NPA Management Strategies for Banks and Financial Institutions
Non-performing assets are a part and parcel of the lending business for banks and financial institutions. However, every effort must be taken to not only recover as much of the dues from an NPA as possible but also to reduce NPAs from occurring in the first place.
While the primary strategies for managing NPAs have remained the same for decades, we can now leverage modern technological capabilities to streamline these processes. This makes the entire process more efficient reducing the management cost of non-performing assets in banking.
In this guide, we’ll go through some of the most effective ways that lenders manage NPAs while also providing an overview of the latest innovative tactics and techniques that can be used.
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Reduction and Prevention of NPAs
Before we talk about curative strategies for managing NPAs, let’s spend some time on preventative strategies so that the non-performing assets ratio doesn’t become too high. Any loan sales officer will speak of sales quotas that they need to meet month after month. This can send the wrong message to the sales team that loan sales must be executed regardless of the suitability of the borrower.
Banks and other financial institutions involved in lending can place higher emphasis and internal controls to ensure that loans that are passed are serviceable by the borrower. This is especially important for unsecured loans that carry a much higher risk burden.
Further, banks and lenders can do well to provide budgetary and personal finance-related information to their retail borrowers. A lot of borrowers overestimate their financial circumstances which can lead to overspending.
Situations often arise when the retail borrower’s finances suddenly face a crunch and they start to default on their payments. Proper financial education and debt management techniques can help such borrowers navigate their finances better so that such situations don’t arise in the first place.
Leveraging Best Practices for Debt Collection
Only a decade ago, the main way in which lenders used to collect on overdue payments was by sending a collection officer to the residence or office of the defaulter. While this remains an effective method even today, lenders can leverage several new methods to complement the house call.
Lenders can send personalized emails and messages that relay the lender’s position to the borrower. These emails and messages can largely be automated so they can save considerable resources.
Further, lenders can consider implementing a multi-channel contact strategy. This involves getting in touch with the defaulter through a number of different ways. The first contact can be a simple text message stating that the last payment is overdue.
The second contact can be a phone call. If the overdue payment is still not settled, then lenders can consider sending a loan officer to meet the defaulter. Such a multi-channel approach can help lenders escalate or de-escalate their collection efforts according to the need of the hour and the particulars of the borrower. This technique is especially effective for standard assets in NPAs.
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Negotiation or Loan Restructuring as a Last Resort
Once a lender realizes that the borrower is genuinely unable to pay their dues, rather than continuing with the old approach, a more effective strategy can be to start negotiations and provide better terms to the borrower by changing the non-performing assets classification.
Such better terms can help the borrower meet their obligations so the lender can recover its money. It is in the best interest of the lender to fully understand the borrower’s financial situation so that they can arrive at a satisfactory pathway to the final settlement to reduce gross non-performing assets.
The terms of the loan should be formally restructured by entering into a new legal agreement. This step is especially important in case the defaulter is a corporation so that they can be held accountable to abide by the terms of the new deal.
It’s important to note that the negotiation process should be entered into with the mindset to recover as much of the dues as possible. Many negotiators fall prey to the false goal of trying to punish or penalize the defaulter for defaulting in the first place. Such a mindset while negotiating can only make it more difficult for the lender to recover its dues.
Approaching the Courts
In case the loan restructuring is not successful, then the last resort for lenders is to initiate legal proceedings to recover their dues. This is not an ideal solution since it carries significant costs as well as multiple years. However, if the amount of the loan is high enough, it can be worth it to pursue this course.
The Indian legal system has taken steps to make it easier for lenders to recover their dues. We now have established specialized courts called Debt Recovery Tribunals that only deal with loan recovery matters.
This can help to streamline and speed up the process which can otherwise take excruciatingly long. The mounting costs of such an endeavor can also end up being higher than the actual loan amount in the first place.
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How to Make NPA Management Easier?
At Legodesk, we understand that NPA management is difficult.
That’s why we’ve created an all-in-one software platform that helps lenders manage the numerous default cases that they have. We have built specialized features on our platform that helps lenders streamline their internal debt collection processes and save both time and money.
Just some of our innovative features include legal notice automation, case tracking, contact management, and online dispute resolution.
Legodesk is trusted by both banks and financial institutions. You can reach out to us so we can take you through how our product can help your processes become more efficient.
Wrapping Up
NPA management can challenge the most robust and competent team. That’s why its crucial to leverage the latest techniques that can help achieve marginal gains.
Systems that allow for even 10% efficiency gains can be significant for lenders that deal in such high volumes of non-performing assets. Thankfully, there are now ways that can make it easier for lenders to not only solve NPA cases more quickly but also to prevent them from occuring in the first place.