I F C A D V I S O RY SERVICES | ACCESS TO FINANCE 94833 Responsible debt collection In Emerging Markets In Partnership with: Copyright © International Finance Corporation 2012. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. 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Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. Acknowledgement The report “Responsible Debt Collection in Emerging Markets” was developed within IFC’s Access to Finance Global Risk Management Advisory Program under the overall guidance of Panos Varangis and with the support of team members Shundil Selim, Davorka Rzehak and Risserne Gabdibe. We would particularly like to thank the team at Oliver Wyman led by David Bergeron and Matthew Sebag-Montefiore, commissioned by IFC to produce this study report. Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The team would like to acknowledge the contribution of IFC’s internal peer reviewers: Garth Bedford, Joseph Julia, Inho Lee and Ferdinand Tuistra. IFC’s Access to Finance Global Risk Management Advisory Program would also like to acknowledge and thank the Government of the Netherlands for their contribution and partnership in the program and report. Last, but not least, this report would not be possible without the contribution of the study’s participants including institutions within IFC’s own client network  a special thank you to all –  the financial institutions globally for their invaluable time and insights into this important study. Contents Acknowledgement 1. Executive Summary 1 2. Introduction 3 3. Overview of the Study 5 3.1. What is responsible finance? 5 3.2. Collections in emerging markets 6 4. Approach and methodology 9 5. Key observations 11 5.1. Industry and geographical trends 11 5.2. Policy setting 12 5.3. Borrower contact 14 5.4. Human resource management 17 5.5. Monitoring and complaint handling systems 20 6. Recommendations 23 6.1. Pillar 1: Regulation and policy 23 6.2. Pillar 2: Responsible practices by financial providers 24 6.3. Pillar 3: Financial capability 27 7. Conclusions 29 Appendix A: Standards for ethical collections practices 30 Appendix B: Jurisdictions covered and Fitch ratings 31 Appendix C: Collections controls benchmarking 33 Appendix D: Spectrum of customer harm 36 Appendix E: References 37 1. Executive Summary 1 1. Executive Summary Emerging market economies have been experiencing high treatment of customers. Similarly, customer complaints tend credit growth and high delinquency rates amongst retail banking to be handled and monitored using rudimentary procedures. customers in recent years. However, collections practices have not always kept pace with this rapid growth; many collectors still rely on Lastly, the training offered to employees is often limited and relatively unstructured processes and weak oversight frameworks. incentives weakly tied to process discipline. It is therefore important to consider how fair and ethical treatment This study recognizes that while no collections control system of borrowers can be better promoted in these markets. can be totally effective, there is a lot that collectors in emerging To this end, International Finance Corporation (IFC) markets can do to enhance borrower protection. Using the commissioned a study in 2009 to examine the question of Responsible Finance Forum’s “three pillar” structure, the what guiding principles should financial institutions follow following recommendations are proposed: to raise their responsible and ethical standards in collections. IFC has subsequently commissioned Oliver Wyman to study 1. Regulation and policy existing global retail debt collections practices and recommend tangible actions that lenders and collectors can take to promote Regulation should go beyond the oversight of collections responsible and ethical standards in the field. The conclusions activities to provide a legal recourse framework, a consumer of this study are based on field research conducted by IFC and protection framework, protection from creditors through Oliver Wyman, industry experts’ analysis and opinion, and a personal bankruptcy options and recourse mechanisms for survey of institutions in 20 emerging markets. ill‑treated borrowers (e.g. ombudsman offices). Policies should also promote strong credit information infrastructures, customer Overview of practices observed education and training and licensing of collections agents. This study confirms that collections practices lag best practice 2. Responsible practices by financial providers along three key dimensions that impact how strong controls are on customer treatment. Disciplined collections processes can not only achieve better control over the customer experience, but also deliver superior First, the study finds there is a strong correlation between the collections performance. Institutions that focus on applying best legal infrastructure available for enforcement of claims and practice in analysis and strategy will naturally see the incidence the sophistication of the controls employed by collectors. For of customer conflict reduced. Strong measuring and reporting instance, in many emerging market economies, field collections of collections activities can also greatly improve institutions’ tends to be the dominant mode of customer contact, while ability to identify and respond to weaknesses in controls. in more developed markets, collectors can tend to rely more heavily on voice contact, where oversight options are stronger. 3. Financial literacy Second, an independent governance and oversight framework is also relatively rare amongst emerging markets economies Well-informed consumers can make good financial decisions collectors. The responsibility for setting and ensuring and defend themselves against coercive and improper adherence to ethical standards sits within the collections treatment by collectors. In addition to regulators and providers, function itself, and external oversight is generally uncommon. financial education institutions and industry associations can It is no surprise, therefore, that participants of the study play a role in creating greater “financial literacy” both in better reported that their collections policies place greater emphasis aligning financial products to customer needs as well as better on achieving the highest possible recoveries than on ethical resolution of hardship cases. 2. INTRODUCTION 3 2. Introduction IFC is committed to promoting responsible finance. This high delinquency rates and, as yet, developing legal recourse stems from its broader goal of alleviating poverty by helping to mechanisms that prevail in these regions. These challenges enhance access to finance to the world’s underserved segments. have led to some high profile accusations of collections abuses. While recognizing access to financial services does not alone The publicity around these cases has contributed to regulatory achieve this goal; financial products must also be matched to backlash, reputational loss to banks, discontinuation of whole client needs and help lift them out of poverty without trapping lines of business and legal difficulties for some bank staff. In them in debt. this way, insufficient investment in responsible practices can roll back access to finance. Because lending cannot exist without repayment, and repayment requires collections, debt collection practices are IFC commissioned a study in 2009 to examine the question integral to the responsible finance agenda. Collectors must not what guiding principles can financial institutions follow only effect repayment but they must also conduct their work in to raise their responsible and ethical collections standards. an open, honest and legal manner. The study proposed the following set of principles based on Debt collection assumes special significance in emerging lessons learned from developed credit market systems – and the market economies1 because of the high credit growth rates, principles fall into the following three categories2: 1 For the purpose of the report, emerging market economies refers to the Derived from IFC’s Global Practices in Responsible and Ethical Collections, 2 jurisdictions under scope of the study, as listed in Appendix B of the report. working paper 2009. Table 1: Principles of collections conduct Principle Example elements 1. Investing in • Borrower awareness of the consequences of default a transparent • Terms and conditions clearly communicated relationship with the • Education about avoiding delinquency borrower • Avoidance of predatory lending practices 2. Interacting with the • Non-discrimination customer in a fair and • Contact at reasonable hours and frequency respectful manner • Polite, respectful, non-threatening language • Respect of privacy • Good faith participation in negotiations, mediation and other processes for consensual resolution of debts 3. Develop • No outsourcing of unethical practices to other collectors relationships and • No manipulation of legal or political institutions to condone irresponsible/unethical practices systems to support • Internal systems to regularly audit practices and operational performance to ensure compliance with ethical ethical practices guidelines • Loan restructuring and other solutions for hardship cases • Training and incentives for ethical practices 4 Responsible debt collection This study builds on the above-mentioned work, focusing on the control mechanisms that lenders and collectors can use to ensure that actual practices align to stated conduct standards. It does not attempt to define standards on how customers should be treated; under what circumstances; and cultural context. Rather, the study focuses on the control mechanisms currently used by emerging market collectors to promote ethical practices. From these observations of actual practices in a variety of markets, the study formulates recommendations for collectors. As in developed markets, customer mistreatment will never be eliminated in all its forms. Limitations on legal recourse for lenders in many emerging markets can make it challenging to ensure agents do not overstep boundaries in their efforts to recover dues. Nevertheless, this study reveals that collections practices in emerging markets are rapidly professionalizing. Successful initiatives by market leaders demonstrate that obstacles are not insurmountable. While targeted investment in governance, professionalized processes and measurement can give lenders more comfort that the risks in collections are being managed, it is also important to note that issues in collections can also stem from poor practices at other points in the lending cycle – and can be resolved by eliminating them. In this report, we first present the context and methodology of the study. We then summarize the key insights. Finally, we make recommendations for improving responsible collections control mechanisms. 