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Collections Resilience post COVID-19

December 10, 2020 at 2:30 PM

Principa Decisions (Pty) L

The COVID-19 pandemic was first identified in December 2019 in Wuhan, China. On 5 March 2020 it was confirmed that the virus had reached South Africa, and a national state of disaster was announced on 15 March 2020.

On the 23 March, a national lockdown was announced in South Africa, starting from 27 March 2020 and expected to last for only 21 days.

This chain of events has changed the way we live and work, and the changes we have experienced this year will undoubtedly be our new normal, at least for the foreseeable future.

When we look at the first stage of the pandemic, we know that most countries went into total lockdown, that businesses closed and people lost jobs or, if they were lucky, only had to deal with salary reductions. This had massive repercussions on many areas of life, most notably on the economy and people’s bank accounts.

The introduction of relief schemes

Financial institutions immediately realised the impact the pandemic would have on their customers’ ability to service their loans, and therefore introduced short-term relief schemes aimed at assisting customers in the immediate future.

If we look at how these relief schemes have influenced collections, we will notice that it created a large reduction in accounts rolling into worse delinquent states, and falsely created a positive portfolio position.

From August and September 2020, a balloon of accounts begun to roll through the delinquent stages as the South African population continuously found themselves in financial difficulty. Sadly, it looks like we can expect this to continue into 2021.

This shift in financial positions for a large proportion of the population is going to force the credit industry to carefully look at their debtor books and consider how they are going to move forward in the future.

Personality traits of debtors

We generally deal with three types of debtors, identifiable by key ‘personality’ traits.

  1. Financially disorganised: this group makes up the bulk of the defaulting portfolio, and are those customers who are disorganised in their finances, but ultimately are still capable of managing their finances;
  2. Financial difficulty: this group comprises customers who experience some difficulty in satisfying their financial obligations and can improve their situation with short to medium term support;
  3. Financially distressed: customers in serious financial difficulty, who are unlikely to be able to recover.

Now we must ask ourselves the question: Will the second group of customers increase in size during the recovery phase of this pandemic?

The answer must surely be yes, but more importantly we need to ask ourselves which employment sectors will be most affected, and can we pro-actively identify and assist, before they become delinquent?


As we head into 2021, we can comfortably say that we are going to need to look at business differently in the upcoming year.

The question remains, how can we ensure that our collections capability is resilient to what is to come? And are we efficient and effective in recovering debt in the new normal?


Using the data we have available

Do we utilise data analytics and where are we in the evolution of data analytics within collections?

Are we still in the descriptive analytics space, where we use analytics solely for the tracking of our collection performance and yields?

Have we evolved into the Predictive Analytics space, where we utilise predictive models to rank on a single predictive outcome? Perhaps, we have evolved a bit further where we utilise multiple collection scorecards within our collection segmentation? Here we may have evolved to using multiple data (policies, models and segmentation) within a decision tree in order to assign actions against micro-segments?

Perhaps we are “leaders” in the collection analytics evolution by using prescriptive analytics (mathematical optimisation), by bringing all predictive analytics into a single decision framework to assign the optimal action for each account given specific business constraints?

Most large organisations that we come across are in the single scorecard/multiple scorecard stages.

evolution of a collections team

The age of digitalisation

One thing that this pandemic has made us (especially us older folk) contemplate is the use of technology when communicating.

“As the coronavirus pandemic has forced millions around the world to stay in their homes, the 9-year-old platform Zoom has emerged as the go-to service for not only virtual meetings and classroom lessons but happy hours, costume parties, church services, brunches, book clubs and romantic date.

On Monday March 23, Zoom was downloaded 2.13 million times worldwide, up from two months prior which only received 56 000 global downloads in a day.” - CNN Business.

We already know that the younger generations prefer chat over voice, but did you know that during this lockdown period there has been a remarkable rise in email open rates? Email open rates are 26.95% higher during lockdown, and outperforming the annual Black Friday shopping event, with the click through rates registering 6.38% higher during lockdown.

The evolution of communication will force us to move from a multi-channel communication and cross-channel communication approach to an interactive omnichannel capability.

A customer-preference-driven communication approach has become a MUST in the new normal.

In part 2 we will look further at legislation & scrutiny, and we will finish off with part 3 - flexibility of systems and processes.



Perry de Jager
Perry de Jager
Perry has been involved in Collections and Recoveries for the past 12 years, spending time in different market segments ranging from law firms to investment companies. At Principa, Perry has worked on extended projects within both South Africa and the Middle East with some of the largest financial organisation, providing on-site consulting within the collections and recoveries space covering strategy, process, people and technology.

