As credit grows, so do banks’ collection risks

With the explosion of consumer credit and expansion of the economy, Philippine banks are being urged early on to improve their collection systems for small loans and receivables to prevent problems down the road.

Burton Crapps, country manager for financial risk services firm Fico, cited how as much as 15 percent of all credit card debt in the country had been reported to be delinquent.

“The growth of the economy naturally brings along the trash,” Crapps told the Inquirer. “You get the problems that come with it.”

The official from Fico, which specializes in services to protect against financial risks like fraud and collection problems, pointed out that the rapid growth of the Philippine economy could “cause a lot of problems” if banks and utility firms were to fail in upgrading their credit systems.

“Most of the collection groups—whether from banks or utility firms—they have this growth of new business. But they haven’t really focused on growing back office support to manage delinquencies,” he said.

Crapps pointed out that while the credit card delinquency rate in the Philippines had been estimated to be as high as 15 percent of total debt, the global average for unpaid credit card debt stood at only 4 percent.

As of mid-2012, the Bangko Sentral ng Pilipinas reported that the total amount of credit card receivables of the local banking system stood at P165.2 billion, while delinquencies totaled P18.3 billion—a delinquency rate of 11.1 percent.

Crapps noted that most banks and utility firms allocate a large amount of resources to securing new clients or customers through aggressive marketing activities but neglect to properly staff and equip their collection departments, which is crucial to maintaining a firm’s profitability.

“In many cases, you will find firms with collection agents working on spreadsheets listing down their clients, and they simply go down the list one by one,” the Fico official said.

This manual method, he said, is impractical for large companies like banks, which may have as many as one million credit cardholders at any given time.

Crapps said that one Fico service would help banks detect usage and payment patterns among their credit cardholders to allow them to better collect payments on time.

The challenge, he said, is to be able to retire receivables within 18 days after the due date, when the chance of a successful collection stands at 70 percent. Beyond 18 days, the chances of making a successful collection drops sharply to 50 percent, he said.

“What we see in the Philippines is, yes, consumer lending is growing and people are using their cards more,” the Fico official said. “But delinquencies are growing as well.”