As I said before, even in “normal” and “healthy” economic climate there are bound to be loan defaults as it is “by design”. “New money” chasing “old money” or ”other new money” to pay for the loan as the interest has “stolen” from the money supply.
Those who are financially “weaker” will be the ones generally who will default first and others will eventually follow suit. “The design” of USURY or RIBA based system will ensure that new debts will have to be created to pay for the old debt where there will never be enough “money” to go around. For revision of the usurious system, you can visit this link:
When there is an economic crisis, the loan default rates will multiply many times over. This is where the collection department of Banks and Collection Agencies would have to intensify their collection efforts for their own survival like what happened in the Asian Financial Crisis in 1997. During that time, collection was low, repossession of vehicles reached record highs, foreclosures of property were aplenty and Bankruptcy proceedings were rampant.
The returns from principal and interest were not enough to cover for operational expenses (lower returns of interest portion as loans get “older”) and new loans were frozen, so “new money” could not be created with “higher” portion of interest/USURY for the “rolling of expenses”. Finally the aid from the government in the form of “bailout” was needed to prevent the Banks from going under and restore the confidence of the people in the monetary system.
Maybe we will have a special session dedicated to the Asian Financial Crisis of 1997 to reminisce and learn from it in order to at least be “better prepared” for the incoming and expected bigger crisis. Many of you readers may still be too young to remember or even still wearing diapers when the said crisis of 1997 happened so it is good to know.
Ok, back to the types of loan defaults. The type of loan defaults can be divided into the following categories (these are my classification and might be slightly different from the classification from Banks and Central Banks)
1) Potential Non Performing Loan – Loans that are overdue from 1 to 3 months. These are sometimes considered “normal” and “active” accounts but need to be monitored closely. Phone calls and simple reminder letters are normally used.
2) Non Performing Loan or Doubtful Debts – Loans that have the potential to die off and become bad debts. Usually overdue from 4 to 12 months. More frequent follow ups sre required and normally already under litigation.
3) Bad Debts – Loans which remain unpaid for more than 12 months. Either in advanced stage of litigation and depending on the respective policy of Banks, these accounts may be written off and transferred to a department specializing in “cold” accounts. On the other hand, there are some accounts where legal actions are still undergoing would not be written off just yet, just isolated from the “active” accounts. The “income” from the interest from these accounts will be suspended in line with the guidelines from the Central Bank normally from the seventh month of default until the account becomes active again. For “write off” accounts, whatever amount paid is considered as profit after considering all recovery costs since it has been recorded as a “loss”.
The loan recovery process in the above three categories depends on the respective internal policies of the Banks. For the 1 to 3 months category, it is normally handled by the Banks staff because it is relatively “easy”, that is by “cordial” phone calls, sms (text messages) and reminder letters which nowadays generated by computers.
For car loans, it is governed by “The Hire Purchase Act 1967 (latest amendment 2012) where the Banks will have to follow the provisions of the said act in terms of recovery of the vehicle. Legal action may be taken after efforts to recover the car as provided by the act failed.
As for personal loans and credit card loans “affectionately” known as “unsecured loan” (may be “secured” by a guarantor) the usual process of recovery such as phone calls, reminders, lawyer’s letter of demand, court summons and judgment are used.
With regards to property loans, the usual recovery process as unsecured loans will be carried out. However, when it comes to foreclosing the property, the Banks would have to abide by the provisions of the National Land Code.
Wow! That sounds complicated you might say. Don’t worry, I will try to give a detailed info graphics on each recovery process for each loan category in part 6 of this topic.
It is hoped that by knowing the procedures especially the TIME FRAME for each legal action, you will not be bullied with impunity by the Bank or the Debt Collection Agency staff with threats such as “TOMORROW we will make you a Bankrupt” or “TOMORROW we will auction your house” or “TOMORROW we will deduct your salary” and a few other “TOMORROWs”
Nevertheless, we also need to understand that the “collection guys” need to resort to such tactics to pile the pressure on the borrowers to get the debt paid . They are paid to do that and for the Debt Collection Agency staffs, they are actually “collecting” their salary but some have overstepped their boundaries in terms of proper collection guidelines and ethics.
However, please be reminded that if the proper legal procedures has been followed, the above threats are REAL, the bluff is in the timing and time frame or whether it has been executed at all. This is where the borrowers need to be aware of their rights and at the same time be responsible for the agreement that they have signed with the Banks in the first place.
As long as they have the legal right to collect the debt (unless prohibited by the Limitation Act due to “expiration” of the right to claim), they (the Banks and Collection Agents) are entitled to do so. I am not teaching you to run away from your debt but to give you the understanding of the collection procedures and the proper collection ethics and the channels in which you might get help. So keep on reading..
END OF PART 4
NEXT: PART 5 – THE COLLECTION DEPARTMENT
Part 3 – TYPE OF LOANS IN THE HOUSEHOLD DEBT PORTFOLIO
Part 2 – QUALITY OF BORROWERS
Part 1 – BANKS AND DEBT COLECTION AGENCY