON WRITE-OFF PRACTICE
 For unsecured loans
Delinquent accounts will normally be written-off at
180 DPD
 For Secured loans
- Auto loans : Delinquent account will start to write
down from 90 DPD until 180 DPD
- Mortgage loans : Delinquent account will start to
be written down on 180 DPD to 90% of the
updated valuation. Further write-down will be done
every six month

FREE RESOURCE
RISK & REWARD
Trade-off

RISK & REWARD TRADE-OFF
Our objective is NOT to be risk aversive but
rather pursuing risk/reward optimization
For risk/reward optimization, we need to
control absolute risk and reward numbers
We must understand credit risk and reward
have an inverse relationship
Risk and Reward Goals must :
 Be acceptable and attainable
 Be able to be attained jointly
 Balance market reward goals with
credit risk goals

IF NCL RATE BY ITSELFIS NOT ADEQUATE,WHAT MEASURES
COULD WE USE ?
RORA
Revenue to NCL Coverage
Volume Growth
Net Profit
One single measure may not be adequate

In order to achieve the Risk/Reward
Optimization, we need the following in place :
A well structured Risk Management Organization
A good Product Planning and Development
process;
Knowing Lifetime Profitability & a Profit Model
Having Prudent Credit Policies & Procedures,
Credit Evaluation Tools, including statistically
validated scoring system

An efficient and customer friendly account servicing
process
A robust collection/recovery management
department with precise collection & write-off
policies and processes
Adequate portfolio management with appropriate &
sufficient MIS
Availability of strong SYSTEMSdepartment & a
reliable data base

SUMMARY
 Measuring activity by risk/reward is appropriate, but
some risks are unacceptable at any level of reward
 Risk moves swiftly and you have to know what is
happening- if God is in the details, then predictability
is in the MIS
 Consumer lending is a statistical business – but only
when there is a history on which to build statistics.
Testing is therefore key

REMEMBER
Credit is an ART as well as a SCIENCE
- IF NOT, machines could take the blame
for variances

6 P’S OF CONSUMERCREDIT
Portf olio
Management
Process
Product
Development
Process
Evaluation&
Approval
Process
Loss
Recognition
Process
Collection&
Recovery
Process
Account
Servicing
Process

FREE RESOURCE
PORTFOLIO MANAGEMENT DYNAMICS

WHAT IS A PORTFOLIO
A gathering of customers grouped by common
characteristics :
Type of Product
Type of Guarantee
Type of credit
Terms / Rates
Refinancing Plan

WE USE PORTFOLIOMANAGEMENTTO
Evaluate asset performance versus
Business plan
Product Program
Industry / competitor
Analyze trends versus
Historical
Seasonal
Economic cycles

RESULTSIN TAKINGACTIONSTO
 Improve profitability from future acquisition
 Enhance profitability from exiting portfolio
 Control exiting portfolio

PORTFOLIOMANAGEMENTREQUIRES
Knowledge of
• Business objectives
• Customer expectations
• Product characteristics, profit drivers
• Operations, and inter-relationship of credit risk management
•Establishment of policies and procures
 System infrastructure
 Planning for unexpected events
 Accurate / timely MIS

THE KEY TO EFFECTIVEPORTFOLIOMANAGEMENTIS
MIS

WHAT IS MANAGEMENTINFORMATIONSYSTEM (MIS)
An Informationsystem that facilitatesbusinessplanningand control
Data Conversion
Alternative
Information
Decisio n
Control&
Validation
Resou rcesResults

CHARACTERISTICSOF GOOD MANAGEMENTINFORMATION
 Present at all stages of the credit risk
management
Relevant data base
 Structured to support decision making
Short term
Medium term
Long term
 Compare against appropriate benchmark and
historical standards

CHARACTERISTICSOF GOOD MANAGEMENTINFORMATION
 Reaches all organization levels with the
required level of detail
Relevant, timely, consistent
Data Integrity

INFORMATIONFLOW

THREE TYPE OF PORTFOLIOMANAGEMENTINDICATORS
1. Leading New Accounts
2. Coincident Active Accounts
3. Lagging Problematic Accounts

TWO LEVELSOF ANALYSIS
MACRO – Total Portfolio, “The Big Picture”
MICRO – Segmentation Analysis, “Peeling the
Onion”
The Goal is to Understand :
What’s working
What isn’t
Why?