3. Overview of the Study 5 3. Overview of the Study Rationale, objectives, and approach 3.1. What is responsible finance? Limited access to finance is a challenge to economic growth that encourage and assist financial services providers and their in emerging markets economies, and expanding it does help clients in improving their understanding and approaches, to lift people out of poverty. But access to finance alone is not practices, and behaviors that can eventually contribute to sufficient. Rather, finance must be delivered in a responsible creating more transparent, inclusive, and equitable financial way, which allows informed individuals to invest in productive markets.” Further, the Responsible Finance Forum has assets and businesses without subjecting themselves to excess articulated a three-pillar concept consisting of: leverage, costs or indignity. I. Regulation for consumer protection While the Consultative Group to Assist the Poor (CGAP) II. Responsible practices by financial providers defines responsible collections simply as “not abusive or coercive,” the Responsible Finance Forum* defines responsible III. Financial capability finance as “coordinated public and private sector interventions Figure 1: Responsible finance: A multi-stakeholder (three-pillar) approach AREAS OF 1. Consumer protection (regulations): a regulatory framework for financial consumer protection, ACTION at both national and international levels 2. Responsible providers: voluntary commitments, practices, standards, and initiatives in the financial sector (individually and at industry level, nationally and internationally) 3. Financial capability: interventions aimed to build and enhance financial capability of financial institutions’ clients – the consumers of financial products and services KEY STAKEHOLDERS Providers of financial Regulators (central banks, Consumers – individuals services – banks, MFIs, financial regulators, and businesses – and NBFIs, other – and their consumer protection advocacy organisations associations agencies) CROSS-CUTTING ISSUES Financial markets stability, poverty reduction, access to finance, job creation and SME development, health and education, sustainable development Source: Responsible Finance Forum. * The Responsible Finance Forum, established in 2010, is an annual event aimed at gathering a diverse group of actors in responsible finance, comprised of bilateral and multilateral donors, development finance institutions, investors and practitioners in the financial sector. The Responsible Finance Forum has thus established a community of practice with the common goal to improve cooperation and share knowledge on the emerging concept of responsible finance. 6 Responsible debt collection This study focuses on the practices of financial institutions in the area of retail debt collections. Specifically, it is interested in the control frameworks that institutions can put in place to ensure that collections activities are consistent with the principles of responsible lending and treating customers with dignity. 3.2. Collections in emerging markets For the most part, lenders in emerging markets have underinvested Insufficiently developed legal support for in collections capabilities as their retail businesses have grown. As collections a result, they have struggled to develop collections processes that are effective, cost-efficient and protect the customer from •• Criminal and civil legal procedures are usually costly, lengthy harassment or abuse. and uncertain •• Many emerging markets are characterized by weak or non- Collections practices across emerging markets vary with legal existent personal and corporate bankruptcy frameworks frameworks, regulatory processes, risk appetite and credit that would permit judicial determination of ability to repay culture. Nevertheless, they face a reasonably common set of and allocate losses among creditors. challenges, which are summarized below: •• They also lack a mediation/negotiation culture and institutions to facilitate non-judicial resolution Weak information infrastructure Customer awareness •• Important credit information is unavailable for the original lending decision, especially the applicant’s income and •• Customers can have low awareness of the importance of a other debt obligations. Hence, many customers are offered good credit history products whose repayment does not properly match their •• Many emerging markets often lack convenient non- income in amount, tenor or currency. This leads to high cash repayment mechanisms accepted by borrowers. rates of default and fraud. The predominance of cash increases the need for field •• Limited credit information is available at the time of collections and the opportunity for agent fraud. collections. It is difficult to access the customer’s repayment •• Informal lenders with reputations for aggressive tactics are records with other lenders and service providers, and to a further challenge wielding more leverage over borrowers verify the customer’s income. This makes it difficult to than other more regulated lenders. The prevalence of such determine which customers are genuinely unable to pay and lenders and their tactics may shape popular perception of which are merely unwilling. the industry and “legitimize” certain tactics in the minds of •• Vetting employees and agencies is also more challenging in collection agents. emerging markets where employment history and unique ID numbers are not always easily verified 3. Overview of the Study 7 Figure 2: Credit information is generally weaker in emerging markets – proportion of population covered by public registry or credit bureau Proportion of population covered by public registry or credit bureau 50%+ 25-50% 0-25% 0% or N/A Source: World Bank, “Doing Business in 2011” Source: World Bank, “Doing Business in 2011”. 4. Approach and methodology 9 4. Approach and methodology The conclusions of this study are based on a series of interviews with collections practitioners across various emerging market countries, as well as input from Oliver Wyman and IFC subject matter experts with experience working in collections in these countries. Table 3: Sources of insights Field research Industry Experts Survey yy Understand collections practices at yy Observations and opinions from industry yy Written survey distributed in ~20 select firms experts at IFC and Oliver Wyman emerging markets −− Hold discussions with senior management of firms –– Visit and conduct detailed research with a small number of firms This study focuses primarily on countries whose retail and Given these criteria, we focused on the Indian subcontinent, consumer debt industries are evolving from underpenetrated China, Central and Eastern Europe, the Middle East and to mature. This is when countries collections challenges tend Southeast Asia. Other emerging markets were covered to be greatest and the need to build the institutional elements of primarily through secondary sources. These include Latin responsible collections is most acute. To this end, the selection America, whose largest economies have more mature credit of target regions was based on two criteria: infrastructure and West and East Africa, whose retail lending institutions are as yet too new to provide extensive insights. 1. Sufficient scale and history of retail lending to have built up collections infrastructure that has been “tested” through an Site visits of one to two days each were conducted in 19 economic downturn (or consumer debt crisis) institutions across a broad subset of the target jurisdictions. 2. Legal and public information infrastructure illustrating at The participants include a broad spectrum of institutions, least one of the challenges of emerging retail and consumer including originators of consumer and small and medium finance markets, such as immature credit bureaus, absence enterprises (SME) loans (including Microfinance Institutions of national legislation governing debt collections practices, (MFIs)), debt servicing firms, consumer debt purchasers lengthy or unpredictable legal processes, lack of nationwide and a technology provider specializing in financial inclusion professional debt collections agencies infrastructure. To supplement the findings from these interviews, a written survey was distributed to lenders in jurisdictions where site visits were not conducted. 10 Responsible debt collection Figure 4: Jurisdictions of focus IFC and Oliver Wyman Survey geographical coverage Products and institutions covered  The focus of the survey was retail loan portfolios including – Home loans Russian Federation – Auto/2W/Hire-purchase – Unsecured personal loans/CC – Small business loans China (secured/unsecured) Taiwan, China – Microfinance Philippines  We used the surveys and site visits to cover – Retail lenders – Microfinance Institutions United – Collections servicing Arab agencies Emirates Bangladesh Thailand Turkey India Indonesia Targeted by survey Mexico Brazil Ukraine South Africa Kazakhstan Malaysia A full list of jurisdictions covered in the project is provided in Appendix B. 5. Key observations from the Study 11 5. Key observations The study’s investigations conclude that there are no “silver bullets” and “checklists” of best practices that can ensure that customers are always well treated. Nevertheless, we have observed several laudable attempts to strengthen controls, most notably among professionalized collections servicers, and have highlighted many of these throughout this report. The key observations from the study include: •• There is a strong correlation between the legal infrastructure •• Little training is provided to employees, and incentives are available for enforcement of claims and the sophistication usually directly aligned to amount collected. Conduct issues of controls employed by collectors. Jurisdictions with strong tend to be addressed only in extreme situations. legal recovery mechanisms tend to have more evolved •• Complaint handling and tracking mechanisms can collections practices. be rudimentary −− Less evolved markets, tend to make more use of field In this section, findings are summarized across the following (door-to-door) collections than call centers key dimensions: −− More advanced markets use negligible field contact and usually focus on phone collections and letters •• 5.1 Industry and geographical trends •• Responsibility for setting and enforcing conduct standards •• 5.2 Policy setting generally sits within the collections function itself, with only •• 5.3 Borrower contact a few institutions having independent oversight. •• 5.4 Human resource management •• Policies are designed to maximize collections value. •• 5.5 Monitoring and complaint handling systems Fair treatment of customers generally remains only a secondary concern. 