Debt Collection Excellence
Table of Contents
1. Why dealing with debt collection today...3 2. International overview ...5 3. Challenges in the domestic market ...8 4. Ten points of debt collection experts... 14 5. Final remarks ... 17
1. Why dealing with debt collection today
Debt collection represents an increasingly “impacting” business area over the years as a result of adverse dynamics affecting financial sector and real economy, among which the most important are:
increase in customers indebtedness and reduction of the ability to repay;
higher income uncertainty of costumers and difficulty in tracking down in case of past‐due;
decrease of the liquidity available to financial system.
In recent years past‐due and non performing loans management policies and methodologies, those until three years ago were almost exclusively relevant for financial players, have spread among industries (e.g. financial, manufacturing, services).
The worsening of the trend of non performing loans volume (in Italy “Sofferenze1” have exceeded 220 billion Euros, increasing by 36% over the last 4 years) and recovery rate
results in big challenges for the players. These challenges, in fact, take place in a regulation environment that struggles to follow business changes and in an evolving competitive environment characterized by strategies review, pursuit of process efficiency, improvement of rewarding systems and skills. The players have recently understood the increasing importance of debt collection and have launched interventions related to the issue. Nowadays, however, they are required to review, in short time and in a more forceful manner, their approaches, processes, tools and skills in a business area that has quickly become “core” for overall business management “Among non performing are increasing especially those most difficult to collect”
In the following pages, the main issues relating to the international and domestic scene are presented together with the point of view of the experts in this field than comes out from the recent “Debt Collection Excellence Roundtable” promoted by Accenture. Figure 1: Challenges in debt collection
Elena Mazzotti Fabrizio Sarrocco “In many companies non performing loans provisions far exceed net profits”
2. International overview
The International context is challenging and fulfill worsening forecasts as a result of turbulences in financial markets and in real economy that have brought to bankruptcies and bailouts of leading players both in financial and non‐financial sector. In this context non performing loans (NPL) are expected to growth even further.
Regarding the financial sector, overall credit situation and non performing loans specific one vary across the world:
In Asia and Oceania a positive trend can be highlighted. This trend has been characterized, over the last 3 years, by strong growth of total loans / GDP ratio, driven chiefly by China (+21%). Moreover, NPL ratio (ratio between the stock of the NPLs and total outstanding loans) is very low (1.2% in 2011) compared to other continents;
North America shows stability of lending (compared to GDP) in addition to an increase of NPL ratio compared to 2009. This trend is partially offset by a decrease in 2010 (largely due to write‐downs and transfers of non performing loans);
A high growth of NPL involves, instead, Latin America, chiefly driven by Brazil which has, in late 2011, a NPL ratio of 9% (increase of 11% compared to 2010). This critical context is even more important considering low credit volume in these economies. In addition, NPL could holds down credit expansion that is crucial to most of Latin America’s countries.
In Europe, despite the sharp contraction of credit (decrease of 5% in total credits / GDP ratio in the last 3 years), the economic and financial crisis has impacted both on companies and individuals leading to a NPL Ratio increase of about 5% compared to 2009. Negative forecasts about NPL growth, along with the credit crunch, are expected to impact on European economy recovery. “Understanding the reasons why a client aren’t paying is extremely important”
Figure 2: International overview Source: Elaboration on data from Deutsche Bank, Federal Reserve, Banco Central do Brasil People’s Bank of China Even in Europe the situation is not homogeneous: Countries such as UK and Spain “pay” credit expansion (respectively +2% and +6% over the last 3 years) with a double‐digit growth in NPL which amount stood above the European average (respectively 7,9% and 5,5%).This situation is even more severe considering the high private indebtedness (around 160% of GDP). Other countries like France and Germany, are characterized by a greater stability in the NPL ratio, respectively 5,6% and 4%, in line with the European average (although “Debt collection companies are fundamental today in order to help clients to manage the high amount of NPL stock
in France it increases by 10% per year between 2009 and 2011 ), largely due to a credit crunch in the last 3 years (decrease of total credit / GDP ratio of around 16%) Russia and Turkey show a low credit volume on GDP, with opposite credit trends in the last 3 years (increase of total credits / GDP of 13% for Turkey, decrease of 14% for Russia) but both Countries reduce NPL stock of around 20% per year. Figure 3: European overview Source: Elaboration on data from Deutsche Bank e Prometeia, BCE and Eurostat . “Clients have difficulty in repaying even mortgages
3. Challenges in the domestic market
Italy compared to the other European Countries shows a high NPL ratio (8.2% in 2011,
halfway between European average of 4.6% and 13.5% of Greece) that is expected to grow in the next years and an annual average recovery rate around 6%, constantly decreasing. This situation is even more critical considering that outstanding loans towards private sector have rapidly exceeded the European average, reaching 122% of GDP.