DEVELOPMENTOF ANALYTICALTOOL
 Off-the-shelf software
 Develop proprietary analytical tools
 Dependent on available data
 Line management’s involvement important
 Knowledge of the business or product
dynamics is important

FREE RESOURCE
PORTFOLIO SEGMENTATION

WHAT IS PORTFOLIOSEGMENTATION
 The identification of homogeneous behavior
segments requiring different portfolio
management actions
 The development Of further customer sub-
segments based on demographics/customer
habits to aid in the design of specific
marketing programs to induce favorable
customer behavior
 Types : Single / Multi- dimensional

SINGLEDIMENSIONALPORTFOLIOSEGMENTATION
 Identify risky segments of customers in a
portfolio
 Describe higher risk customer, which may help
to enhance credit acceptance policies
 Does not provide information on who are
profitable customers, and profitable customer
behavior

BEHAVIORSEGMENTSUMMARY
Segment 1 : Demographic sub-segments
Common Profiles :
Majority single female,aged between 26 – 40
High gold card penetration
Distinct profiles :
Heavy cash sales, at least 1 cash advance
transaction a month
Boutiques type of transaction are more than
average

BEHAVIORSEGMENTSUMMARY
Segment 1
Potential Management Actions :
Need to retain good relationship in high
loyalty programs.Important for retention
Acquire new customer with similar profiles
through customized Member-Get-Member
program
Cross-sell opportunities

PORTFOLIOSEGMENTATIONDATA BASE CRITERIA - EXAMPLES
 All characteristics that relate to new business
demographics
 All characteristics that relate to new business fields
other than demographics fields
 All characteristics that relate to portfolio financial
demographic
 All characteristics that relate to portfolio
demographics
 All characteristics that relate to portfolio field other
than demographics
 All characteristics that relate to account closures
 All characteristics that relate to customer behavior

SUMMARY
 Effective portfolio management requires detail and
specific understand of customers which are provided
through portfolio segmentation analysis
 Portfolio segmentation analysis requires a through
understanding of the business dynamics
 Portfolio segmentation analysis must provide
information that leads to actionable management
decisions
 It requires massive data base covering financial,
behavior and demographics of customers
 Data quality and data accuracy is critical
 Inputs from multiple functional areas is mandatory for
success

FREE RESOURCE
PORTFOLIO CREDIT PERFORMANCEINDICATORS

3 DIFFERENTTYPES OF CREDIT PERFORMANCEINDICATORS
 Leading New Accounts
Coincident Exiting Accounts
Lagged Problematic Accounts

LEADINGINDICATORS
What Are Leading Indicators?
 Provide information to understand the
direction of the business
 Utilize information gathered during the
account acquisition stage
 Give insight into success of acquisition
strategies, target marketing, appropriateness
of credit policies and processes; type of
customers acquired
 In a score environment, provide insight into
actual booking versus expectation

TYPES OF LEADINGINDICATORS
Through-The-Door (TTD) analysis
Demographics of applying customers
Account Acquisition Analysis
Acquisition channels
Approvals / Declines
Response Rate Analysis
Are we attracting right target market
Score Analysis
Population Stability Report
Override Analysis report – by score range

ANALYZING LEADINGINDICATORS
Taking Action From LeadingIndicator Analysis
 Targeting Strategy
 Right product for prospect
 “Adverse Select”
 Wrong people responding
 Product Feature
 Underwriting Criteria

COINCIDENTINDICATORS
What Are CoincidentIndicators?
Provide Information to understand product drivers :
Revenue
Activation %
Utilization %
Payment Rates
Attrition / Retention %
Expense
Delinquency % / Rp

WHAT ARE COINCIDENTINDICATORS
Illustrate present performance of accounts :
Point in time snapshot
Trends of a single segment/program
Comparison of different segments / program at same
relative time
Possible external factors ( seasonality, economic shifts)
“ Is There somethingwe did or not do or should have known“

Account & Customer Relationship Analysis
 Credit line increases
 Credit line renewals / attrition
 Fraud
Delinquency tracking and analysis
Flow Rates tracking and analysis

