Hello everyone, 

Welcome to the 84th edition of The Pattern, a weekly newsletter where we dissect and delve into the latest rumblings from finance, technology, and the economy. Let’s get started. 

 Getting a gift or a hamper from a business partner or a service provider is commonplace during the festive season. However, what if the gift you just received is not borne out of a harmonious relationship but rather a reminder of your failings? 

 This is what seemed to have been UCO Bank’s great big idea to stem NPAs as the bank sent out a circular directing branches to visit and gift sweet boxes to their top 10 non-performing borrowers. The idea, supposedly, was to bring harmony back into a soured relationship where customers might have felt antagonized by the bank’s collection teams for their inability to repay EMIs on time. 

 “In some cases, it has been observed that clashes of ego between the customer and bank officials lead to the account turning into an NPA," the bank  noted  in a November 1 circular. 

 However, just a day after this circular, the bank seems to have gone back on the idea, claiming that it won’t be possible to deal with all NPA accounts similarly and these accounts need a more contextual approach. 

 "Each case has to be dealt with on merit. There is feedback that in some non-performing cases, the borrowers are not cooperative, and strict action as per existing rules should be pursued,"  said  a senior bank executive. 

This is interesting for two reasons. 

 One, the approach signifies an about-turn concerning how lenders traditionally deal with non-performing borrowers. The usual strategy has been to penalize, confront, and name-and-shame defaulters. This approach of sending sweets/gifts (albeit shortlived) is a welcome departure from the heavy-handed approach.

 Second, the idea that a box of sweets can bring back payment discipline when there have not been timely repayments for more than 30-60-90 days is farfetched. It not only exposes the need for long-term thinking on the part of the lenders in dealing with defaults but also puts to test their internal controls and frameworks should their loan books go sour. 

Sweets, stress, and sincerity

Even as one speculates the potential effectiveness of such moves, the point that lenders need to be kinder to borrowers isn’t up for debate. The Finance Ministry has been re-emphasizing this for a while now, ever since the nuisance of third-party collection agents and their alleged harassment of defaulting borrowers came to the fore. The ministry has been urging lenders to avoid harsh steps in the recovery process, and the RBI has consistently released guidelines to put guardrails - the latest one discouraging collection agents from calling before 8 a.m. or after 7 p.m. 

And hence, banks are improvising. The Punjab National Bank was among the first to launch a quiet visit program where its agents would visit the defaulters and quietly sit there on their premises to remind them of their pending payments. Even the State Bank of India recently partnered with a fintech where executives visit stressed accounts’ borrowers with a box of chocolates and urge them to repay their loans on time. 

"Banks cannot only rely on old traditional methods like sending recovery notices or publishing names. We need to connect with the customers. At times, distress could arise from extraneous reasons, and the bank can help the borrowers get back on track,"  said  a senior executive with PNB. 

However, this will only work if lenders adopt a more holistic framework for collections and portfolio monitoring. At FinBox, we’ve written a bunch here on how lenders can  monitor accounts in real-time  with CollectX, how they can nurture  trust-based relationships , how  collection practices can be improved  with bucketing and  more . I highly recommend you read these pieces. 

The bottom line is this - the only worthy loan is the one that gets paid back. Lenders would do well to keep early tabs on their portfolio and act  before  it becomes non-performing. A distinction between inability and unwillingness to pay must also be made. Hence, high-quality analytics and contextualized approaches can help credit teams determine whether the borrower needs a carrot or a stick - the answer most likely lies somewhere in the middle. 

Have you observed any interesting collection practices that work well according to you? I’d love to hear. 

 This is all for this week. As always, leaving some interesting data and reading recommendations below. 

Reading list 

1. Cross-border payments guidelines by the RBI 

2. Salaried borrowers are preferred over others in personal loans

3. RBI is watching private bank attrition rates 

4. Canary testing with FinBox Sentinel makes credit decisioning a breeze 

5. Temple and Panchayat payments go digital in the next fintech wave

Between the digits 

  53%:  Percentage of Indians who take loans before turning 30, according to a  study  by PaisaBazaar. The study also highlights that men prefer credit cards while women prefer personal loans for their financing needs. 

  Rs 6,500 crore:  Beleaguered airline GoFirst’s revival seems tough and lenders stand to  lose  more than Rs 6,500 crore in overdue payments. Central Bank of India and Bank of Baroda are among the top creditors. 

Rs 437 crore:  DBS Bank has put non-performing loans of Rs 437 crore on sale with a minimum price of Rs 30 crore - a  recovery rate of just 7%  in a portfolio of 69 loans.