Session 5 Remedial Management Unit

Remedial Management Unit Session Outline Definition & Goals of Remedial Management Remedial Management Unit (RMU) - Functions - Structure - Staffing - Workload Remedial Management Process Facilitator: Review the outline of the session. The presentation will review:

What is Remedial Management? The process of instituting effective and practical approaches in the collection and recovery of hardcore delinquent accounts. Facilitator: Ask the participants what they understand of a remedial management function. After the discussion – validate responses from the participants and introduce the session….

Goals of Remedial Management Implement preventive measures to minimize losses due to delinquency Focus on collection efforts through a specialized unit to manage the recovery process Discuss the goals of remedial management. Read through the bullet points. These bullet points provide the rationale for remedial management.

What is a Remedial Management Unit? A specialized trained and responsible unit for managing the collection and recovery of written off or hardened accounts. Introduce the Remedial Management Unit. The remedial management unit is a specialized unit in a multi-branch bank created, organized and or activated specifically for the task of managing and conducting collection and recovery efforts against all written off accounts. As the time progresses however, the RMU may also be tasked with the collection and recovery of all hardcore delinquent accounts of the bank. An RMU activity is also focused on the formulation and implementation of effective collection strategies.

Functions of the Remedial Management Unit Takes over the responsibility of hardcore accounts. Relieve branches of “uncollectible” accounts so that they can focus on serving existing productive accounts and generating new accounts Why do we have to create a separate unit just for remedial management? RMU is the “life” after the write off. It is the activity which automatically functions when substantial accounts have become problem accounts that need to be written off, but need specialized collection effort. The RMU assumes the responsibility of Recovering written off accounts from the branches. The RMU relieves branches of uncollectible accounts so that the branch can engage in more productive activities. Providing information and analysis of problem accounts. This helps management to formulate and revise credit-granting policies With the organization of the Unit, assets surrendered by clients as payment for their loans can be managed and disposed efficiently.

Remedial Management Unit Structure A Remedial Management Unit set up is ideal for banks with multi-branches A single unit bank may opt to assign an experienced account officer or collector solely for remedial management functions Facilitator: The organization of a Remedial Management Unit varies depending upon the size and structure of a bank (i.e. single unit or multi-branch bank, organizational structure of the microfinance unit, etc). Tailor the discussion on structure of the RMU to the organizational structure of the banks represented in the audience. The functions of the RMU may be tasked differently depending upon the size and organizational structure of the bank. For example, a bank with a microfinance unit may structure a RMU within the MFU itself. Alternatively, a bank that does not have an MFU, but that does microfinance activities within a broader lending division, may create an RMU to manage hardcore accounts for the entire lending unit, as opposed to focusing on just microfinance accounts.

Remedial Management Unit Staffing Recommended Staffing for the RMU: Unit head, preferably from among experienced Microfinance supervisors, to be based in the head office At least two dedicated Collection Officers with experience and demonstrated success in resolving delinquent or problem accounts RMU reports to the President or Head of Lending Operations Facilitator: Walk through the organizational structure for an RMU. Emphasize that account officers assigned to the remedial management unit should have experience in handling accounts for at least one (1) year. They should be experienced with different “types” of clients and with the management of problem accounts. They should be skilled in handling complaints, negotiating repayment plans, and assessing the repayment capacity of delinquent clients. These staff should also display the ability to be assertive but not abrasive in collection – strike a balance in recovering funds for the bank and maintaining a courteous relationship with clients. In the collection of delinquent accounts, the bank needs to strike a balance between preserving its image as serious in the business of banking, but also sensitive to the (sometimes uncontrollable) situations of clients. Facilitator: Emphasize the importance of “specialization” in remedial management where the bank assigns staff to the specific task of the collection and recovery effort.

Remedial Management Unit Workload As a rule of thumb, the RMU has 200 or more accounts The ideal caseload per Collection Officer is 100-150 delinquent accounts Unit Head assigns geographic areas to Collection Officers for efficiency in loan recovery efforts Facilitator: Discuss the responsibilities of the RMU.

RMU Remedial Management Process Classify Accounts Pre-collection Preparation Create Incentives For Staff Recommend Accounts to RMU Collection Process Internal Control Mechanisms Facilitator: Use this process map to discuss the remedial management process. Evaluation of Accounts by RMU Performance Monitoring Reports Developing Payment Plan File Transfer

Remedial Management Process 1. Classify Accounts & Recommend to RMU BRANCH LEVEL AOs alert MF Supervisor/Branch Manager when an account becomes difficult to collect or “hardened” MF Supervisor/Branch Manager evaluate the status of account All possible measures are taken in the field to recover account When collection options are exhausted……  MF Supervisor/Branch Manager recommends loan write off to RMU Facilitator: Read through the responsibility of the branch and field officers to classify accounts and recommend accounts to RMU

Remedial Management Process 2. Evaluation of Accounts by RMU RMU and senior management review recommendations from branches to write off loans RMU validates recommendation for loan write off at the branch level a) review of account folders b) discuss the status of the account with the AO, supervisor and branch manager Senior management validates loan write off and the account is “transferred” from the branch to the RMU Read the slide. This activity is conducted when written off accounts are endorsed from the branches. The RMU validates each referred account to determine what collection arrangements have been made previously; the status and whereabouts of clients; assets surrendered by clients, if any, and other repayment and credit history. The branch manager facilitates access to information on these accounts.