DELINQUENCYTRACKINGAND ANALYSIS
Concept Of Buckets
 Each time segment of delinquency, which is
usually in 30-day intervals, is called a bucket
 They define the delinquency status of an
account, customer, or amount
 When group together, they indicate the credit
condition of the portfolio
 The information allow management to
compare portfolio performance to past results
and business forecasts

DELINQUENCYTRACKINGAND ANALYSIS
Coincident rate Lagged rate
30 DPD+ - 30DPD+
Delinquency Delinquency
( two missed payments)
90DPD+ - 90DPD+
delinquency delinquency
( four missed payments)

LAGGED DELINQUENCY
Definition:
 A percentage calculation that relates
delinquency or losses to previous
(lagged) receivables

LAGGED DELINQUENCY
Attributes:
 Provides a better picture of portfolio
performance
Factors out growth in the receivables to
determine true delinquency level

Is a method for forecasting future
delinquencies and gross write-offs using
balances in the existing delinquency buckets
As net flow movements remains consistent
within a range. It is possible to forecast future
gross write-offs

NET FLOW EXAMPLE
30 to 60 Net Flow Rate = 60-89 DPD This Month
30-59 DPD Last Month
Net Flow means that accounts in the 60-89 DPD bucket
could have :
flowed from 30-59 by missing a payment,or
Stayed in the 60 day bucket by making one payment,
or
Flowed back from higher delinquency by making
more than one payment

TYPES OF NET FLOW

NET FLOW FORECASTING
Direct impact on Collections and P & L :
Front-end flow deterioration has
significant impact on delinquency
volumes and potentially gross write-off
Back-end flow improvements go
directly to the bottom line by reducing
GWO

USES OF THE NET FLOW TECHNIQUE
Reasonable check on forecasts by
credit/collection manager
Bankruptcy adds volatility
Review corrective actions being implemented
Collector staffing levels
Capacity planning using number of accounts
Forecast gross write-offs

TAKINGACTION FROM COINCIDENTINDICATORS
1. Revenue production program
 Activation
 Cross-sell
 Line increase
 Retention
2. Credit performance
 Collections staffing and strategy
 Account monitoring strategy
3. Marketplace
- Comparable data ( other lenders)

LAGGINGINDICATORS
 The final measure of evaluation of the
performance of decisions / programs :
 Takes time until results are in :
 Up to 24 months to see stable measures
 In mature markets / portfolios, can evaluate quality in 3-6 months and get a
good picture in 1-2 years performance

VINTAGEDELINQUENCYMEASUREMENT
“Vintage” denotes batch of accounts
booked at specific time frame and
tracked separately
Accounts perform differently over time
Vintage delinquency measures
delinquency from date of booking

MONTH ON BOOK - MOB
 Denotes grouping of accounts based
on length of times the accounts have
been opened ( on Books)
It Is used for account life-cycle
performance analysis
This analysis can be used together with
vintage analysis

TAKINGACTION FROM LAGGINGINDICATORS
1. Communicate to :
 Acquisitions
 Credit policy
2. Revise recovery strategies :
 3rd
party attorney/agency

FREE RESOURCE
FORECASTINGLOSSES

COMPONENTSOF LOSSES– GROSS WRITE-OFF
 Occurs when debt reaches specific stage of
delinquency based on the Bank’s write-off policies
 Forecasting gross charge-off is a function of assumed
flow rates to predict delinquency volume by bucket
 Methodology for forecasting gross write-off varies
based on product type

COMPONENTSOF LOSSES - RECOVERIES
Wr iting off an accountdoes not mean that
Collectionaction will be stopped
Recovery
Collections after
Write-off
Considered as
Income to reduce
Gross write-offs

FORECASTING LOSSES
Most predictive tool is net flow rates to derive
gross write-off
Net flow assumptions may be based on
Average historical flow rates
Historical trends
Take into consideration the type of forecast
required
12 month forward
6 month forward
3 month forward

FORECASTINGLOSSES
Adjustments to be made for anticipated or
sudden situations
That has long term impact
That has short term impact
Forecast accuracy will be enhanced by
differentiating segments (of the portfolio)
based on
Vintage
Month-on-Book (MOB)
Special customer segments
Forecast recoveries based on trend