5.1. Industry and geographical trends 5.1.1. Geographical trends The sophistication of collections tends to follow the maturity of customer segmentation and most customer contact is via call the retail finance market and effectiveness of legal recourse in each centers. The most challenging environments for collectors are geography. This is likely driven by two factors. First, lenders have in South Asia and the Central and Eastern European countries. tended to invest initially in product development, underwriting In these regions, collections are performed by a fragmented and sales, only belatedly recognizing the centrality of collections third-party industry, working “in the field” with little use to the retail finance business. Second, in jurisdictions where of technology or customer segmentation analytics. These the legal framework better supports lenders’ claims against observations are consistent with the assessments of the rating borrowers, lending businesses were able to take root earlier. agency Fitch regarding the effectiveness of legal recourse mechanisms for debt collection3. Leaving aside some significant intra-regional variations, collections capabilities are most developed in Latin America 3 “Country-Specific Treatment of Recovery Ratings,” Fitch Ratings, 23 and parts of Southeast Asia. Here, the debt collection business February 2011. The Fitch ratings focus on corporate recoveries. We expect a broad correlation between development of legal framework for recoveries for is more consolidated and professionalized, analytics support both corporate and retail customers. 12 Responsible debt collection 5.1.2. Industry trends •• Microfinance Institutions: The participating MFIs all operate on the joint liability self-help group structure (whereby the MFI lends not directly to individuals but Participants in this study include conventional lenders, to small groups of customers who have come together collections servicers and microfinance institutions. These to share liability for repayment). In this structure, the players face different challenges and incentives, giving rise to risk of mistreatment of borrowers by MFI agents is different approaches to collections. actually deemed to be low for two reasons. First, agents’ •• Lenders: Retail lenders for the most part do not view roles include business development, loan servicing and collections as a core competence. Many lenders rapidly collections. Because they operate within the community, moved to build their retail portfolios without investing in their activities are highly visible, and they seek to the collections capabilities required, doing so only when maintain good relationships with the communities in delinquencies became a problem. Because of the direct which they hope to generate future business. Second, impact on P&L, day-to-day flow rates tend to be the when a member of a self-help group becomes unable or over-arching performance metric receiving management unwilling to repay, it is the other members of the group attention. For the most part, lenders, lenders’ collections who put pressure on that borrower to maintain payments. functions are not strongly influenced by independent units that have an interest in fair treatment of customers, such For all its merits, this model fundamentally “outsources” as customer relationship management, operational risk front-line collections function to the group itself, and management or corporate social responsibility units. because of this MFIs themselves have little to no control •• Servicers: By definition, collections is a core capability for over the tactics employed. The participating MFIs are professional loan servicers. They have therefore invested more aware of the challenges, particularly in the wake of the in both capabilities and controls. Their focus on controls is crisis in Andhra Pradesh India, which was precipitated by due to the fact that maintaining an untarnished reputation is allegations of collections abuses. Examples of factionalism important to a professional servicers’ ability to secure future and abusive behavior by group leaders show that formation contracts. Unfortunately, in many markets the servicing sector of a self help group does not alone guarantee sound remains fragmented and dominated by small unprofessional collection and portfolio management decision-making. players for whom reputation can be less important. 5.2. Policy setting Responsible collections start with senior management articulating Figure 5: Participants in collections policy setting how they expect the institution’s customers to be treated. All the institutions participating in this study reported having a Board 0% collections policy document. However, when probed about the committee primary purpose of the document, a majority of participants cited maximizing collections and avoiding litigation as the primary Executive 21% committee purpose of the guidelines, while preserving customer relationship and Corporate Social Responsibility are ranked as lesser priorities. Retail loan 50% head Further, responsibility for drafting the policy usually rests within Collections 71% the collections function or retail business unit, and many policies head are not signed off by senior management. As a result the interests of potential stakeholders, such as the compliance, reputational Others 29% risk or service quality functions, do not have a significant voice in 0% 20% 40% 60% 80% policy setting. Through discussions with collectors, it was further apparent that collections policies are not always understood by field collectors and, hence, had limited effect on behavior. 5. Key observations from the Study 13 Formal written procedures to cover irresponsible use of Figure 6: Reported objectives of collections policy borrower contact channels, collections strategies and debt recovery procedures are common. However, the following limitations were observed: Holistic – Extends to corporate social responsibility 38.5% •• “Special case” treatment is rarely defined. Where hardship and customer relationship management case procedures do exist, they tend to be limited in scope, such as the death of a borrower. As a result, collectors are left to their own devices in such cases. •• While policies prohibit threats and intimidation, they tend 38.5% Includes avoiding customer litigation to be silent on other potential goals, such as protecting customer privacy, limiting threats of incarceration, protecting customers’ credit record or when and how to contact guarantors. 23.0% Limited to compliance and collections value Case Study: Centrality of code of ethics – Mexican MFIs Mexico is host to a number of microfinance institutions and enjoys a relatively favorable legal environment for enforcing claims (Fitch places the country in “Group C,” ahead of the bulk of countries studied in this report). Two firms, FinComún and Compartamos Banco, have drawn distinction for their efforts in promoting ethical and responsible treatment of customers. FinComún is a deposit-taking microfinance institution in Mexico. In response to rising delinquency rates in 2008, management set forth a new “philosophy” based on collection agents treating customers with respect and dignity. The new framework introduced a code of ethics based on the “golden rule”, eliminating outsourced collections, ethics in recruiting and solicitating customer feedback. The framework has enabled the institution to improve on-time payments and weather not just the global financial crisis but also the impact of the H1N1 outbreak which damaged the economies of the communities in which it operates. The for-profit Compartamos Banco MFI is also recognized for its strong institutional commitment to its clients and employees. Its Institutional Code of Ethics and Conduct covers all employees and management levels. Among other things, the code protects customer information and requires that customers be treated with dignity in the collections process. Embedding these values throughout the organization has been accomplished through strong leadership as well as tangible initiatives such as: • Independent department charged with the oversight and promotion of the institutional values and mission • Annual certification of all staff • Toll-free whistle-blowing hotline • Toll-free customer complaints hotline • Third party review of client impact • KPIs related to ethics and conduct incorporated into balance scorecards for staff appraisals Sources: “Collections with Dignity at FinComún”, Smart Notes – Putting Principles into Practice, No. 1, February 2010, www.smartcampaign.org/storage/documents/Tools_and_Resources/Collections_FinComun.pdf. MicroRate Social Rating report for Compartamos Bank, 2009. Compartamos Banco website, www.compartamos.com. 14 Responsible debt collection 5.3. Borrower contact In more mature financial markets, voice channels (call centers) are 5.3.1. Field collections the dominant mode of customer contact, while field agent visits are reserved for special cases such as skip tracing and candidates In jurisdictions such as those in South Asia, field visits are for repossessions or foreclosure. In the jurisdictions studied, essential to the collection process. For many borrowers, the mix of voice and field contact varied widely, with some physical instruments (cash or cheque) are the only practical markets dominated by voice (e.g., Central and Eastern Europe, or trusted forms of repayment. In some cases, borrowers have South East Asia) while others mostly used field contact, even for even come to expect and appreciate this “doorstep service” borrowers in the early stages of delinquency (e.g., South Asia). from their lenders. One South Asian institution which aspired to eliminate all cash handling by agents acknowledged that Figure 7: Where judicial recourse is less strong, field this was next to impossible without a fundamental shift in activities are more prevalent borrower culture. Allocation of staff to field, call center and other roles Study participants consistently viewed field collections as 100% the most risky channel, from both a customer treatment and 1% reputational risk perspective because none of the automated 25% monitoring and control features of a call center are available. 80% Furthermore, there are real and perceived threats to collectors which can quickly escalate the situation. Much attention 60% 81% 45% is placed on the problem of cash defalcation (collectors pocketing customers’ payments), which is both a cost to the 40% lender and a problem for customers, since it inevitably leads to a dispute situation. 