Remedial Management Process 3. File Transfer Account files transferred from branch to the RMU A Statement of Account for each account transferred to the RMU should be prepared and filed in each credit file. The account transfer is formalized to reflect the RMU’s responsibility for loan recovery or resolution Read the slide. When accounts are “turned over” to the RMU, the RMU retains full management control of the accounts. Credit files are endorsed to the RMU for collection. The RMU does not accept endorsed written off accounts whose documentations or credit folders are missing. The written off account becomes part of the Unit’s “portfolio.” Goals and targets should be created for the unit as a whole (i.e. the unit should have targets to recover a “x” percentage of the accounts in its portfolio). Incentives can be created to motivate staff within the department to encourage recovery efforts. To create targets and incentives, an analysis of the types of accounts classified as “hardened” needs to be conducted.

Remedial Management Process 4. Pre-collection Preparation RMU classifies accounts according to: Collectible Uncollectible Collection officers should focus initially on higher potential collectible accounts Collection officers organizes field visits One of the primary activities of the remedial management unit is the process of account identification and classification. After the written off accounts are endorsed to the Unit, the first activity is to classify the accounts: collectible and/or uncollectible. This process involves the review of individual credit folders, including the notes of AOs who handled those accounts and supervisors and branch managers that supervised those accounts and recommended them to the RMU. After the accounts are classified, the RMU plans follow-up activities. Immediate attention should first be placed on recovery efforts of accounts classified as “collectible.” Accounts that are classified as uncollectible shall be validated by the Unit head to determine the actual reasons why the account/s have become uncollectible.

Remedial Management Process 5. Collection Process RMU staff visits borrower with written off or hardened accounts at least twice a month RMU staff follows up on collection agreements and propose an approach to recover the account; Recovery activities are organized per area to maximize the minimum target of 15-25 clients per Collection Officer; Collections should be turned-over to the branch or office where the CO has completed the collection; Collection reports are organized daily or weekly as procedures dictate Facilitator: Review the collection process outlined on the slide.

Remedial Management Process 6. Developing Payment Plan Payment Terms Amount Collectible Full settlement w/in 60 days after notice. 1. Principal balance only. Full settlement of account in single payment over 60 days Principal balance, plus Accrued interest up to date of payment Settlement of account on staggered basis a) 3 months w/ monthly payments b) 4 months w/ monthly payments Accrued interest, plus 25% of penalties due; 1. Principal balance, plus 2. Accrued interest, plus 3. 50% of penalties due Facilitator: This slide presents payment terms that the bank can consider in restructuring delinquent accounts, and encouraging clients to settle their accounts as soon as possible.

Remedial Management Process 7. Creating Incentives A commissioned-based incentive scheme should be developed to motivate the RMU to recover hardcore accounts in its portfolio: 10% commission for accounts considered collectible 30% on accounts considered uncollectible All staff facilitating the collection of bad accounts should be considered for incentives Read the slide. A sample incentive scheme is illustrated on this slide. An incentive scheme serves to motivate staff to collect accounts. The incentive scheme should reflect realistic goals in recovering collectible and uncollectible accounts. The incentives package must be clear in its policies. Management reviews and incentive scheme to confirm their comprehension and commitment. Refer to the “Guidelines on Microfinance Loan Write-off Policies and Procedures” developed by MABS for more information.

Remedial Management Process Internal Control Control and custody of credit files Preparation and review of final Statement of Account Designate approving authorities on final settlement option and rescheduling of payments Timely turn over of collections to nearest branch office Monitoring of collections and other cash management issues Separate MIS listing of written off accounts One of the critical issues to the remedial management function is internal control. The RMU is assigned accounts that have been written off the books of the bank. Any collection from these accounts goes directly to the bank’s revenues. To protect against fraud, the bank should establish internal control mechanisms. Some control mechanisms include: Create a separate loan listing for written off accounts. This involves transferring written off accounts from the bank’s outstanding portfolio. This transfer can be automated through the use of the bank’s MIS and/or manually through subsidiary ledgers (2) Maintain detailed records of restructured payment plans with clients (i.e. dates of expected payments) and monitor client credit files. (3) Require a paper trail (i.e. official receipts) to validate all financial transactions (4) Require weekly performance collection reports to monitor collection efforts

Remedial Management Process Performance Monitoring Reports Daily collection and follow up reports Weekly performance reports Monthly Status Reports of Collections The Remedial Management Unit should provide performance monitoring reports to management on a regular basis. Collection officers complete daily and/or weekly collection reports and submit to the unit head. (Facilitator: share with participants examples of weekly and monthly performance reports) Weekly reports are consolidated to a monthly reports and presented by the RMU unit head to senior management.

Remedial Management Unit To summarize.... RMU is an effective and practical approach to collect and recover hardcore delinquent accounts. To be effective, RMU must be a separate, specialized unit with its own portfolio of hardened accounts. RMU must have goals and targets and reporting mechanisms. The Remedial Management Unit should provide performance monitoring reports to management on a regular basis. (1.) Collection officers complete daily and/or weekly collection reports and submit to the unit head. (Facilitator: share with participants examples of weekly and monthly performance reports) (2.) Weekly reports are consolidated to a monthly reports and presented by the RMU unit head to senior management.

Thank you!