Used wisely, consumer debt can help people achieve their life goals more quickly. However, overspending and accumulating unsustainable liabilities could lead to missed repayments that escalate into something more serious.
During economic downturns, the risk of defaults usually climbs as unemployment rises and employers defer or reduce salaries. However, nonpayment can occur at any time. Personal circumstances such as medical emergencies, loss of jobs, and poor budgeting can lead to such outcomes.
While lenders have a good grasp of why people fail to pay, insights around defaulters' behavior can be lacking. A recent study of Indian defaulters offers some interesting statistics, including those on differences between women and men. Here's a fresh look at how digital transformation is changing the way we do business.
Female Defaulters Quicker To Repay
Older workers who are more established in the workplace might be less likely to lose their jobs and miss payments, but what about differences between men and women? In India, research has shown one gender fares better in this respect.
CreditMate's latest India Delinquance Report reveals female defaulters repay 11% faster than their male counterparts. Male borrowers, on the other hand, logged maximum late payments at 82% in contrast to women's debtors at 18%.
The survey by CreditMate, a cloud-based debt-collection platform, uncovered two key causes of defaults in the world's second-most populous country. Salary-payment delays accounted for 36% of nonpayments while business downturns were responsible for 29%.
The respondents were located across 30 India states and had borrowed from 40 different lenders, most of which were nonbank financial companies and digital lenders, which could be taken as a reflection of the growing popularity of alternative loans.
Repayment Behavior
Just as with making purchases, borrowers can have their preferred ways to transact. Learning more about this can support financial companies in motivating their customers to repay more quickly.
The CreditMate study uncovered some interesting insights relating to online loan repayments versus cash. Those falling in the Millennial category and other tech-savvy generations were confident with making repayments online. A majority, of 79%, said they preferred making online repayments.
A minority of 21% chose to repay with cash. Less than 40% of the respondents utilized debit cards to process their repayments. E-Wallets were the second most popular payment method. This was followed by the Unified Payment Interface, which accounted for 20% of the payments.
Geographical Differences
Geographical metrics can offer valuable intelligence to assist with recovery and building detailed assessments, including risk profile. CreditMate's study uncovered notable differences between borrowers in different regions. Debtors in Goa were the best repayers, while those from Haryana, Andhra Pradesh, and Delhi tended to be the worst at repayments.
In terms of metropolitan areas versus rural regions, the metro non-payers were better at repaying, with Vadodara, Mumbai, and Patna residents better at repayments than those in Ludhiana, Chennai, and Bhopal. These latter three areas were home to those nonpayers who performed the poorest for loan repayments.
The survey also looked at the time of the week for payments. It found payers prefer Friday and Thursday for transferring funds. Saturday, on the other hand, was the least favorite for repayments.
The Significance of These Findings
As the founder and CEO of CreditMate Jonathan Bill states, “the study was carried out to improve the company's services to large and smaller financiers. Understanding the behavior of the indebted can drive insights that can support loan-portfolio improvements and enhance collections systems.”
Data on defaults across geographies, concerning varying stages of delinquency, can also be helpful for financial companies seeking to recover funds. The insights can assist with improving communication, enhancing risk-profile databases, and supporting debtors with their preferred repayment channels.
Collection Tactics Improve
The Digital Transformation (DX) age has overtaken India—like much of the world—and digital technologies are defining a new consumer debt-collection landscape in three ways: Increasing the accuracy of credit risk assessment and preventing repayment defaults; deploying personalized payment plans, and reducing costs associated with collections.
Fintech businesses are leveraging new technologies to access more and highly varied data from some surprising sources. Gathering social activity, transaction records, and payment histories, lenders gain a holistic picture of the type of credit risk a borrower represents.
With new data comes more data analysis, and this leads to a better understanding of consumer behavior. Instead of taking a hardline on debt repayment, there is a trend by fintech to work with the customer to develop alternative debt repayment options. Additionally, these businesses are helping customers get back on track by adding credit counseling designed to teach the customer skills in avoiding delinquencies.
Taking a Personalized Approach
DX has led to the creation and deployment of intelligent bots that are creating detailed profiles about individual consumers. These AI-powered tools can also make predictions throughout the debt-collection process, from assessing the likelihood a borrower will default, to the best time to phone them with reminders, and which debt-recovery approach is likely to be the most successful.
In the past, debt collection practices focused on physical mail, phone, and email reminders, but with access to social channels, debt collectors have many more ways to connect with a customer and offer help. This type of personalized debt collection is showing measurable results in the areas of reduced outstanding debt, improved customer satisfaction, and creating better relationships between lenders and borrowers.
The time of aggressive collection tactics is quickly being replaced by more effective, understanding approaches that include communication at a time convenient to the borrower and using the customer's preferred channel.
What Do the Studies Show?
A clear view of those owing money and their conduct and predilections supports not only improved debt collections but also the approvals process. These studies highlight how offering convenient payment methods might improve payment rates.
Factors such as gender and geographical location are also associated with different payment outcomes, and in the age of big data and digitization, they could be used to improve the profitability of financiers.
Both creditors and collections agencies could also leverage this data to deliver timely reminders, manage expectations, and take preventative action against spiraling nonpayment situations. Instead of a one-size-fits-all strategy, tailored messaging could be more effective at motivating contactees to repay.
Crowd on a narrow… -DepositPhotos