20% 30% Lenders commonly make monthly case allocations to field 18% 0% agents on the basis of product types and period of delinquency. Fitch C rated Fitch D rated Seldom are borrowers segmented within a given delinquency bucket. In some cases, agents are provided with tools to Field collectors Call center collectors Others support their efforts, such as workflow automation, feedback from prior customer contact or guidance on handling hardship cases or arranging exit options. In other cases, agents are left Where field collectors are employed at early stages of to their own devices. In the worst cases, lenders’ management delinquency, the reasons cited were generally the difficulty in information systems (MIS) are incapable of aggregating contacting borrowers by phone and a lack of non-cash modes exposures to a borrower, and multiple agents are despatched of repayment. Skip tracing activities also rely heavily on field to a customer’s residence to collect on different facilities. investigation in most countries. There appears to be a strong negative correlation between the use of field contacts and the frequency of legal action (such as court cases, repossessions, etc). We postulate that in those countries where a strong, credible threat of legal repercussions is present, the perceived “need” for intensive customer contact is greatly reduced and, with it, the risk of customer abuse. The following sections provide a description of how each contact channel is used, and the types of controls applied to each: 5. Key observations from the Study 15 Figure 8: Most respondents had restrictions on threat of harm or abuses, however, only 36% had restrictions on criminal proceedings against borrowers Threat of harm/abuse, 93% dignity Restrictions on contact 86% with 3rd parties Contact restrictions 79% Informing about dispute 71% resolution policies Accuracy of 64% communication Financial penalties & 57% credit history Criminal proceeding 36% restrictions 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% The study’s participants use four different control mechanisms: 1. Close supervision: Field agents are generally managed 3. Team visits: Several collections servicers send staff in pairs in small teams, with management spans as low as 10:1. or teams, or send staff to accompany third parties engaged Agents will typically report daily to team leaders who closely for repossessions. This ensures that a second pair of eyes manage their caseflow, accompany agents on selected visits keeps a check on the customer interaction and discourages and bring in more senior collectors for more difficult cases fraud. It is costly, however, and used mostly for higher value or those requesting modifications or settlements. cases or non-routine visits. 2. Mobile technology: Mobile technology is now being 4. Visit follow-ups: A few lenders have established a system employed by collectors for conventional lenders and of random follow-up calls to customers visited by field MFIs to help manage workflow, record customer trail agents. These confirm that a visit was made, verify the information, track collectors’ whereabouts and issue receipts outcome of the visit (i.e., whether a payment or promise to to borrowers. Such systems show promise, especially with pay was given) and seek feedback on the collector’s conduct. regards to reducing fraud and cash defalcation, but do not At least one lender calls customers where no contact has yet provide a window into the agent-customer interaction. been reported by the agent. 16 Responsible debt collection Case Study: Community-based collections in Philippines In the Philippines, one servicing firm has initiated a collections program aimed at settling non-performing loans with the incentive of clearing the debt from the borrowers’ credit record and thereby giving them a fresh chance for access to credit. The firm has undertaken a community-outreach approach, bringing teams of remedial management specialists into a community and offering attractive settlement programs to bring in customers for voluntary settlement. Given the potential for community backlash, they are acutely aware of the need to be perceived as problem-solvers, not collectors. Examples of their controls include: • Door-to-door campaigns in teams, not solo • “Welcome pack” given to customers with guidance on process, benefits, customer service channels (hotline, SMS, email) Case Study: Field agent oversight in China One Chinese loan servicing firm dealing in corporate and SME loans reported having a strict policy of sending field collectors in groups of two or three to visit client sites. No collector can visit a client alone. This helps ensure there is peer oversight of customer interaction, and checks the tendency of a collector on the use of coercive, aggressive or dishonest tactics. Nor does the firm allow field collectors to accept cash or cheques from clients. They visit the client with the intention of securing a “Promise to Pay”. The client then wires the money directly to the organization’s account. This eliminates the possibility of cash defalcation by individual field collectors. Table 2: Practices snapshot: Field contact channel observed practices Leading Typical Minimal Field collections • Low reliance on field yy Mix of field and phone yy Heavy reliance on field • No cash handling yy Cash is handled to certain extent yy Mostly cash handled • Field used mostly for skip tracing and asset recovery 5.3.2. Phone collections Phone contact is used for soliciting repayment for early stage With few exceptions (see case study), collections institutions do not delinquencies. Use of phone contact declines for later stages of completely centralize phone contacts at a call center. Instead calls delinquency, and is more prevalent in markets with more robust are made from branches or by collectors using their own mobile legal recovery frameworks and where non-cash repayment phones. This distributed calling is usually unscripted, unrecorded mechanisms are readily available. and only loosely monitored. As a result, there is a greater risk of misconduct than in a formalized call center. Table 3: Practices snapshot: Voice contact channel observed Leading Typical Minimal Phone collections • High reliance on phone yy Mix of phone and field yy Low/no use of phone • All calls scripted, with call yy Most calls scripted yy No call scripts/protocol termination protocol yy No auto dialling yy No system/logic behind dialling Predictive dialling • yy Limited training using call records yy No training/call records not used Training using call records • in training 5. Key observations from the Study 17 Case Study: Thailand – a voice-dominated market Among the countries studied, Thailand has one of the most professionalized collections industries and receives a favorable “C” assessment from Fitch for enforceability of claims. More attention was spent on the oversight of collectors than in most other countries covered. Some practices observed included: • Customer contact dominated by phone calls, with field collectors being employed primarily for skip tracing and asset recovery; payments can be conveniently deposited with local merchants such as 7-11 • Customers assigned to field agents are also contacted by phone to verify contact (or non-contact) and solicit feedback on interaction • Call centers have an open floor plan, tight management spans and call recording for effective peer and supervisor line-of-sight dedicated complaint hotline and behavioral scoring used to triage customers for contact strategy  “Country-Specific Treatment of Recovery Ratings,” FitchRatings, 23 February 2011. 5.4. Human resource management Study participants were asked about four key dimensions of human resource management: recruitment, training, incentives Case Study: Central and Eastern Europe – and vendor management. Across the board, results reveal that recruiting experienced staff from other sincere attempts are made to attract and retain good staff, yet industries participants cited several obstacles. In general, turnover rates are high and qualified applicants are scarce. Among the countries studied, the general trend has been to recruit collections staff at the entry level or to make internal transfers. This allows staff to be trained in ethical collections practices but is costly 5.4.1. Recruitment and time consuming. In Central and Eastern European countries, lenders found In most markets, experienced collectors are scarce and most themselves lacking capacity to cope with rapidly rising defaults. agents are new to the job, with entry level staff or internal transfers. Lacking sufficient experienced staff to rapidly train others, some For entry level hires, lenders typically seek candidates with a banks turned to collection experts from outside their industry. high school diploma and seldom expect more than 3 years of Specifically, they recruited staff from the leading mobile phone operators – renowned for their effective collections departments experience. The profile of a firm’s staff depends on the proportion – to build capable collection teams rapidly. Because these recruits of work done in the field, the demographics of the clientele, and were already experienced in customer interactions and collections the nature of the portfolio (e.g., secured vs. unsecured). in a non-lending and relationship-oriented environment, they were well suited to transition to ethical collections in lending. Most firms use some form of background check but some noted that the effectiveness of these investigations is limited given applicants’ inexperience and the paucity of data available  “Retail banking in Central and Eastern Europe, Debt collection in times of crisis,” EFMA, 2011 for background investigations. Table 4: Practices snapshot: Recruiting observed practices Leading Typical Minimal Qualifications • Graduate/post graduate yy High school/diploma/college yy Middle school/no criteria Average experience • 5+ years 1-3 years • <1 year, inexperienced hires • Field collector Checks required • References required, fraud checks • No checks • background check 18 Responsible debt collection 5.4.2. Training The quantity of training varies considerably across participants and is often driven more by regulatory than business requirements. Typical study participants report providing 15 hours of training to new employees, with annual refresher courses of around 10-30 hours. In some cases initial training is as much as 100 hours. This study was unable to assess the effectiveness of training in imparting ethical collections values to agents. Most respondents indicated that ethical practices are covered within the training curriculum. Table 5: Practices snapshot: Training observed practices Leading Typical Minimal Hours of training • 80-100 hours yy 15 hours yy No training, < 10 hours Training on ethical • 30-100 hours, quarterly refresher • 10-30 hours, annual refresher No training • collections courses courses 5.4.3. Performance evaluation and incentives As with sales functions, collections performance is driven by strong