India’s debt collection moves towards less muscle and more artificial intelligence

A bot may soon take over the debt collector position. This theory can be tested in an unexpected location for a modern technology rollout: the Indian countryside. With about 5% to 10% of the country’s farmers failing to repay their tractor loans on time, the situation might not be as strange as it seems.
The Idea under discussion
The reasons for the delays range from failed crops to medical emergencies to strategic defaults in anticipation of state-mandated debt forgiveness, which is a common occurrence in the political economy. Borrowers forget their due dates or refuse to withdraw cash to pay the nonbank financiers who supply the majority of farm machinery loans, resulting in delinquency. These last-mile obstacles, like those in other emerging markets, provide India’s creditors with a frustratingly complex challenge. They also raise the risk premium associated with rural advancements.
The changes
Three things have changed recently. First, smartphones have become popular due to the world’s lowest data rates. Second, in the last seven years, a vigorous campaign for financial inclusion has resulted in the opening of more than 400 million no-frills deposit accounts. Finally, banks have access to a national mobile payment network that is fast, simple, and compatible with apps such as Google Pay and Walmart Inc.’s PhonePe. The architecture has also been suggested by Google to the Federal Reserve of the United States.
The challenges
In all of technology’s assistance, village collections remain difficult due to language, schooling, and reliance on the currency. Farmers are unable to use the latest digital technologies because they are unfamiliar with them. They may also miss a deadline due to a short-term cash flow problem. Scandals arise as creditors act by turning borrowers over to third-party collection agencies. This is a worldwide problem. Citigroup Inc. was barred from attracting new credit card clients in Indonesia for two years after the death of a cash-strapped small businessman in Jakarta in 2011 after alleged abuse by collectors. Even if things don’t go to those lengths, discomfort in smooth relationships always follows.
The solutions
Sumeet Srivastava, head of a five-year start-up company that aims at boosting collections without any human touch, says that the easiest way to lose a customer for a bank or financial institution is to send the account to a collection agency. In others words, you should make collections without collectors. Srivastava worked at General Electric Co. and Monsanto Co., the seeds and agrichemicals giant later purchased by Bayer AG, before founding Spocto Solutions in Mumbai. His Kisan Pay — Hindi for Farmer Pay — is an electronic voice call that allows farmers to choose when and how they will repay loans. Text messages with online payment connections are sent when those options are selected. The bot will remain on the line to assist borrowers in navigating the confusing world of online money transfers.
It seems simple enough until you remember that in a large, multilingual country like India, where there are more than 146 million operating land holdings, the service must be available in more than 100 dialects. Spocto is focusing on loan portfolios worth 1.2 trillion rupees (USD 16 billion) from some of India’s biggest banks and non-bank financiers. In situations where borrowers have postponed one payment, it has an 85 per cent repayment rate, compared to 70 per cent for conventional networks. According to Srivastava, the cost savings for borrowers was in the region of 30 per cent to 40 per cent. The behavioral hints Spocto picks up when nudging consumers to pay on time provide value to lenders. Srivastava can determine which consumers will most likely restart paying after skipping a few instalments, and who will most likely default, by teaching his algorithms to mine the details. Turning over a much lower number of problem loans to debt services ensures that decent borrowers aren’t scared off by coercion. Creditors benefit from lower bad loan rates and default provisions, as well as improved performance.
Conclusion
Fintech is transforming conventional finance in a variety of ways, from remittances and working capital lending to microinsurance and buy now, pay later. Collection technology, on the other hand, has gained even less interest and funding. Expect this to evolve as a big-data exploration of repayment kinks and quirks complements underwriting algorithms’ yes or no decisions. The two can also be combined to track and attract healthy clients. In the United States ten years ago, there were over 10,000 collection firms. Their number has now dropped below 7,000. More than 70% of the agencies have less than five employees, and it is these small businesses that are merging. Though letters and phone calls are still the most popular in the industry, larger businesses have embraced text messaging, artificial intelligence-driven chatbots, and other digital tools, according to TransUnion’s 2020 collections survey. According to the study, 9 per cent of market participants consider tech to be a major cost in the next year or two.