It’s no secret that businesses cannot operate, expand, or invest in new opportunities without access to capital. Providing easy debt is crucial for driving growth in any economy. However, effective debt collection is equally important for the survival of lenders and banks. And we all know how tricky that can be.

With high levels of consumer debt and increased financial uncertainty, lenders are facing mounting pressure to recover outstanding debts while maintaining positive customer relationships. 

That's not all - frequent regulatory changes and technological advancements have also impacted debt collection practices

In this blog, we'll dive deeper into the challenges faced by lending businesses in debt collection and the ways to overcome them. 

What is Debt Collection?

At its core, debt collection is the process of recovering dues from individuals or businesses who owe money. When a borrower fails to make a payment, the lender may attempt to recover the debt through a variety of methods, including messages, letters, and legal action.

If the borrower fails to respond or make the payment, the creditor may escalate the collection process. This can involve enlisting the services of a debt collection agency that specialises in recovering outstanding debts.

Debt collection can be a complex and challenging process, with several on the way for lenders, such as: 

• Difficulty in reaching borrowers and obtaining payment

• Unwillingness or inability of borrowers to pay

• Regulatory changes impacting debt collection strategies

• Limited resources for debt collection efforts

• Legal constraints and compliance requirements

• Inaccurate or incomplete borrower information

• Balancing debt recovery with maintaining customer relationships

• Negative perceptions of debt collection practices

• Borrower disputes or challenges to the debt owed

Different types of Debt Collection

1. In-House Debt Collection

Businesses and lenders primarily attempt to recover unpaid debts using their own resources. As part of this strategy, the business or lender contacts the borrower directly, usually through text messages and notifications. In-house debt collection allows businesses to maintain control over the process and avoid paying third-party fees. However, it requires significant resources, including staff and technology.

2. Third-Party Debt Collection Agencies

Third-party debt collection involves businesses and lenders outsourcing their debt recovery efforts to specialised agencies or debt collectors. Third-party debt collection agencies often use more advanced technology, such as skip tracing and automated dialers to increase the chances of success. However, using debt collection agencies comes with a cost, and lenders need to make sure their approach aligns with their business values.

3. Legal Debt Collection

This approach involves filing a lawsuit against the borrower to get a court order in favour of the creditor. Legal debt collection can be effective in cases where the borrower has significant assets, but it can also be costly and time-consuming. Additionally, if the borrower does not have the ability to pay, a judgement may not elicit the desired repayment. This is most often used as a last resort.

Legal Framework for debt collection

In India, the legal foundation for debt collection is primarily governed by two laws: 

• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and 

• The Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993.

The SARFAESI Act provides for the securitisation and reconstruction of financial assets and enforcement of security interests by secured creditors, primarily banks and financial institutions, without the intervention of courts. This Act enables secured creditors to take possession of the collateral of the borrower, sell the assets without court intervention, and settle the debt with the proceeds.

The RDDBFI Act , on the other hand, provides for the establishment of Debt Recovery Tribunals (DRTs) and Appellate Tribunals for speedy resolution of disputes related to the recovery of debts due to banks and financial institutions. DRTs have jurisdiction to hear cases where the amount of debt due is more than Rs 20 lakh.

In addition to these laws, there are other legal provisions that govern debt collection in India, such as the Indian Contract Act, of 1872, the Limitation Act, of 1963, and the Consumer Protection Act, of 2019.

It is important for lenders to adhere to the legal framework while collecting debts to avoid any legal complications. Failure to comply with the legal framework can result in penalties.

How does Debt Collection Work?

The debt collection process involves several sequential strategies aimed at recovering the debt owed. Here are some of the most common debt collection strategies:

• Communication : The first step in debt collection is to communicate with the borrower. This should ideally involve digital communication on the borrower’s preferred channel. The purpose of communication is to remind the borrower of the outstanding debt and to explore options for repayment.

• Negotiation : In many cases, borrowers may be willing to negotiate repayment terms. Businesses might need to reduce the interest owed, extend the repayment period, or even settle for a lump-sum payment. Negotiation requires effective communication and a willingness to work with the borrower.

• Legal action : If the borrower is unresponsive or unwilling to negotiate, legal action may be necessary. This step could involve filing a lawsuit, obtaining a judgement, or enforcing a judgement through wage garnishment (withholding a portion of the borrower’s salary by employer) or other legal means.

• Debt settlement : Debt settlement entails negotiating with the borrower to settle the debt for less than the full amount owed on the condition of immediate repayment of the due amount. This happens usually when the borrower is not able to repay fully and the lender and borrower reach common ground on discussions.

• Debt consolidation : In some cases, debt consolidation may be an option for borrowers. Debt consolidation refers to combining multiple debts into a single loan with a lower interest rate and a longer repayment period.

Stages of Debt Collection

The debt collection process can be complex and time-consuming. Businesses or lenders must balance their efforts to recover outstanding debts with adhering to regulations and maintaining positive customer relationships. 

Here’s a strategic approach involving four stages of debt collection: 

1. Early Delinquency : This stage begins as soon as a borrower misses a payment deadline. At this point, lenders usually send reminders and make phone calls to the borrower to try to collect the payment. The goal of this stage is to recover the payment as quickly as possible and prevent the debt from becoming overdue.

2. Late Delinquency : If the borrower doesn't respond to reminders and calls, the debt becomes ‘late delinquent’. Lenders may use collection agencies or attorneys to try to recover the payment. 

