How does the Debt Collection Agency work?
Limesh Parekh
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BFSI companies have to collect money from people on a continuous basis, which is outsourced to a third party, the Debt Collection Agency. However many times they have their own collection department. Inefficient collection system can paralyse the cash flow for the BFSI company.
Outsourcing the debt collection work to a third party is profitable for BFSI companies like Banks, NBFC, insurance and Credit Card companies. It reduces their cost of collection and at the same time brings in more efficiency.
What is a Debt Collection Agency?
Debt Collection Agency is a specialised organisation, who get the list of payees from the banks and do the collection work on their behalf. Collection Practice deployed by these agencies is well tested.
The primary role of the Agency is to collect Accounts Receivable on behalf of BFSI Company. The Agency employs people who call, remind, visit actual borrowers and make them pay the money due.
Agencies use every possible way of communicating to collect the debt, It may be Calls, SMS, WhatsApp, Emails, Letters, Personal visits. They may contact borrowers or guarantors in case the borrower is not properly responding.
Generally, Agencies don’t collect and keep the amount themselves. They helps the borrowers to make the payment in the original BFSI company’s account, directly.
Debt Collection Agencies act on behalf of Banks and BFSI Companies, Hence many legal restrictions of Government apply to them also.
Debt collection is different from Debt Buying
Collection Agencies just collect or recover the debt from the borrowers on behalf of original Creditors, i.e. BFSI companies who have granted the credit. However, debt buyers are different from these agencies. When Debt buyers buy the debt, they become the Creditors.
Debt buyers generally buy some particular amount of debt at a discounted price and then they do the collection process. The main difference is that Debt buyers don’t collect on someone’s behalf, they are the creditors.
Debt buyers do comprehensive market research before buying the debt. Based on that research report they analyze whether they can collect the debt within the forecast period so that they can remain profitable.
The Debt collection Process is very complex, since it involves very sensitive data from BFSI companies and time period is extremely limited. There is absolutely no scope for inefficiency.
Debt Collection Techniques & Process
Debt Collection Agencies get paid on the basis of the percentage of the total debt that they collect. Higher the percentage of collection, higher is their commission. Hence in order to remain profitable, the agency has to be very efficient in collecting the debts.
The commission for Agencies is very small and at the same time, the time available for collection is also limited. If they don’t collect money (or EMI) when it is due, they will not earn money. Operational efficiency is the key element, which is not possible without proper techniques and processes.