incentive mechanisms. Most firms covered in this study evaluate employees primarily on the basis of the amount collected from borrowers, with targets being differentiated by difficulty of collecting (e.g., by product and delinquency bucket). Adherence to processes is only a secondary consideration of incentive policies. Figure 9: Most firms evaluate employees by amount collected from borrowers, with only 40-50% evaluating adherence to process Successful Contacts Promise to pay kept Amount collected Adherence to process Judgemental factors Company performance Others 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Field Call Center 5. Key observations from the Study 19 Table 6: Practices snapshot: Performance evaluation observed practices Leading Typical Minimal Performance • Balanced scorecards with • Field collectors evaluated on • Evaluation and incentives tied to evaluation financial and process elements financial performance financial performance alone • Severe penalties for • Voice collectors evaluated on transgressions multiple criteria Although performance-linked incentives are an important driver of performance in a collections function, they can also have the effect of encouraging collectors to use any means, fair or foul, to realize a payment. As in the case of sales abuses (e.g. mis-selling), strong negative incentives (e.g. termination, prosecution) are essential for discouraging inappropriate behavior. In almost all cases, respondents reported that allegations of misconduct are dealt with seriously and termination is the most frequent remedy. Case Study: Incentives in the relationship manager model One alternative incentive structure is the relationship manager model. In this model, which is most commonly practiced in microfinance or very small business loans, collections activities are carried out by the same loan officers who originate and service the loan. This approach fundamentally alters the collections incentives, because the relationship officer has strong incentives to retain the customer relationship and to maintain good relations in the community in order to foster future business. These “long view” incentives allow the officer to play the role of problem solver rather than enforcer. In many institutions, the case may be referred to a recovery agent if the customer remains unresponsive. While reportedly effective in “good times”, this model has been less successful under stress (high NPLs), when the prospect of future business no longer outweighs the need to get payments on existing delinquencies. 5.4.4. Vendor management The professionalization of agencies varies by geography. Predictably, those jurisdictions with more favorable legal frameworks tended to also have more professionalized collections Engaging third-party agencies at some stage in collections industries, while others tend to be dominated by small, local “sole occurs virtually wherever permitted by law. In some cases, third proprietorship” agencies. In these fragmented markets, ensuring parties participate in all stages of collections and are contracted responsible practices by these agencies is a serious challenge. not for special skills, but simply to augment capacity. In other cases, they are contracted for specific skills which the lender is Few institutions have invested in vendor management capabilities not able to provide, such as skip tracing. that would help give comfort that customers are being treated with dignity. When vetting vendors, reputation and performance are For the most part, the participants in this study use vendors paramount, while the number of customer complaints received to provide door-to-door field collections services. Somewhat is seldom a prominent consideration. A common reason for surprisingly, among the study respondents there were few outsourcing is to benefit from the greater “flexibility” available examples of either outsourcing of call center operations or to third parties, including, but not limited to, better relations with “managed service4” arrangements. officialdom (including police and politicians). 4 In managed service contract, the service provider manages all aspects of collections under a set of pre-agreed SLAs in exchange for payment based on collections outcome. 20 Responsible debt collection Figure 10: Customer complaints rarely considered as part of 3rd party agency empanelment 100% 80% 60% 40% 20% 0% Years in Local Specialized Reputation Background Collections Hiring Pending Customer Others business expertise skill check efficiency policy litigation complaints Further, when selling debt to third parties, participants did not cite the quality of controls as a significant factor in selecting a purchaser. Nor are customer protection mechanisms commonly built into the sale contracts. Case Study: Vehicle repossession process in India As in many countries, vehicle repossessions in India are often outsourced to third-party providers. These agents benefit from an informal cooperative network to locate vehicles of delinquent borrowers and bring them to the attention of the lien holder. In most cases, the owner or driver must be physically present and voluntarily relinquish the keys to the repossessing agent. One asset reconstruction company reports that to monitor the conduct of the repossession agent and minimize chance of conflict, a staff member accompanies the third party agent throughout the process. Often a police officer is also present.While reportedly effective in “good times,” this model has been less successful under stress (high NPLs), when the prospect of future business no longer outweighs the need to get payments on existing delinquencies. 5.5. Monitoring and complaint handling systems Active monitoring and complaint handling mechanisms were found to be generally at a rudimentary or ad hoc level. As will be discussed in the following section, this is an area where investment is essential for responsible emerging markets economies lenders and collectors. 5.5.1. Monitoring systems Monitoring of activities in professional call centers tends to Monitoring of field collections is inherently the most difficult. be strong, with tight management spans (typically 1 supervisor In most cases, field collectors visit debtors alone except in to 10-12 callers) and call recording in place. Among study difficult cases, leaving only scope for remote oversight such as: participants, however, advanced tools such as detection of foul language or aggressive tones are not prevalent. Mobile technology: Some lenders have implemented mobile device applications which track collector activities. This In cases where voice contact remains decentralized in branches, technology is nascent, with only a few institutions having initiated scant infrastructure is available for monitoring. or piloted it (see case study box below). 5. Key observations from the Study 21 Follow-up contact: A more effective mechanism is the practice of making random calls or visits to customers to solicit feedback Case Study: Technology for field agent and verify collector reports. monitoring (India and Thailand) Most lenders have a system of checks and controls for Several collectors spoken to are experimenting with mobile supervising third parties, often with in-house staff regularly technology for assisting and monitoring field agent collection activity. monitoring and supervising agency operations. In these pilots, field collection agents are equipped with handheld devices with Global Positioning System (GPS) and General Packet Figure 11: Management spans were tighter for field Radio Service (GPRS) capabilities which can be used to track their collections than for call centers at most respondents whereabouts as they do their rounds. These systems can provide (manager to staff ratio) daily workflow support, such as customer address, delinquency and trail information, and can also be used to upload trail updates after customer contact. Call center The systems can be linked to portable receipt printers via Bluetooth® technology so that customer receipting is automatically synchronised with lender account records. Fielder In the case of one MFI, each customer has a biometric card with their thumb impression captured on it. The card is swiped in the mobile device, thereby reassuring the client that payment will be credited to the correct account. Others While these devices show promise in limiting fraudulent activities by agents, they do not provide the kind of direct line-of-sight to the 0 2 4 6 8 10 12 14 customer interaction that can be achieved in call centers. 5.5.2. Complaint handling systems Few lenders have invested in formalized complaint handling and early warning mechanism to identify weaknesses in controls. resolution systems. For the most part, complaints were handled in an Some lenders have taken steps to formalise their complaint and ad hoc fashion, without mechanisms for recording and tracking the redress procedures, including: level or nature of complaints received over time. Whistle-blowing •• Establishing dedicated complaints hotlines policies and processes were found only in a minority of cases. •• Providing alternative complaint channels – SMS, email, mail Quick resolution of customer complaints is an important part •• Advertising hotlines to customers through documents, of customer service and a mechanism for avoiding future receipts and in one case employee business cards conflict or litigation. Monitoring complaints also serves as an 22 Responsible debt collection Case Study: Debt collector regulation in South Africa South Africa has a relatively professionalized and well-regulated collections industry; it also enjoys the highest rating of “A” by Fitch for the effectiveness of judicial recourse. Phone contact strategies dominate the market, in part because of the effectiveness of legal measures and in part because door-to- door collection is deemed to be a dangerous activity for collectors. The South African government has established entities charged with promoting responsible practices in microfinance lending and debt collections for conventional lending. In addition to these, the Association of Debt Recovery Agents maintains its own code of conduct and investigates its members. The Micro Finance Regulatory Council (MFRC) is a non-governmental body created in 1999 with a mandate for: • Promotion of micro-lending industry • Encouragement of sustainable growth in the industry • Lending credibility to the industry • Serve credit needs of South Africans who may not have access to credit by formal banks • Protection of consumers against unfair business practices by lenders • To educate consumers and lenders about their rights and obligations All microfinance lenders must be accredited by the MFRC as a condition for the waiver of usury restrictions. The Council has established guidelines for fair business conduct, including limitations on collections practices. Consumer complaints can be directed to the MFRC through phone, fax, email or website. MFRC then has the power to investigate and discipline lenders. For most other consumer debt, collectors are regulated by the Council for Debt Collectors. The council has been operational since 2003. All debt collectors must be registered by the council and agree to adhere to its code of conduct. Though the documentary requirements for consumer complaints are more onerous that those of the MFRC, the council does have the mandate to investigate complaints and discipline violators (including levying fines).  