In Italy there have been 12.000 bankruptcies in 2011 (source: Cerved). The figure has constantly increased since 2005 and in 2011 has registered a growth of 4.4%. Particularly affected have been manufacturing and construction sectors which show an Insolvency Ratio of 40 and 31 respectively (number of bankruptcy every 10.000 companies). Service sector, however, is growing rapidly, showing a 10% growth during 2011 and reaching a peak of 18.7. In terms of geographical area, particularly impacted are North‐West (25.7), Center (23) and North‐East (21.5), led by the provinces of Milan (39), Prato (37.5), Lodi (35.8) and Novara (33.9). The overall Italian non performing loans are estimated in 220‐240 billions of Euros, mostly held by the banking sector (45%) and manufacturing, telco and utilities sectors (30‐35%). In Banking sector, data show a clear and increasing emergency. Sofferenze, in 2011, reached 105 billion Euros and are particularly relevant compared to value and risk main indicators. They, indeed, represent 260% of the market capitalization of banks and 81% of Tier 1 Capital.
Moreover, the estimated non performing loans are expected to grow around 20% during 2012, which would lead the stock to 126 billion Euros and would increase non performing loans / outstanding credits ratio from the current 6.1% (2011) to 7.2% of 2012 and to 7.8% in 2013. “In this market context we have difficulty in exploiting credit collateral
For manufacturing, telco and utilities sector, non performing loans in the form of overdue receivables are also constantly growing and are already a relevant issue in the financial statements of companies in these sectors, amounting to 75 billion Euros.
The data evidence how the problem of non performing affects no longer only banks and financial companies, but the whole economy. Figure 4: Overview of Sofferenze in Italy Source: Elaboration on data from Prometeia and Università di Macerata “The sooner you find out the problem the stronger are the possibilities to recover the credit
The market of debt collection services is also steadily growing. These activities are
carried out by specialized companies that show an increase of 18% per year in terms
of files handled (raised from 19,000 in 2007 to 31,000 in 2010). Even more
significant is the increase of the total amount managed which has more than
doubled from 15 to more than 31 billion of Euros with expectations, based on the
intentions of the leading European banks, of further growth over the next 3 years.
The business sectors that mostly apply to specialized companies for debt collection
are manufacturing, utilities and telco, (56% of the files), followed by the financial
sector (38% of the files) although the second one is more relevant in terms of
volume. Regarding the banking sector, the use of such services is expected to
increase within 20‐30% over the next 3 years.
Figur5 5: Debt collection industry in Italy
Source: Elaboration on data from UNIREC (Italian Union of Debt Collection Companies) “What are necessary to avoid are legal proceedings
The competitive environment in the domestic market shows significant problems
particularly linked to exogenous dynamics s that have developed in recent years and
have led to:
Increase of customers indebtedness and reduction of the ability to repay: in
September 2011, in fact, the average debt for mortgages and loans to the
banking system was about 20,000 Euros for each household (increase of 36%
compared to September 2008);
evolution of the borrower profile, increasingly characterized by higher
income uncertainty (about 3.9 million temporary work contracts in Italy in
2010 which amounts to about 18% of total implying an increase of 17%
compared to 2008) and difficulty in tracking down in case of past‐due
(regarding this issue, a key indicator is the turnover of phone cards that in
Italy was 25% in 2010).
Italian legal system evidences, on average, longer and more complex in‐court
procedures for the debt collection
unlikely other European countries such as Spain,
where there is a simplified and faster in‐court procedure
for the collection of
amount up to 30,000 Euros. In Italy, in fact, debt collection activities take, on
average, about 1,200 days (this slowness also weakens the position of the creditor
also in out‐of‐court procedures where most recoveries occur) compared to the 400
average days for Germany and 230 days for the United Kingdom.
