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With geopolitical uncertainties rising due to multiple factors and several economies facing headwinds, economists are predicting that the world economy is likely to enter a phase of slowdown. The tightening of monetary policies by central banks worldwide will have a significant effect on the global financial landscape. This is also likely to have an impact on the credit cycle and financial institutions in India. The rising demand for credit, greater financial awareness, and expectations for a seamless experience have compelled lenders to adopt digitization. 

According to the latest RBI data, the Indian banking system’s credit grew 16.1 per cent year-on-year (YoY) as of February 10, 2023, to reach a whopping INR 134.17 trillion. However, there is still a need to create a robust and scalable lending infrastructure, which will depend mainly on the efficacy of the debt collections processes. 

Burdened with manual workflows and high cost inefficiencies, financial institutions are revisiting their collections strategies. Changes in the borrower’s behavior have propelled a large part of this reevaluation. For example, borrowers today are more inclined towards digital communications on SMS, email, WhatsApp, and voice message instead of repetitive phone calls. Stringent regulatory interventions against coercion further trigger a rethink of the latter approach. 

A transition from manual collections to a holistic digital ecosystem that is more efficient and debtor-centric is rapidly becoming inevitable for lenders to strengthen their institutional resilience, reduce operational costs, and humanize borrower relationships. 

The need to expedite the digital transition

An appropriate collections strategy based on the judicious deployment of technology and data-driven analytics is indispensable to improving resolution rates on stressed assets while reducing the underlying costs and time to collect.  Banks and NBFCs face the challenge of keeping bounce rates and the size of NPLs low on an ever-increasing loan book. 

As demographics evolve and economic fluctuations arise, there will be a further surge in debt, strengthening the need for smooth, scalable, and technology-led solutions for lending and collections. 

Modern technology charged with Artificial Intelligence, Machine Learning, Data Analytics, Predictive Analysis, and Natural Language Processing (NLP) is slowly becoming crucial for digital transition. Digital debt collections imply leveraging these capabilities to create segments based on borrowers’ demographic profiles, repayment patterns, and response rate over various channels, to boost the efficiency of the lenders’ conventional strategies. The next critical steps are determining the borrowers’ preferred communication channels and devising relevant content to personalize the engagement and increase the likelihood of debt repayment.

The present scenario 

India is the 8th largest e-commerce market globally, with an expected CAGR of 13.9% from 2023 to 2027. The meteoric rise of digital applications over the last decade has resulted in a dramatic shift in customer experience expectations. With a range of products and services available at the click of a button, people no longer wish to engage in prolonged phone calls to get simple information or resolve issues. Moreover, customers prefer self-service options over intrusive and manual service delivery. 

With increasing dependence on digital, lending institutions will have to mould their end-to-end collections processes to cater to the rapidly evolving needs of borrowers. Even though financial institutions have embraced a digital-first approach to loan disbursements and onboarding processes, collections strategies continue to remain manual, unscalable, and inefficient. 

Techniques such as tele-calling and field visits are sometimes leading to poor borrower experiences and increasing the cost of collections for financial institutions. The challenges in the current scenario include:

  • High operational costs: Collections teams grapple with the rising resource costs in an industry that has historically depended heavily on human agents. Archaic communication strategies are inflexible for borrowers and add costs for lenders since deploying a human agent is much more costly than using digital channels. Paper-based legal processes and workflows also add to the overall lending cost.

  • Borrower embarrassment and discomfort: Owing to social stigma and mental harassment, borrowers do not wish to be pursued over calls and aggressive physical visits for defaulting on debt. Without a borrower focused self-service approach that considers the borrower’s unique situation and tailored debt resolution options, creating a holistic experience is impossible. 

  • Compliance risks: Banks and NBFCs need to adhere to several compliance protocols imposed by the financial regulators. Not meeting these requirements leads to financial penalties. Debt collections strategies relying on human instinct increase the risk of error and non-compliance.

  • Impact on lender reputation: A bad borrower experience can tarnish the lender’s hard earned reputation. If a lending institution becomes widely known for being aggressively persistent in recovering debt, it can lose out on expanding its customer base.