3. Legal Action : The legal action stage is the final resort for lenders to recover their outstanding debts. This stage involves taking the matter to court and seeking a legal judgement to enforce the collection of the debt. 

4. Recovery : If legal action is successful, the final stage is to recover the debt. This may involve seizing assets, garnishing wages, or other forms of debt recovery. It is important to follow all legal requirements during this stage and to work with experienced legal professionals to navigate any potential obstacles.

Top Challenges of Debt Collection With Solutions

Debt collection is not always a straightforward task. In India, lenders face several challenges that make it difficult to recover outstanding debts. By understanding these challenges and implementing effective strategies, businesses and lenders can improve their chances of collecting on debts owed.

#1 Non-Responsive Borrowers 

One of the most common challenges in debt collection is dealing with non-responsive borrowers. These are individuals or businesses that simply do not respond to attempts to contact them about the debt they owe.

In this situation, it may be necessary to hire a debt collection agency to handle the matter. Debt collection agencies have more resources and experience when it comes to locating non-responsive borrowers and encouraging them to pay their debts.

#2 Legal System Challenges 

When we talk about India, the biggest challenge in debt collection is probably the limited legal options available to them. The Indian judicial system is considerably slow, and the legal process can be time-consuming and expensive. This can make it difficult for lenders to recover outstanding debts, particularly in cases where borrowers are uncooperative. 

The best solution for this challenge is to have a clear and concise debt collection strategy in place. It's essential to understand the legal options available and to work with experienced legal professionals who can help navigate the legal system effectively.

#3 Lack of Information

Another significant hurdle in debt collection is the lack of information available on borrowers. Without sufficient information about their customers' financial situations, institutions may struggle to assess their creditworthiness accurately and make informed decisions about debt collection strategies.

To address this issue, lenders need to invest in robust data management and risk assessment systems. They need to maintain accurate and up-to-date records of all borrowers, including contact information, employment history, and creditworthiness. This information can be used to track down delinquent borrowers and improve the chances of debt recovery.

#4 Economic Conditions

Economic downturns or recessions can result in increased delinquencies and defaults, as individuals and businesses struggle to make ends meet. During these times, people may be more likely to prioritise their basic needs over debt payments, leading to a decrease in debt recovery rates.

In such market conditions, debt collectors may need to adapt their strategies to account for the economic conditions. For example, they may need to be more flexible in negotiating payment plans with borrowers, allowing for longer payment periods or reduced amounts. They may also need to improve their communication efforts.

How to Increase Debt Collection Rate?

Apart from hiring a debt collection agency or independent debt collectors, lenders also need to adopt a strategic approach that involves addressing the key challenges associated with the process. 

Here are some effective strategies that lenders can use to increase their debt collection rate:

1. Set up clear payment terms : Clear payment terms and conditions should be established from the beginning of the business relationship. This includes the due date for payments, penalties for late payments, and interest rates on overdue balances.

2. Establish clear communication channels : One of the most common reasons for delinquent accounts is a lack of communication. Lenders should establish clear communication channels with borrowers to ensure that they are aware of their payment obligations. This can include regular reminders, notifications, and follow-ups via email, phone calls, or text messages.

3. Develop a debt collection policy : Lenders should have a clearly defined debt collection policy in place that outlines the steps they will take to collect overdue payments. This policy should also include information on the consequences of non-payment, such as late fees or legal action.

4. Maintain accurate records : Clear and detailed records of transactions,, and payments can help businesses track outstanding balances and follow up on overdue payments more efficiently.

5. Offer payment plans : Many borrowers may be willing to pay off their debts if given the option to do so through a manageable payment plan. Lenders can offer customised payment plans that fit the borrower's financial situation, making it easier for them to make regular payments.

6. Know legal rights : It is essential to understand the legal rights and responsibilities when it comes to debt collection. Businesses should be familiar with relevant laws and regulations, like the Reserve Bank of India's guidelines for debt collection and the Consumer Protection Act of 2019, to avoid legal issues and protect their business reputation.

7. Provide incentives : Lenders can also offer incentives to borrowers who make payments on time or pay off their debts early. This can include discounts, rewards, or other perks that encourage borrowers to prioritise their debt payments.

8. Hire professional debt collection agencies : If the internal debt collection process fails, businesses can go to professional debt collectors. These agencies have expertise in collecting debts and can often achieve better results 

9. Leverage intelligent technology to identify & eliminate risk: Use relevant technological platforms to monitor borrowers’ financial behaviour so as to take action on time and avoid any potential default. To get started quickly, use bank statement analysis by FinBox BankConnect to analyse bank data and financial statements fast, precisely, and at scale.

How can FinBox help you Transform Debt Collection Intelligently?

Risk intelligence technology can be a game-changer for financial institutions looking to improve their debt collection and reduce the risk of non-payment. By leveraging such solutions, banks and lenders can gain valuable insights into their customers' creditworthiness and tailor their debt collection efforts to the needs of each individual customer.

CollectX by FinBox enables lenders to identify risky borrowers with an early warning and intelligence system. It helps lenders: 

• Monitor real-time financial activities of borrowers

• Segment them as per their default risk

• Realign communication efforts, and

• Take quick action 

Do you want to improve your collection rates? Leverage real-time data and optimise your collection efforts with FinBox’s CollectX!

Book a demo today !