In this context it is considered increasingly important for companies to review
recovery strategy, processes organization, and skills development in order to
improve the performance and remain competitive.
Nowadays, Italian banks widely use “mixed” operating models that involve internal
structures and resources focused on high value segments with a partial support by
external specialized servicer on small‐medium size segments.“The bank has to turn on the other side from lending to credit management & collection
The main challenges related to debt collection that operators have to face are :
1. evolution of debt collection approach, for example by segmenting the
portfolio, developing methodologies and analytics (also derived from the
exploitation of information resources) that enable specialization paths of
operators (and their debt collection functions) and tailoring the strategies per
2. evaluation of the advantages deriving both from increased industrialization
of collection activities and from the opportunities provided by an high value
segments focus. It implies also leveraging on specific expertise already
existing or that are going to be acquired (even through servicer) and
outsourcing of low value “areas”;
3. implementation of solutions that improve interconnection between debt
collection and core business and monitoring tools that provides a complete
and updated view of the debtors. This should enable a more efficient debt
collection management process;
4. strengthening and completion of the skills, for example, adding, to the legal
related ones, economic, financial and business skills;
5. review and reinforcement of specific medium‐term rewarding systems
aiming to ensure a greater alignment of stakeholders, both internal and
external on the targets.
The objectives are mainly connected to the improvement of debt collection
performances, efficiency and rationalization of costs. Debt collection related
interventions, articulated as above, on International players has been resulted in
relevant benefit and pointed out the possibility to increase the average recovery
“Debt collection industry has been liberalized
rate by 15‐18% and cost savings by 12‐18% (benefits depend on the starting point).
Figure 6: Key points for value generation in debt collection
Source: Elaboration on data from debt collection related interventions “We don’t have to manage a credit file only but a whole debtor at the same time
4. The ten points of debt collection expertsThe experts in debt collection that belong to different industries highlight ten main points in order to facilitate performance improvement and efficiency pursuit. The following points are referred to banks and other lending institutions:
1. Review problematic credits management strategies chiefly focusing on credits connected to “incomplete” projects, i.e., that need investments in order to run the business (for instance construction mortgages, project finance). Regarding these exposure, in fact, it would be convenient to change approach from a mere recovery‐ oriented to a project continuation‐oriented one in order to gradually lead it to generate the cash necessary to repay the debt. For this purpose would be important to:
o enhance scouting in order to find investors (also cross‐countries) interested in the continuation of projects;
o develop “transfer agreements” in order to enhance the possibilities of success of the project.
2. Development and improvement of an integrated view of the credit process through information exchange between debt collection, portfolio monitoring and commercial network. This involves a “bidirectional” information flow, from the commercial network to debt collection, concerning the information about the customer useful for the purpose of collection, and vice versa, concerning information on the status of non performing position and its management. This should have a positive impact on:
o client related decisions, taken by commercial network, concerning credit lending policies on the local portfolio and the non performing client management; o recovery policies, plans and, if convenient, contingency management. “Speculation on NPL market keeps lenders away from performing loans sales and placements
3. Development and implementation of a “Country level” solution that enable, through the involvement and the commitment of most banks and public administration/regulators, transfers of Not Performing Loans and implementation of improved NPL‐related management procedures in order to ensure an advantage for each stakeholder;
4. Review of debt collection staff recruiting, training and conversion (from other functions) procedures. Nowadays it has become convenient, in fact, potential incremental value added by a properly trained operator in debt collection ensures interesting returns and enables cross‐area development paths;
5. Optimization of collateral management, chiefly those not immediately redeemable. In the case of real estate, in fact, recovery from public auctions sale are neither fast nor convenient. Drop of demand due to the liquidity crisis and the increase of the real estate on sale by order of the court result in auction failures, delays and low “hammer prices”. In this context should be useful new collateral management and sale advanced procedures that aim at maximizing economic value and sale prices, and minimizing management costs. It should lead to take into account possible alternative to public auctions (e.g., sale agreement, repossession) and a review of actions planning and scheduling.
