What We Know:NPE Management

NPL Guidance is a recommendation document by ECB (see here) which summarizes practices a financial institutions must have to be compliant with prudent management of non-performing exposures. The guidance is a sensible summary of good practices and can be divided into six general areas:

  • Strategy

  • Governance and Operations

  • Forbearance

  • Recognition

  • Impairment & Write-Off

  • Collateral valuation

More generically, when clients “become” non-performing, they are likely in some trouble. Several payments in delay, the clients can’t hide they are in a trouble. Tools such as PTP (Promise to pay), or accelerated repayment plans failed and new treatments must be included.

 

Along with Collections, ABC was fortunate enough to gain years of experience implementing NPE recovery improvements. Starting with restructuring / reprogramming, usage of external agencies, voluntary asset sale, differentiated settlement, asset takeovers, but also leaning out legal procedures, portfolio valuations and debt sale. We help our clients clean their NPE stock, and reduce the flow of fresh cases to legal.

 

LATE COLLECTIONS | Introduction of Credit Counselling

 

Our client, a major bank in Hungary, was facing several problems in late collections, especially with huge mortgage inflows to 90+DPD and a growing stock due to governmental interventions in the legal process and eviction rules.

The process was designed in the times when massive mortgage issues wasn’t on anybody’s mind. Hence, the process lacked segmentation, certain treatments, proactivity in communication and suffered from other deficiencies such as low visibility on productivity and efficiency of actions. Moreover, given the fact that sizable part of the portfolio was in NPL, majority of internal FTEs were still allocated to front, or back office, not in collections.

After setting up late collections field visitors with the ability to choose a variety of healing options or acceleration to further stages, we were able to improve cure (that is going and staying in bucket zero) by 19% (based on randomized control trial) and increase cash collected by almost 40%. This was done through:

  • Selection of clients who are eligible for counseling

  • Giving boundaries for usage of available treatments to cure, start paying, or accelerate a client

  • Prescribing and measuring communication intensity and rules

  • Reviewing vintage and overall results, in context with productivity

  • Creating system support and respective reporting

  • Coaching and fixing issues during the first run of the process

 

LATE COLLECTIONS | Improve the late collections results by an optimal split of customers among the internal call center, field visits and external partners and their automatic assignment

 

Our client, a major consumer finance provider in China, was facing several problems in late collections related to the split and assignment of individual customers to specific field-visit agents and external agencies. The process was slow (all the TLs spent the entire day by assigning the customers to the agents at assignment, no reassignment was done), half manual, and with limited control over the assignment process as a whole, caused by a missing reporting. Missing reporting made the whole assignment process unclear and was producing a significant share of the customers not being assigned anywhere. Typically, such leakage was discovered with a delay, or it was not discovered at all.

ABC designed and developed the end-to-end process of the automatic assignment of the cases into the call center, field visits, and external agencies. The new solution offered the following advantages:

  • The assignment is automated nearly to 100 % (the manual adjustments remains in a fractional frequency)

  • The cases are assigned to the closest agents

  • The assignment is reflecting the capacity and experience of agents (various number of assigned cases to junior/senior agents, no assignment to agents on sick leave, etc.)

  • The distribution of cases per individual agent became more efficient (shorter distances among individual cases, dynamic changes in an assignment, and other)

 

NPE STOCK CLEANUP | Decrease the stock of a retail NPE portfolio without negative impact on LLP

 

A Russian bank has found itself outsourcing most of the 90+DPD cases to external partners with little to no safeguards, or reporting. The earlier stages were poorly collected and late phase lacked exit strategies. As a consequence, bubbling NPE portfolio of secured and unsecured clients grew over the years out of proportions.

ABC was able to decrease the stock of NPE within the first 12 months by 36% with releases of LLP (Loan Loss Provisions), +3% (p.p.) of additional recovery from legal, and +9% (p.p.) of additional recovery from out-of-court agreements.

The 36% cleanup was done in part with a clear segmentation of cases with little or no value, washing them through external partner (2x) and then writing them off. The improvements in legal and out-of-legal processes were due to better case selection to legal (hence higher focus, better results) and through the introduction of voluntary asset sales and settlement for other suitable cases with short-indicator & results reporting implemented.

 

NPL | Decrease stock of not performing SME & Corporate loans

 

Romanian bank needed to decrease its stock of loans in the non-performing status. However, the economic and legal environment did not support this initiative. An increasing number of clients inclined to enter insolvency and execution procedures but these processes were long lasting and ineffective.

