Friday, June 8, 2012

The challenges of recovery management

In the context of economic crisis, late payments of companies have never been more important in Europe for four years in the UK for 10 years and Italy for 13 years. In Europe, these late payments weigh 90 billion Euros per year and account for 10.8 billion Euros of lost interest. Also records a steady increase in litigation causes the loss of nearly 24 billion Euros
this resurgence of unpaid is accompanied by increased provisions penalizing the financial results. For major European banks, have seen a sharp increase in 2009 the cost of risk compared to 2008.

To limit the increase in the cost of risk, banks must increase their efforts on managing risk cases and those in default. To do this, banks must act on the entire loan process:

Process pre Default: granting and credit management (administration, monitoring of commitments), banks must prevent default and avoid as much.
Process post default recovery and provisioning, they must implement measures to enhance the collection function to optimize the recovery of sums due when the fault occurs.

The regulation defines a fault when the debtor exceeds 90 consecutive days overdue or when the bank should take appropriate measures such as enforcement proceedings. Therefore, an outstanding does not necessarily lead a transition to recovery.
However, these delays repayment of a loan maturities are costly to banks, they result in a cost to the capital asset. Client monitoring is therefore a key challenge for lending banks.

In this sense the retail banks and the BFI are not housed in the same boat.

The BFI have documentation on the basis of official publications that provide information concerning the financial health of the company on a regular basis. They also act upstream, from the granting of credit to facilitate monitoring and ensure optimum risk coverage. Thus, upon funding, the credit agreement has specific provisions for backup (covenants). Expressed usually in the form of thresholds of financial ratios do not exceed the covenants allow regular monitoring of the creditor. Failure to follow these ratios can lead to a full refund of the credit.