The following issue is specific for utilities and telco companies:
6. Availability of specific “centralized” credit information sources regarding chiefly the costumers. These companies, in fact, can’t access to bank system credit information (e.g. “Centrale dei Rischi”). Given the increasing impact of non performing loans on these companies, industry level initiatives should be considered in order to fill this gap. The following points are referred both to financial sector and utilities and telco: “Despite the review of credit commercial policies are working, non performing loans keep on increasing
7. Optimization and industrialization of the collection process also through an improved segmentation of positions and the development of cluster‐tailored processes. In this context an increased recurrence to outsourcing could represent a good choice to diversify recovery processes, review costs structure increasing variable costs, and improve the efficiency benefiting from increased competitiveness of debt collection services market.
8. Straightening of specialization chiefly in relation to customer segment and type of
credits, in order to achieve better performances compared to massive and
unspecialized management. This issue involves improvements in portfolio segmentation methodologies and procedures, insolvent customers profiling, and in dedicated skills, processes and tools that can be also derived from credit origination, approval and management.
9. Review servicer selection and rewarding methods. It is necessary, in fact, to set as more important the value and performance rather than cost saving. In order to ensure competition and good performances is necessary to review the rewarding system with focus on variable compensation, increase direct competition among the servicers and establish long term partnership with best performer ones.
The following point is referred to debt collection specialized companies:
10. Strengthening its own “excellence” and reputation through the development and improvement of monitoring and audit system. Servicers focus should be also flexibility pursuit through diversification of approaches and processes related to customer segments and type of exposure and the development of defined and easily implementable adaptation and “reparametrization” rules. This will enable to meet the specific needs of the customer remaining competitive in terms of costs. “We, utilities and telco companies, unlike financial institutions, can’t access to Centrale Rischi and most credit information data bank
5. Final remarksAs a result of International financial and economic trends and the characteristic of the Italian context, debt collection has moved, over the last years, from being an ancillary area to be an important part of the “core” business. It requires a change, for the companies involved, according to new drivers such as: definition of portfolios‐based specific strategies, process and activities industrialization, availability of information and development of information access integrated tools. This should enable also skills monitoring and improvements.
In international and domestic companies (with different levels of awareness) a new “view” of debt collection issue has already taken shape. This has allowed to point out improvement opportunities and the convenience to invest especially in the following areas:
approaches and methodologies for non performing loans and past‐due portfolios segmentation;
skills specialization on higher value segments considering also outsourcing strategies;
industrialization of low value processes most repetitive and massive activities; acquisition and improvement of economic, financial, industrial and legal skills; development of medium term horizon rewarding systems and improvement of
management tools to strengthen interconnection within credit process chain.
The evolution of debt collection “business” will allow the operators that will have managed properly this phase recurring to both internal and external resources and organizing them into a structured and efficient framework to obtain a short‐medium term relevant competitive advantage. “Debt collection is one of the most important issues on CEO’s agenda
Special thanks to the participants (listed below in alphabetical order) to the roundtable “Debt Collection Excellence” promoted by Accenture. Fabio Balbinot – CEO of Italfondiario S.p.A. Sergio Bommarito – Chairman of Fire S.p.A. Olivier Capon – CEO of Intrum Justitia S.p.A. Pier Lorenzo dell’Orco – Customer Management Director of Sorgenia Eleonora Franco – Credit Risk Responsible ‐ Process and Systems Market division of Enel
Nicola Jeva – Pre‐Legal Disputes Service – Legal Disputes Department of Gruppo Banca Popolare dell’Emila Romagna Maurizio Maffa – Head of Legal Disputes Department of the Gruppo Banca Popolare di Milano Stefano Marchetti – Debt Collection Director of Gruppo Intesa Sanpaolo Davide Motta – Responsible for Credit Portfolio Quality and Policy of Gruppo UBI Banca Marco Tintori – Responsible of Credit Processes of Group UBI Banca Paolo Tosi – CEO of Società Gestione Crediti (Credit Management Company) of Gruppo Banco Popolare Roberto Ubiali – Head of Credit Accounting Office Gruppo Banco Popolare Marco Viola – Responsible for Top Customers & Public Services Credit Management of Telecom Italia
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To discuss this document, or for further information, please contact: Elena Mazzotti
Responsible for Credit Services in Europe, Africa and Latin America
Finance & Risk Service Line
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