Mr. Clever Nicholas

By Clever Nicholas

Banks play a critical role in the economy by providing loans and financing to businesses and individuals. However, the downside of lending is the risk of borrowers defaulting on their loans, leading to non-performing loans (NPLs). NPLs can tie up a bank’s capital, reduce its profitability, and damage its reputation.

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Loan default is mainly caused by charging high interest, increases in business operating costs, poor risk assessment, and poor loan monitoring.

The Bank of Uganda Quarterly Financial Sector Review report indicates that as of September 2022, the industry ratio of non-performing loans (NPLs) to total loans (NPL ratio) for
banks, which is a key indicator of credit risk, remained stable at 5.2 percent compared to 5.3 percent in June 2022.

The use of professional debt recovery agencies can be an effective way for banks to reduce their non-performing loans, improve their financial performance, and manage their credit risk more efficiently.

Firstly, professional debt recovery agencies have specialized tools and techniques to locate and negotiate with defaulters. They have expertise and experience in recovering debts from customers who have defaulted on their loans. Debt recovery agencies have trained staff who use various methods to track down the defaulters, including skip tracing and credit bureau reporting. They can also negotiate with defaulters to come up with a repayment plan that works for both parties.

Secondly, debt recovery agencies have legal knowledge and expertise in handling debt recovery cases. They understand the legal procedures involved in recovering debts and can help banks avoid costly legal mistakes. This is particularly important in countries with complex, ever-changing debt recovery laws and regulations.

Thirdly, engaging a debt recovery agency can be more cost-effective than trying to recover the debt in-house. Banks can save time and money as they don’t have to invest in training employees or purchasing tools and software. By outsourcing debt recovery services to a professional agency, banks can focus on their core business and leave the debt recovery process to experts.

Fourthly, using debt recovery agencies can help banks preserve customer relationships. Banks can maintain a professional relationship with their customers by hiring a third-party debt recovery agency. This is because the agency acts as an independent third party, and the bank is not seen as the aggressor. This can help minimize the risk of damaging relationships with customers who may be struggling to repay their loans.

In conclusion, the use of debt recovery agencies can be a valuable tool for banks in managing their non-performing loans. By engaging a professional debt recovery agency, banks can improve their debt recovery process, reduce costs, and maintain good relationships with their customers. This can help banks reduce their credit risk, improve their financial performance, and strengthen their position in the market.

The writer is a debt recovery expert and Managing Director at Smart Skills Limited

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