FORECASTINGLOSSES
Forecast for next 12 months ( Annual Planning)
Bucket
Flow Rates
Adjustment
Factors
AdjustedBucket
Floe Rates
WeightedAvg
Flow Rates
Vintage
Segment1
Vintage
Segment2
Vintage
Segment3
Special
Progra m1
(Rewrite)
Special
Progra m2
(Teststudents)
Changein
Legal/Social
Constraints
Changein
CollectionStra tegy
Economic
Changes
Credit
Waves
Total
Product
Portf olio
Forecast
Vintage
Segment1
Vintage
Segment2
Vintage
Segment3
Special
Progra m1
(Rewrite)
Special
Progra m2
(Teststudents)
Gr osswrite-off

FORECASTINGLOSSES
Forecast for next 3 months ( forecast updates)
Bucket
Flow Rates
Adjustment
Factors
AdjustedBucket
Floe Rates
WeightedAvg
Flow Rates
Vintage
Segment1
Vintage
Segment2
Vintage
Segment3
Special
Progra m1
(Rewrite)
Speci al
Pr ogram2
(MKT Test
Pr ograms)
Changei n
Collecti on
Capaci ty
Changei n
Collecti onManager
Collecti onIncentive
Pr ogramsbursts
Infrastructure
Breakdowns
Unanti ci patedLoss
In Collecti onhours
Storm s,Ear thquakes,etc
Total
Product
Portf olio
Forecast
Vintage
Segment1
Vintage
Segment2
Vintage
Segment3
Specialized
Progra m1
(Rewrite)
Special
Progra m2
(MKT Test
Progra ms)
Gr ossCharge-off

AUTO LOANS
Auto Loan
Loss Forecast
Upo n
Re-possession
Not disposed
After
6 months
Not
Repossessed
At/ over
90 DPD+
Disposal
deficiency
Not
Repossessed
At/ over
180 DPD+
Difference
between
O/S & FSV
100 % O/S 50% of O/S 100% O/S Difference
Bet ween
Sale processed
And O/S

FORECASTINGLOSSES- SUMMARY
 The basic methodology
utilize delinquency MIS and
net flow trends to predict
delinquency volume by
bucket
 This “benchmark” must be
adjusted based on the
various factors which can
influence loss forecast
 Type of product/business
 Changes in legal and
social constraints
 Seasonality
 Maturing vintages
 Credit wave
Accuracy can be improved by
forecasting individual segments to be
aggregated into a total portfolio view
Always a degree of judgment on
the assumptions used

FREE RESOURCE
PRODUCTS AUTO

PRODUCTFEATURES
GENERAL
• A “secured” lending product
• A loan, not a line of credit
• Transaction size
• A repayment schedule
• Interest rate – fixed and floating
• Early settlement not unusual
• Collateral value
• Direct and indirect sourcing
Form of Financing
• Hire purchase
• Lease purchase
• Bank Loan
• Conditional sale
• Operating ( or True ) lease
 Terms & Conditions
• Down Payment
• Payment in advance
• Tenor
• Interest Rate
• Dealer recourse, Non-recourse &
commission

RISK PROFILE– TARGET MARKET
Dual/triple target marketing process
Vehicle preference ( your collateral)
 Valuation efficiency
 Secondary market
Buyer demographic ( your customers )
 New and used car buyers
 Lifestyle and behavior
Dealer demographic ( our pipeline )

RISK SENSITIVITY
+
Interest rate
Down payment
New car Price
+
Interest rate
Down payment
New car Price
-

RISK PROFILE– INSURANCERISK
 Risk of coverage
 Loss beneficiary
 Cover note vs. insurance policy
 Premium payment receipt
 Second and subsequent years renewal
 Strength of insurance company

RISK PROFILE– COLLATERALRISK
 Assumption
 Depreciatedvalue –
 1Y = 30%
 2Y = 55%
 3Y = 80%
 4Y = 90%
1. Untuk kredit dengan jangka waktu 36 bulan maka nilai collateral akan
selalu dibawah outstanding kredit.
2. Untuk kredit dengan jangka waktu 48 bulan, nilai jaminan akan berada
dibawah outstanding kredit mulai dari bulan ke-15 /16 sampai bulan
ke 43
3. Untuk kredit dengan jangka waktu 60 bulan nilai jaminan akan berada
di outstanding kredit mulai dari bulan ke 9 /10 sampai dengan bulan
ke-55
Financin g% : 85%
InterestRate : 8% p.a.flat