Meagher, Peter, Ed., “Microfinance Regulation in Seven Countries: A Comparative Study Submitted to Sa-Dhan, New Delhi by the IRIS Center, University of Maryland, 31 May 2006 www.debtcol-council.co.za www.mfrc.co.za Anderson, Raymond, “Micro-lenders: Sub-Prime Lending and its Implications for Credit Bureaux and Credit Scoring in South Africa”, Presented at Credit Scoring & Credit Control VII, University of Edinburgh 3-5 September 2003 Case Study: China – Call Center Quality Control One major Chinese lender has recently implemented an advanced collections system, which enables the collections department to take a customer-level view, track collections trails in detail and segment borrowers according to their aggregate exposure and account behavior. Unlike most Chinese lenders, who manage collections activities out of city branches, collections is a centrally-coordinated activity with monitoring, analytics, letter dispatching, SMS and call center all run out of headquarters. The management of door-to-door activities remains with the branches. Only the mailing of dunning letters is outsourced. Customer contact is kept in-house to better control reputational risk concerns. The call center is a critical element of the customer contact strategy, and the bank has established several monitoring mechanisms for their call center, including: • Centralized complaint handling unit charged with identifying, following up, resolving and tracking customer complaints • Call recording system through which all calls are recorded and checked on a sampling basis by an internal monitoring/quality assurance team • Reconciliation of call logs by call center managers on a sample basis. • Real-time oversight of calls by the team leader • Periodic assessment of the call center by headquarters 6. Recommendations 23 6. Recommendations Despite the good intentions and significant effort of collectors, much can still be done to strengthen the controls on collections activities. The following recommendations focus on the guiding principles that can be followed more rigorously in institutions. Successfully implementing this guidance cannot provide fail-safe protection of consumers, but can do a great deal to mitigate the risks associated with collections and promote fair treatment of borrowers. In the structure of the Responsible Finance Forum’s three pillars of responsible finance, the following recommendations focus primarily on practices which can be adopted by financial providers. However, regulators and policymakers can also facilitate greater fairness in collections by strengthening supporting institutions. 6.1. Pillar 1: Regulation and policy The role of regulation must go beyond the oversight of •• Credit information: Access to good credit information collections activities. It must create an environment conducive improves the quality of underwriting and hence reduces to fair interactions without inadvertently playing into the hands the risk of mis-selling or excesses by collectors. Key tools of those willing to operate on the fringes of system. Important include credit bureaus and national ID systems. features of such an environment include: •• Customer education: Financial literacy in emerging markets •• Legal recourse: Lenders should have access to timely, is a challenge. Some customers can easily be mislead about equitable and enforced civil 5 proceedings against defaulting their legal rights, dispute resolution channels or the financial borrowers, whether the debt is secured or unsecured. consequences of their repayment behavior.6 Lenders should also be protected from the kind of frivolous •• Agent training and licensing: Training and licensing claims often put forward by borrowers’ intent on taking collections agents raises their awareness of the principles of advantage of the inefficiency of the courts. responsible collections, and encourages them to engage with •• Consumer protection: Just as lenders’ legitimate interests customers in more humane and effective ways. should be protected by reliable legal recourse against •• Ombudsman office: Regulators can promote centralized borrowers in breach of their contractual obligations, so mechanisms for raising and resolving or publicizing customer should borrowers be protected by legislation banning them complaints. In some jurisdictions regulators themselves may with recourse against fraudulent, intimidatory and other be able to operate these recourse mechanisms, while in unethical collection practices. others independent ombudsmen or other entities might be •• Personal bankruptcy legislation: Customers who are in more appropriate. financial distress need recourse to a legal process by which their financial situation can be independently assessed and a degree of repayment apportioned to creditors in exchange for protection from further obligations. 5 In some jurisdictions, the only effective legal recourse is criminal proceedings 6 For example, some collectors see incentive to keep customer in delinquency under laws governing negotiable instruments (i.e. writing bad checks). In these instead of making regular payments. Customers may not understand that failure jurisdictions, post-dated cheques are taken at time of loan disbursement and to regularize subjects them to unnecessary late fees and/or penal interest. One encashed only in the event of delinquency. The inevitably returned cheque then lender reported that their customers were unaware of the importance of taking provides basis for criminal proceedings and often incarceration. In our view, a receipt when making a doorstep payment. judicial avenues which do not involve threat of incarceration are preferable 24 Responsible debt collection 6.2. Pillar 2: Responsible practices by financial providers The internal controls of many emerging market lenders give 6.2.1. Governance insufficient comfort that consumers will not be abused even in benign market conditions, let alone in a period of mass A consistent finding of this study is that few institutions have delinquency. Although professional collections agencies and debt collectors have generally invested more in their control designated clear accountability for collections’ being carried frameworks, they still have shortcomings and the following out ethically. Oversight of collections rarely extends beyond recommendations is broadly applicable to them too. the collections unit or retail lending business. Lenders can take comfort that the investments required will pay Institutions that take responsible finance seriously must dividends in the form of improved collections efficiency. This improve their governance structures. Specifically, they should is because many of the practices recommended minimize the assign independent responsibility for defining and monitoring chance of excessive pressure from collectors by giving them more ethical standards of conduct within collections. effective ways to understand borrowers’ ability and willingness Ideally, such responsibility should rest with an independent to repay and hence, to quickly achieve the best possible outcome. function reporting to senior management. In most institutions it In other words, more responsible collections processes requires is impractical to have a function dedicated to ethical collections being smart about collections, not being soft. It is recommended practices. Responsibility could instead be assigned to a function that institutions focus on the following three areas: with a related mandate, such as Compliance, Risk Management 1. Governance: Clear ownership and management of or other departments responsible for customer service quality. collections initiatives Where this is impractical, institutions may consider assigning 2. Process: Best practice use of information, analytics and tactics responsibility to a suitably constituted committee. 3. Monitoring: Measurement and reporting mechanisms to ensure line-of-sight to the customers interface Figure 7: Practices snapshot: Performance evaluation observed practices • Clearly defined responsibility for setting and monitoring conduct standards for collections staff, independent from collections or lending business ERNANCE GOV • Line-of-sight to customer interface – Tight management spans RESPONSIBLE – Call center LLENCE COLLECTIONS recording/monitoring • Best practice processes both – Follow-up calls to customers M CONTROLS O improve performance and – Innovative field tracking XCE NITO minimize risk technologies SE RI NG – Customer intelligence S PRO CE – Customer complaint – Process triage mechanisms – Remediation tools – MIS reporting of key indicators – Process discipline • Whistle-blowing mechanisms – Vendor management • Internal audit 6. Recommendations 25 The unit responsible for collections standards must work Besides strengthening governance, institutions should review with other stakeholders, such as the lending business, the their existing policies to ensure sufficient emphasis on the fair collections function and relevant independent stakeholders treatment of customers, including: to set and maintain appropriate ethical standards. It must also •• Transparent relationship with borrowers ensure that adequate measurement and reporting frameworks for monitoring performance are established. Mandates for all •• Guidelines for interacting with fairness and respect stakeholder functions must be clearly defined. •• Conditions for the application of financial penalties •• Customer information security •• Dealing with hardship cases •• Processes for training and certifying staff 6.2.2. Process excellence Effective collections practices apply the right contact approach to each borrower and wield a combination of carrots (e.g., in the form of modification solutions) and sticks (e.g., in the form of legal recourse). The key elements of good collections are: Element Common shortcomings in emerging markets 1 Early identification of the borrower’s situation, ideally yy Limited behavioral scoring applied pre-delinquency or after the first missed payment, yy Qualitative feedback from customer contact not captured or assessing likely capacity and willingness to repay. incorporated into strategy 2 Triage of