Technology can lead distressed-asset management towards sustainable practices and better results

• Reducing NPL to manage distressed debt
• Technology transforming distressed-asset management
• Delivering a more positive customer journey

In the wake of the financial turmoil caused by the recent collapse of Silicon Valley Bank, financial institutions are facing increased scrutiny from investors, bank executives and regulators over their management of liquidity risks.

As the price of borrowing increases, lenders are keeping a close eye on loan books for possible default risks. The loan books of banks in the region have swollen in recent times, with governments seeking to fuel economic recovery by encouraging banks to dispense loans.

As the pandemic-era loan moratoriums in the region lapsed—mostly during the last 12 months—banks now have a much clearer picture of the non-performing loans (NPLs) on their balance sheets. They have better awareness of the options available to resolve the expected increase in distressed debt.

Reducing NPL to manage distressed debt

To manage distressed assets, banks can reduce the amount of NPLs on their balance sheet, freeing up capital that can be used for other purposes. Additionally, the option of selling these assets to third-party investors not only provides an immediate cash infusion but also enhances the bank’s liquidity position.

On a broad level, distressed-debt resolution can be classified into two categories: government-led and market-led. A government-led set-up typically sees banks transferring debt to a separate entity that then works through these assets.

One example of a government-led approach is the Financial Institutions Strategic Transfer (FIST) Act introduced by the Philippine government in 2021. This legislation enables financial institutions to divest or outsource the management of their NPLs to authorise entities known as FIST Corporations that function as special-purpose vehicles that collect, dispose and manage NPLs obtained from financial institutions. 

Ultimately, choosing the right buyer for distressed assets demands careful consideration of several factors, including the buyer’s expertise, financial capability, reputation, strategic fit, and commitment to the transaction.

Technology transforming distressed-asset management

The debt recovery industry in Southeast Asia is one of the least-digitalised sectors in financial services, with manual servicing processes and legacy technology being commonplace. These processes often offer minimal flexibility in addressing customer needs.

In recent years, regional distressed-asset management companies have achieved economies of scale by employing a data-driven approach aided by artificial intelligence (AI) to optimise processes and revolutionise the customer experience. 

Debt collection often carries a negative connotation due to unethical and harassing tactics used in the past. However, with technology backed by adherence to regulations and compliance standards, debt management firms can deliver a much more positive and ethical experience for both their partners and customers. Compared to traditional approaches, companies today have the wherewithal to adopt more sustainable practices and deliver better outcomes.

Delivering a more positive customer journey

The use of AI has enabled debt management firms to use advanced analytics and behavioural science to improve debt recovery rates and automate old processes. AI enables debt management firms to adjust their collections approach by collating data, identifying potential defaulters early by singling out those with long response times to communications. This could be addressed by nudging potential defaulters to settle their accounts, for example, by offering an early-payment discount.

A sensible approach would be to provide a self-servicing debt repayment option that gives customers the flexibility to modify their payment plans and choose the payment platform of their choice. An omni-channel communication approach also allows collectors to choose from a range of channels for maintaining regular touchpoints with customers, while also allowing customers to pick their preferred mode of interaction.

Approaching those who owe money can be a sensitive and tricky situation, which is why authorities are implementing measures to protect them from potentially abusive collection tactics. Operating with the highest ethical standards is crucial for debt management firms and can be a differentiator when institutions are looking for debt management partners.

When debt recovery processes are outsourced, firms that comply with regulatory requirements minimise reputational risk for their clients. Hence, lenders reduce the chances of losing the hard-earned relationships they have established with customers.

In today’s unpredictable environment, maintaining and strengthening customer relationships can significantly increase customer loyalty and improve customer lifetime value.

Kian Foh Then is the co-Group CEO of Collectius, an Asian fintech company in distressed asset and credit management in partnership with International Finance Corporation (IFC).