RISK PROFILE
DocumentationRisk
 Title
 Vehicle registration
document
 Permit to own
 Transfer documents
 Loan documentation
Fraud Risk
 Fraudulent title
document
 Double financing
 Non – existence of
collateral
 Phantom customers
 Dealer’s
misrepresentation

PORTFOLIOMANAGEMENTMIS
Establish Portfolio Performance MIS
Monthly, quarterly, Y-T-D
Delinquency – leading, coincident, lagged, flow rate
Exceptions and overrides
Repossession, success rate
Average loss/repo
Loss by make, new and used split
Recovery ratio, NCL
Fraud

PORTFOLIOMANAGEMENTMIS
 Establish Portfolio Performance MIS ( Cont.)
 Loss resulted from insurance claim
 Insurance company exposure
 Breakdown by dealers & other key sourcing
channels
 Loan/marketing officer performance
 Customer service data : complaints,volume,etc
 Establish Portfolio Review policy
 Frequency, timing
 Dealer annual review
 Accountability

FREE RESOURCE
FRAUD RISK MANAGEMENT

FRAUD DEFINITIONS
External fraud
Deliberate action by outside party to obtain
credit in a manner intended to deceive the
lender
Internal fraud
Deliberate wrong doing by an employee for
personal benefit.It includes violations of
established risk management processes for
such purposes

TYPE OF FRAUD

FRAUD MANAGEMENTSTRATEGIES
1. Prevention
2. Detection
3.Recovery
4. Deterrence

PREVENTION
Build a strong internal control process
Build fraud management awareness
among front line staff

STRONGINTERNALPROCESS
 Third party appointments to base on establish
criteria
 Use several third parties
 Customer and collateral verification
 Physical check of collateral for secured loans
 Check sales/purchase document ; commodity
checks for secured loans

STRONGINTERNALPROCESS
Collection agency :
Account for all
recoveries; verify with
customers
Repossession frauds :
Clear disposal
procedures
Engage reputable
auctioneers, monitor the
auction process
Track fraud experience
through use of portfolio
analysis
Build fraud transaction
data base
Investigate known
frauds

PREVENTION
 Build fraud management awareness among front-end
staff
 Train sales staff and monitor sales activities
 Update loan processing staff on new fraud patterns
 Include fraud case discussion into staff meetings
 Build a Strong internal Process
 Build fraud management awareness among front line
staff

DDEETTEECCTTIIOONN
• Develop and implement fraud detection systems
• Allocate more fraud management resources to
proactive detection
• Use detection rate targets for fraud management staff
performance
• Analyze fraud trends
• Maintain excellent communication with other
functions
• Participate in local market Associations

RECOVERY
Aggressive investigation, document and
collect
Pursue fraud cases to recover loss cost
effectively

DETERRENCE
Build and maintain image of a well defended
organization
In process controls
In discipline sales staff
In alert front end staff
In authorization parameters

FRAUD REPORTINGAND FRAUD LOSS RECOGNITION
Fraud incidencemust be reportedimmediately
accordingto policy guidelines,exceptfor card
fraudswhich should be reportedon monthly
basis
Establishcorporatepolicy for fraud loss
recognitionaddressing
Fraud types
Timing of loss recognition
Treatment of recovery

 While fraud management is the jurisdiction of
a single department, all functions within the
Bank has responsibility over controlling fraud
 Run-away fraud losses can bring down a
business

Berdiri sebagai badan hukum di
2019, Prakarsa Anak Negeri
sebagai Perusahaan Penyedia Jasa
Profesional di bidang Pelatihan,
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Sahabat Anda untuk senantiasa
bertumbuh & beradaptasi” dalam
menghadapi berbagai tantangan
juga peluang di Era VUCA ini.
Misi kami:
Menciptakan nilai bagi
Stakeholder kami dengan
menyediakan layanan
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