borrowers to align contact strategy to customer • One-size-fits-all – single process applied to all customers based situation, balancing costs with expected recoveries. Reassessment on delinquency level and value only of tactics as new information is received. Poor information flows between individuals in contact with • customer 3 Access to a variety of “exit options” including restructuring, • Few alternative exit options available modifications and concessions. Where available, ad hoc or burdensome processes for execution • 4 Judicious threat of severe but proportionate consequences for Limited enforceability of property liens • failure to voluntarily repay, including enforceable claims on Few credible mechanisms for leverage against unsecured • property, civil recourse for unsecured exposures, criminal liability borrowers in fraud cases and credit bureau reporting. While the fourth element in the table above is beyond the 1. Customer Intelligence: Use behavioral and other direct control of lenders, there is significant opportunity for customer data as well as contact feedback to assess the improvement in the first three. More systematic and analytical customers’ situation and identify fraud and skip cases early approaches to the first two will lead to lower risk of abuse simply on. Analytical tools can include scoring or other predictive by reducing the number of customers being approached by field segmentation methods. Ensure a smooth flow of customer information between parties interfacing with the customer agents. It will also facilitate a more personalized dialog with to provide continuity in dialog. This requires significant customers and place less responsibility for tactical decisions in the investment in technology and analytics hands of relatively inexperienced collections agents. Providing a wider range of resolution options for customers changes the 2. Process triage: Customer intelligence should be used to dialog from one of confrontation to one of problem solving. segment borrowers into alternative collections processes: (e.g., gentle reminders for first time delinquents likely to In short, the tools that help collectors assess borrowers’ repay, immediate legal proceedings for suspected fraud circumstances and choose approaches aligned to the customers’ cases, and everything in between). Processes should be likely ability and willingness to repay both maximize recoveries selected to employ field agents only when alternatives and minimize the chance of mistreatment. cannot reasonably be used 26 Responsible debt collection 3. Tools: Lenders need a more complete suite of remediation C. Tight spans of control at ground level (field or phone) to options, with flexible processes that enable collectors to provide adequate oversight on collector activities work in problem-solving mode with customers. Care must D. Technology that monitors call voice contacts – software be taken not to introduce undue moral hazard or to make to monitor language and tone of agents in interaction excessive concessions unnecessarily with customers 4. Process discipline: All collections processes should be E. Random follow-up calls to customers contacted by field clearly defined and delineated. Channel usage according to or phone to verify that contact was made, outcome of products and buckets, third party monitoring mechanisms, contact and get feedback from customer. complaint handling and tracking mechanisms should be F. Innovative technologies for monitoring field collection communicated clearly to employees and adherence to these agent activities. Mobile-phone based applications are processes should be tracked and monitored. being introduced to better manage field agent workflow, 5. Vendor management: Where third-party agencies are monitor activities and issue receipts. The effectiveness used, strict empanelment and performance monitoring are in regulating agent behavior is unproven but there is required to optimize performance and mitigating risk potential in this area. For microfinance institutions, the tools and processes differ G. Effective and well advertised customer from conventional lenders in several respects, and best practices complaints mechanisms: are evolving rapidly. One learning from this study is that for a. Accessible channels for raising grievances joint liability lending; protection of individual borrowers from (e.g. hotlines, SMS, email), inappropriate intra-group pressure requires lenders to quickly b. Raise customer awareness of the grievance channels identify borrower distress and intervene before tensions within the group become unmanageable. For more information about c. Organizational structure for timely redress of emerging best practices in microfinance, we refer the reader grievances and internal follow-up (individual to other excellent research which has been done in this space7. penalties and process improvements). d. Complaints “dashboard,” showing level and trends of key customer satisfaction indicators, regularly 6.2.3. Measurement and reporting reported to top management. H. MIS and reporting of key risk indicators, such as Measurement and reporting tools complete the loop, allowing survey feedback, customer complaints, lawsuits and management to understand the effectiveness of processes and regulatory penalties. creating awareness among staff that their actions are under 2. Trusted and effective whistle blowing channel: A whistle scrutiny. The objective should be to identify inappropriate blowing channel provides a vehicle for top management behavior for disciplinary action (against individuals or vendors) to learn of potentially risky practices before they cause and to track “key performance indicators” that would indicate the significant customer impact or reputational damage. overall health of processes and areas that need improvement: 3. Internal audit: Independent internal audit is critical for 1. Line-of-sight to customer interface: Management must understanding ground realities of process implementation. have confidence that the agent-customer interface is well The audit function should be given a clear mandate to understood. An effective line-of-sight program would evaluate processes for their impact on customers. Its reports include most of the following elements: should be presented to all internal stakeholders. 7 See, for example: “Best Practices in Collections Strategies,” ACCION InSight, no. 26, November 2008; “Consumer Protection Regulation in Low-Access Environments: Opportunities to Promote Responsible Finance,” CGAP Focus Note, No. 60, November 2010; Clark, Heather, “Beyond Codes: The Foundation for Client Protection in Microfinance,” Oct 2010. 6. Recommendations 27 6.9. Pillar 3: Financial capability Collections abuse is also found in developed markets. However, it is kept under control by borrowers’ financial literacy and knowledge of their rights. In addition to emerging markets regulators and financial providers, other institutions, such as those devoted to financial education or industry associations, can help to advance the financial capability of consumers: •• Standards for ethical practices: Industry associations can take the initiative to create standards for responsible collections, which can be used by consumers as benchmarks to compare lenders’ policies. •• Borrower awareness: Financial education institutes and industry associations can take a leading role in promoting financial awareness amongst borrowers. They could also write booklets, given to new borrowers, informing them of their rights and redress mechanisms. •• Ombudsman office: Industry associations can promote centralized mechanisms for raising and resolving or publicizing customer complaints, especially in jurisdictions where regulators themselves do not provide adequate recourse mechanisms. Case Study: SMART Campaign The Smart Campaign is a global effort to unite microfinance practitioners and supporters around a core set of client protection principles. The Smart Campaign educates and incentivizes MFIs to treat their clients fairly and to avoid harming them. These client protection principles are the minimum standards that clients should expect when doing business with a microfinance institution: • Avoidance of over-indebtedness • Transparent and responsible pricing • Appropriate collections practices • Ethical staff behavior • Mechanisms for redress of grievances • Privacy of client data  www.smartcampaign.org 7. Conclusions 29 7. Conclusions There are no sure-fire mechanisms to ensure full compliance to customer treatment norms. The study finds, however, that despite the inherent challenges in emerging markets, lenders and collectors can take meaningful steps to reduce the risk of collections abuses without impinging on collectors’ ability to deliver financial results. Fortunately, many of those steps will actually improve collections performance by bringing a more scientific approach to decisions about how to approach each customer and by improving line-of-sight to collections activities. To recap, the study encourages the industry to focus on three key innovations: 1. Governance mechanisms that ensure focus on fair treatment of customers 2. Process excellence which brings a scientific and disciplined approach to collections strategies 3. Measurement and reporting that enables clear line-of-sight to collections activities and proactive monitoring of key indicators These initiatives for financial providers will be most effective when they are supported by balanced legal and policy frameworks and when borrowers are empowered with access to fair recourse mechanisms and awareness of their options. 30 Responsible debt collection Appendix A: Standards for ethical collections practices The following guiding principles are derived from an earlier 3. Develop relationships and systems to support ethical study commissioned by IFC8. They have been adapted from practices: in order to sustain respectful interactions with collections practices in developed markets as a foundation for borrowers, collectors must internally commit to responsible developing responsible and ethical collections standards. The and ethical practices. Interactions with the broader set of key principles articulated are: stakeholders – not just borrowers – should reflect this ethos. Example practices include: 1. Investing in a transparent relationship with the borrower: borrowers should be made aware of the E. Do not outsource unethical practices to other collectors consequences of defaulting on a payment. All terms F. Do not manipulate legal or political institutions to and conditions should be clearly communicated to the condone unethical practices borrowers, and they should be educated about ways to avoid G. Develop internal systems to regularly audit practices delinquency. In the event that a borrower defaults on his and operational performance to ensure compliance with loan due to some hardship, loan restructuring options or ethical guidelines other solutions should be offered to him in such a way as to H. Train collectors in ethical practices and incentivize avoid over-indebtedness and help him out of his situation. responsible behavior 2. Interacting with the customer in a fair and respectful manner: while sheer business economics dictates that lenders should try and recover as much of their outstanding debt as possible and minimize loss, it is imperative to ensure collections are done in a humane, respectful manner. The following policies should be adopted and followed strictly: A. No discrimination on the basis of race, religion, gender etc. B. Borrowers should not be contacted at unreasonable hours or frequency C. Language and behavior used should be polite, respectful, and non-threatening. On no account should collectors resort to physical violence or verbal abuse. D. The customer’s privacy should be respected. His state of indebtedness should not be unduly revealed to third parties. 