  • Restricted access to credit in underserved areas: A lending ecosystem predominantly built on manual workflows will have few or no physical branches in remote areas of the country. This restricted access to credit compromises the larger goal of financial inclusion in the country. As per the Global Financial Inclusion Index 2022, India ranked 26th out of 42 world markets, showing significant untapped potential, with Singapore and the  United States leading the Index.

In light of the above-mentioned issues, lenders are now embracing innovation in collecting debts. Technology is becoming an enabler for making repayment processes simple and cost-effective. Additionally, borrowers’ desire for a less-intrusive experience has made lenders acknowledge that making small changes in isolation will not fulfil the goal of protecting human dignity in collecting the debt. Therefore, humanizing the debt collections process has become imperative to enhancing borrower engagement. Analytical insights help lenders study the borrowers’ behavior and response patterns and establish the engagement strategy accordingly. 

The future: Embrace Digital, Data, and Dignity 

The role of data analytics, NLP, and predictive analysis has expanded, offering the benefits of improved credit risk assessment and fraud detection to lenders. Solutions enabled by data and technology are making it possible for lenders to move away from a one-size-fits-all approach to debt collections.

The tremendous opportunity for the growth of credit demand in India over the next few years makes it the time right to adopt a borrower-first approach to recovery mechanisms. AI / ML-powered capabilities help lenders align closely with evolving patterns, automate workflows, and eliminate human errors. 

Utilizing different attributes of borrowers’ profiles and demographics can help lenders customize their outreach strategies. Adopting best practices to elevate the borrower experience will help lenders humanize debt collections by providing insights into borrower’s preferences and response patterns. This will improve the engagement rates and create opportunities for lenders to increase employee productivity and achieve better collections efficiencies. An all-inclusive transition toward digital debt collections will, therefore, help achieve multiple benefits –

  • Frictionless and more productive communications: By segmenting borrowers based on ML-based risk models and other capabilities, lenders can reach them at their preferred time, on the preferred channel of communication, with tailor-made content and conversation tone. The large data set of potentially delinquent borrowers can be contacted through customized strategies. 

  • Reduction of cost of collections:  Lenders can leverage technology, decision theory, statistics, and psychology, to optimize the end-to-end recovery workflow right from communications, telecalling, and field collections, all the way to legal procedures. The resulting economies of scale will further lead to lower servicing and operational costs, giving lenders the bandwidth to expand credit access at lower interest rates.

  • Personalized borrower experience: Debt collections entities must be at the forefront of adopting digital communication tools so that they can connect with debtors in a way that they are most comfortable with. An omnichannel approach increases the chances of connecting with customers through less intrusive communication channels. Eventually, it helps expedite debt resolution via the platform they prefer and through which they are most likely to respond. 

  • Mitigating the risk of non-compliance: In Western countries like the United States, the Fair Debt Collection Practices Act (FDCPA) makes the regulatory landscape multi-layered and future-proof. To strengthen India’s position as an emerging economy, the finance sector must devise methods to make processes risk-proof and less resource-intensive. Digital debt collections will simplify adherence to regulatory protocols defined by the Reserve Bank of India and make it easier for lenders to monitor the same. 

The way forward

Apart from boosting commercial possibilities for lending institutions, a digitized and borrower-centric approach to debt collections will help achieve the overarching goal of financial inclusion in the country. 

As debt collections technologies evolve and practices become more efficient, lenders with dynamism and flexibility will be able to tap into newer segments of the population that have been outside the credit umbrella, leading to lower financial disparity and an improved standard of living for millions of people. 

As a pioneer in industry-first technological initiatives, Credgenics, a SaaS-based debt collections technology platform for lenders, is facilitating rapid digital disruption in the BFSI sector. With a combination of AI, ML, and other digital technology capabilities, Credgenics has helped lenders transform conventional collections strategies, leading to higher scalability, efficiency, and cost-effectiveness in their processes. Technology will become foundational to reimagined lending and collections practices in no time, and lenders who recognize this urgency will benefit in the long run. 

Author– Rishab Goel, CEO & Co-founder, Credgenics

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