ABC reviewed the existing strategies and performed required data analyses based on which we designed specific procedural and technical changes. These changes led to recovery increase from settlement campaigns and Increase in the efficiency of the workout department due to the new insolvency tool. All implemented changes can be summarized in the following points:

  • Proper estimation of recovery for each case (segmentation which is vital for any further activities and the potential recovery estimation)

  • Debt settlement separately for small and big cases prepared (avoiding insolvency procedure)
  • Portfolio for debt sale selected and data tape structured (freeing capacities which can focus on significant recoverable cases)
  • Technical solution for management of insolvency cases implemented

 

DUE DILIGENCE | Assess whether service provider provides realistic recovery assessment

 

Our client, one of the active debts-purchasing companies in CEE and SEE regions, has purchased a portfolio in the CEE region. The company selected a local service provider for servicing the debt. However, our customer did not have any idea, if the estimated recoveries by the servicer are realistic. The customer ordered an independent review.

ABC performed a high-level analysis of the service provider, based only on a phone call, assessed capabilities. Based on the provided data, ABC was able to segment the portfolio and apply conservative and progressive market rates. The results have shown that service provider was too optimistic, primarily due to overestimation of collateral values.

 

DEBT SALE | NPE portfolio sale between two Greek banks

 

Our client, one of the top three banks on the Greek market has been consolidating other banks into their portfolio. One bank had particularly bad retail portfolio and required an assessment before the bank was purchased to estimate pricing.

ABC performed detailed analysis of the portfolio, processes, people, and the legal environment. Done on premise of the seller, we looked at not only the current financial quality of the portfolio, but looked at the behavioural, process, and regulatory attributes to assess future net cash flows from the NPE portfolio.

Based on data analyses, everything looked good. Some 1/3 of all clients were paying “something”. The thought was that if we stimulate the portfolio, we’ll be able to increase the flows and get ~40% more cash collected. After interviews with key operatives, review of the data, and analyses of the processes, we’ve determined the portfolio is not worth purchasing at the expected price. Why? Because the legal situation in Greece did not favour the banks, and also the seller bank offered rather dramatic settlement on the ninetieth DPD to all clients who entered such status since 2 years ago. With such a strong treatment already used, and legal process not working, not many “better” treatments can give the portfolio higher recovery potential.

 

NPE Management Components

 

In ABC, we have delivered over 40 NPL and Due Diligence projects, be it only health check, but mostly implementation, and pilots. Work with NPE (at the time NPL) portfolios started in 2009 and did not stop since.

Aside from our PPP (Process, People, Platform with sometimes additional P - Policy) method develop generically for Collections purposes, we have developed assessment of NPE management based on the toolset (set of treatments) used in the process.

Picture: Collections Components ABC has hands-on experience with

Picture: Evaluation of the toolset

 

Exmple Evaluation of One Tool in the Toolset

 

The following example shows what kind of questions are evaluated in the framework. The framework is designed to prevent simple “checkbox” marking and yes/no answers. The following is an example of one evaluation category.

“Use Settlement as a Collections Negotiating Tool”

  1. How is defined the target segments for settlement?

  2. How is the process defined, and what are the SLA?

  3. How is the settlement offer constructed?

  4. What channels are actively used for communication with the customer?

  5. Is the offer unified across all channels?

  6. Who can offer settlement and how is it controlled?

  7. How is the incentive scheme setup?

  8. What are the metrics monitoring the process and effectiveness?

  9. Is there a continuous ROI measurement?

  10. How do systems support the process?

  11. What offers are visible in the system?

  12. How many accounts are processed at the same time?

  13. At what granularity can be captured costs?

 

Each section has several degrees of maturity. From “not at all” to advanced / automated techniques and usages.

 

ABC standard projects and outcomes:

 

  • NPL Guidance Verification
    • Gap analysis of the NPL Guidance compliance

    • Gap closure planning

    • Self-assessment framework

    • All 6 areas

 

  • NPE health check (sub-part of NPL Guidance, offered separately)
    • Assessment of managerial setup and operational details of NPE Management (strategy, governance, operations, forbearance) with focus on recovery

    • Prioritized gap list with specific improvements and masterplan

    • Basic benchmarking to the market

 

  • Design
    • Segment selection for Restructuring, Field Visit, EXA and other treatments

    • Process and communication design per treatment and between treatments

    • Collections cases assignment automatization

    • Roles and responsibilities description and training

    • End-to-end collections reporting

    • Productivity and efficiency expectation setting (KPI)

    • BRs preparation (business requirements)

 

  • Implementation and Roll-Out including:
    • Improvement of NPE-related processes

    • End-to-end reporting

    • Quick-win workarounds (SQL and Access/Excel-based)

    • Training and handover to the local team

 

For more on our Collections and NPL / NPE Management competencies and on how we can help you, please contact:

Tomas Wolf,

our Subject Matter Expert and Engagement Manager for all matters related to the Collections and non-performing loans.