Debt Purchase: A Revolution in Debt Collection
‘Debt purchase’ or ‘Debt Factoring’, is a debt recovery strategy which involves disposal of a debt portfolio by creditors or other debt owners to debt buyers, who thereafter attempt to collect the debt or sale it to other buyers. The strategy can help untie liquidity of creditors such as commercial banks, in turn allowing them to continue with their core business of lending.
During lending stage, data on borrowers is normally collected and analyzed to inform the final decision. This is to cushion the lender against any exposures. As such, the collected data must meet some bare minimums of industry standards such as establishing and authenticating client’s information. The data is critical in discussions on debt purchase and affects the price of a portfolio during negotiations. The strict Know your Customer (KYC) policies adopted by financial institutions have assisted on strengthening the quality of data gathered from the clients thus improving the quality of portfolios in financial institutions.
Countries which have succeeded in implementing this debt collection strategy such as the U.S.A and U.K, have had to enact laws to guide players in the same space. In U.S.A for instance, debt purchase and debt collection business is guided by Fair Debt Collection Practices Act of 1977. According to the 2013 report by Federal Trade commission (FTC) of the US, debt purchase has been on the increase signifying positivity in the uptake of this strategy.
Further, a report by the Central Bank of Kenya titled “Credit officer Survey” dated 31st March 2021, indicated that there was an increase in Non-performing Loans (NPL) ratio by 14.1%. As a result of this increase, commercial banks have continued to struggle with this huge NPL, which has been exacerbated with the declining economy. This coupled with other factors, have seen some banks in the 2nd and 3rd tier, struggling with liquidity as well as capital requirements. Debt purchase would be ideal for such institutions, as it will untie the money tied in debt and enable them to remain afloat, while meeting their minimum statutory capital and liquidity requirements. It is my conviction that even though Kenya is ripe for debt purchase, there is need for all stakeholder to combine effort in the formulation of regulations that steers implementation of the strategy.