8 Derived from IFC’s Global Practices in Responsible and Ethical Collections, Working Paper 2009. Appendix 31 Appendix B: Jurisdictions covered and Fitch ratings Figure 12: Jurisdictions covered in the study Russian Federation China Taiwan, China Philippines United Malaysia Arab Thailand Emirates Bangladesh Turkey India Mexico Brazil Ukraine South Africa Kazakhstan Indonesia Jurisdiction Region Fitch Jurisdiction Region Fitch grouping grouping Bangladesh South Asia D Philippines Southeast Asia D Brazil Latin America D Russian Federation Central and Eastern Europe D China North Asia D South Africa South Africa A India South Asia D Taiwan, China North Asia A Indonesia Southeast Asia D Thailand Southeast Asia C Kazakhstan Central and Eastern Europe D Turkey Middle East and Turkey D Malaysia Southeast Asia C United Arab Emirates Middle East and Turkey D Mexico Latin America C Ukraine Central and Eastern Europe D 32 Responsible debt collection Figure 13 Fitch country groupings for recovery ratings11 Grouping Description Jurisdictions that generally support the priority of claims on bankruptcy and display other features that are deemed to be A creditor – friendly, including generally reliable enforceability Jurisdictions where insolvency and bankruptcy procedures place less emphasis on the priority of claims, and display other B features that are deemed to be generally more debtor-friendly Jurisdictions where the letter of the law is balanced against governance indicators, suggesting that enforceability of claims C may be variable, for example, where enforceability has yet to develop a demonstrable track record Jurisdictions where the law is not supportive of creditor rights, and/or where significant volatility in the application of law D and legal enforceability of any claim materially limits the practical chances of recovery, or greatly increases the volatility of recovery prospects Figure 14: Fitch categories for commercial recoveries Group A effectiveness Decreasing Group B Group C Group D Source: Fitch, Country‐Specific Treatment of Recovery Ratings, 2/2011 9 Country-Specific Treatment of Recovery Ratings, Fitch Ratings, 23 February 2011 Appendix 33 Appendix C: Collections controls benchmarking We have classified emerging markets into leading, typical, and minimal on certain key dimensions below. C.1. Collections policy Leading Typical Minimal Policy coverage Corporate social responsibility, Collections efficiency is primary Impact of collections not covered reputational risks and customer while recognizing importance of in policy relationship are viewed on par with reputational risk and customer collections efficiency relationship Top management Board committee approves Executive committee Collections dept. drafts collections involvement collections policy approves policy policy and head of collections approves it C.2. Process management Leading Typical Minimal Field collections yy Low reliance on field yy Mix of field and phone yy Heavy reliance on field yy No cash handling yy Cash is handled to yy Mostly cash handled yy Field used mostly for skip certain extent tracing and asset recovery Phone collections yy High reliance on phone yy Mix of phone and field yy Low/no use of phone yy All calls scripted, call yy Most calls scripted yy No call scripts/protocol termination protocol yy No predictive dialling yy No system/logic behind dialling yy Predictive dialling yy Limited training using yy No training/call records not used yy Training using call records call records in training 34 Responsible debt collection C.3. Field collections and collateral recovery Leading Typical Minimal Collateral recovery yy Mechanisms to ensure yy Manager sign off and legal yy Immutable processes or decision (moveable property) alternative resolution “due process” at agent level, minimal oversight options considered to ensure compliance yy Additional controls support such as checklists and pre-assembled documentation packets Home repossession yy Same as above but with yy Same as above, with support yy Same as above consideration of availability of for customers wishing to alternative accommodation for sell properties customer in repossession decision yy Same as above, with support for customers wishing to sell properties Hardship cases yy Special process for hardship yy Life insurance is typically yy No special treatment of handling cases, with authorized bundled with loan, with lender hardship cases personnel required to approve as beneficiary resolution strategy yy Some firms are considering yy Hardship cases are forgiven disability insurance as well loans as a policy in some firms (a few MFIs) C.4. Employee skill management Leading Typical Minimal Qualifications yy Graduate/post graduate yy High school/diploma/college yy Middle school/ no criteria Average experience yy 5+ years yy 1-3 years yy <1 year, inexperienced hires Hours of training yy 80-100 hours yy 15 hours yy No training, < 10 hours Training on ethical yy 30-100 hours, quarterly yy 10-30 hours, annual yy No training collections refresher courses refresher courses Field collector yy References required, yy Checks required yy No checks background check fraud checks yy Balanced scorecards with yy Field collectors evaluated on yy Evaluation and incentives tied to Performance financial and process elements financial performance financial performance alone evaluation yy Severe penalties yy Voice collectors on for transgressions multiple criteria Appendix 35 C.5. Monitoring systems Leading Typical Minimal yy GPS used to track collectors yy GPS not used yy No GPS used yy Collectors visit customer in pairs yy Collectors usually visit yy Collectors always visit alone for better peer oversight customers alone except in yy No random calling/visits Field collections yy Audit team conducts random difficult cases customer visits for feedback yy Random calling/visits for verification and feedback yy All calls recorded and monitored yy Some calls recorded, reviewed yy No call records maintained yy Software to detect tones of in case of complaints only yy No software to monitor quality voice, use of abusive language yy No software to monitor quality of interaction Phone collections yy Centralized open floor call of interaction yy Non centralized calling only with centers with tight supervision yy Branch calling as well as call low supervision centers, adequate supervision of call centers yy In-house staff embedded in yy In-house staff embedded in yy No staff embedded in agency operations agency operations agency operations Third-party yy Strong checks and balances yy Checks and balances in place yy No checks and balances collections (random in-house calling/ visits, clearly defined complaint handling process, no cash handling) 36 Responsible debt collection Appendix D: Spectrum of customer harm Table 8: Types of customer harm during collections Class of harm Description Example controls Control effectiveness Usurious financial Systematic application of charges beyond Compliance function oversight in product High penalties those legally permissible design and audit of implementation Collector fraud or Most common abuse is cash defalcation, Collector background checks, receipt Moderate collusion where collector “pockets” cash payments book monitoring, customer education, from borrowers; also may include collusion provision of non-cash payment and third with borrower to obtain concessions from party collection points (banks, convenience lender stores, etc.) Harassment Contacting borrowers at inappropriate Clear definition of limits, training, oversight Moderate hours, repetitive and excessive outreach and complaints handling, call center monitoring Disrespectful Telephonic, electronic or physical Training, oversight and complaints Low treatment communication using abusive or handling, call center monitoring profane language Misrepresentation Any number of dishonest practices Clear definition of acceptable boundaries, Low or deception intended to deceive borrower into making training, oversight, complaints handling payment or divulging information and strong disincentives Violation of Inappropriate revelation of customers Clear definition of acceptable boundaries, Low privacy indebtedness to third parties training, oversight, complaints handling (e.g., neighbours, co-workers, etc) and strong disincentives Unfair forfeiture of Taking recourse to property without due Diligent processes and oversight. In High property process or in contravention of most emerging markets economies, legal acceptable norms processes sufficiently burdensome to discourage imprudent foreclosures Threats and Using local gangs to threaten and Training, oversight, complaints handling Moderate intimidation physically harm borrowers, seizure of and strong disincentives unjustified assets APPENDIX 37 Appendix E: References “Advancing Responsible Finance for Greater Development Impact: A Stock-Taking of Strategies and Approaches among Development Agencies and Development Finance Institutions”, Consultation Draft for Responsible Finance Forum by BMZ, CGAP and IFC, 27 January 2011. “Best Practices in Collections Strategies”, ACCION InSight, no. 26, November 2008. Clark, Heather, “Beyond Codes: The Foundation for Client Protection in Microfinance,” October 2010. “Consumer Protection Regulation in Low-Access Environments: Opportunities to Promote Responsible Finance,” CGAP Focus Note, No. 60, November 2010. “Country-Specific Treatment of Recovery Ratings,” Fitch Ratings, 23 February 2011 “Doing Business 2011: Making a Difference for Entrepreneurs”, a co publication of The World Bank and IFC, 2010. “Global Practices in Responsible and Ethical Collections”, IFC working paper, 2009. 2121 Pennsylvania Avenue, NW Washington, DC 20433, USA www.ifc.org