The impact of collections strategy on the profitability of unsecured bank micro-loans

Abstract

This research examines bank collections strategy by comparing two micro-loan books; one using a behaviour based strategy, in which a client is encouraged to re-establish regular payments and the other using an arrears based strategy, where the client must repay missed instalments immediately. The results show that the collections outcome does not vary according to collections strategy. However, in contrast to industry best practice, behaviour based collections results in 3,37% more revenue when the loan is rehabilitated, and a 4,54% reduction in losses when the loan is written off. The study also finds that the cost of using a behaviour based collections strategy is lower.