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The 7 types of credit risk in SME lending

  It is common knowledge in the industry that the credit risk assessment of a consumer applying for credit is far less complex than that of a business that is applying for credit. Why is this the case? Simply put, consumers are usually very similar in their requirements and risks (homogenous) whilst businesses have far more varying risk elements (heterogenous). In this blog we will look at all the different risk elements within a business (here SME) credit application. These are: Risk of proprietors Risk of business Reason for loan Financial ratios Size of loan Risk industry Risk of region Before we delve into this list, it is worth noting that all of these factors need to be deployable as assessment tools within your originations system so it is key that you ensure your system can manage them. If you are on the look out for a loans origination system, then look no further than Principa’s AppSmart. If you are looking for a decision engine to manage your scorecards, policy rules and terms of business then take a look at our DecisionSmart business rules engine. AppSmart and DecisionSmart are part of Principa’s FinSmart Universe allowing for effective credit management across the customer life-cycle.  The different risk elements within a business credit application 1) Risk of proprietors For smaller organisations the risk of the business is inextricably linked to the financial well-being of the proprietors. How small is small? The rule of thumb is companies with up to two to three proprietors should have their proprietors assessed for risk too. This fits in with the SME segment. What data should be looked at? Generally in countries with mature credit bureaux, credit data is looked at including the score (there is normally a score cut-off) and then negative information such as the existence of judgements or defaults; these are typically used within policy rules. Those businesses with proprietors with excessive numbers of “negatives” may be disqualified from the loan application. Some credit bureaux offer a score of an individual based on the performance of all the businesses with which they are associated. This can also be useful in the credit risk assessment process. Another innovation being adopted internationally is the use of psychometrics in credit evaluation of the proprietors. To find out more about adopting credit scoring, read our blog on how to adopt credit scoring.   2) Risk of business The risk of the business should be managed through both scores and policy rules. Lenders will look at information such as the age of company, the experience of directors and the size of company etc. within a score. Alternatively, many lenders utilise the business score offered by credit bureaux. These scores are typically not as strong as consumer scores as the underlying data is limited and sometimes problematic. For example, large successful organisations may have judgements registered against their name which, unlike for consumers, is not necessarily a direct indication of the inability to service debt.   3) Reason for loan The reason for a loan is used more widely in business lending as opposed to unsecured consumer lending. Venture capital, working capital, invoice discounting and bridging finance are just some of many types of loan/facilities available and lenders need to equip themselves with the ability to manage each of these customer types whether it is within originations or collections. Prudent lenders venturing into the SME space for the first time often focus on one or two of these loan types and then expand later – as the operational implication for each type of loan is complex. 4) Financial ratios Financial ratios are core to commercial credit risk assessment. The main challenge here is to ensure that reliable financials are available from the customer. Small businesses may not be audited and thus the financials may be less trustworthy.   Financial ratios can be divided into four categories: Profitability Leverage Coverage Liquidity Profitability can be further divided into margin ratios and return ratios. Lenders are frequently interested in gross profit margins; this is normally explicit on the income statement. The EBIDTA margin and operating profit margins are also used as well as return ratios such as return on assets, return on equity and risk-adjusted-returns. Leverage ratios are useful to lenders as they reflect the portion of the business that is financed by debt. Lower leverage ratios indicate stability. Leverage ratios assessed often incorporate debt-to-asset, debt-to-equity and asset-to-equity. Coverage ratios indicate the coverage that income or assets provide for the servicing of debt or interest expenses. The higher the coverage ratio the better it is for the lender. Coverage ratios are worked out considering the loan/facility that is being applied for. Finally, liquidity ratios indicate the ability for a company to convert its assets into cash. There are a variety of ratios used here. The current ratio is simply the ratio of assets to liabilities. The quick ratio is the ability for the business to pay its current debts off with readily available assets. The higher the liquidity ratios the better. Ratios are used both within credit scorecards as well as within policy rules. You can read more about these ratios here. 5) Size of loan When assessing credit risk for a consumer, the risk of the consumer does not normally change with the change of loan amount or facility (subject to the consumer passing affordability criteria). With business loans, loan amounts can range quite dramatically, and the risk of the applicant is normally tied to the loan amount requested. 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In the graph below the performance of an industry is tracked for two years and then projected over the next 6 months; this is then compared to the country’s GDP. As the industry appears to track above the projected GDP, a positive outlook is given to this applicant and this may affect them favourably in the credit application.                   7) Risk of Region   The last area of assessment is risk of region. Of the seven, this one is used the least. Here businesses,  either on book or on the bureau, are assessed against their geo-code. Each geo-code is clustered, and the projected outlook is given as positive, static or negative. As with industry this can be used within the assessment process as a policy rule or within a scorecard.   Bringing the seven risk categories together in a risk assessment These seven risk assessment categories are all important in the risk assessment process. How you bring it all together is critical. If you would like to discuss your SME evaluation challenges or find out more about what we offer in credit management software (like AppSmart and DecisionSmart), get in touch with us here.

Collections Resilience post COVID-19 - part 2

Principa Decisions (Pty) L

Collections Resilience post COVID-19

Principa Decisions (Pty) L