Credit Union

Case Study 1 - Credit Union, Reduction in Loan Arrears & Improved Recovery Rate of Charged-off Loans

Background and Problem

The business had a high local profile and loans were advanced without adequate security or risk assessment of borrowers' ability to repay. New mandatory regulations concerning Bad Debts provisioning with the consequent likelihood of nonpayment of annual dividend threatened the viability of the business. Directors were not aware of the extent of the problems and the lack of information was compounded by the lengthy absence of the Manager and his Credit Control Officer.

Gross loans in arrears were over 12% of loan book.

Actions Taken

Application of Six Sigma DMAIC* tools ensured a rigorous structured methodology was used to tackle the arrears and collection issues and secure fast results. Members in arrears and charged-off loan holders were successfully managed and negotiated with in order to secure repayments without foregoing accrued interest. Full risk assessment was conducted with resultant development of new policies and operating procedures which were approved by the Board. Investments were actively managed to improve returns without added risk. Loan approval process was strengthened and extensive staff and volunteer training conducted. Strategic planning and budgetary control systems were implemented.

The Result

Within 8 months the gross loan arrears were reduced to benchmark 5%. Bad Debts provisioning was reduced to a manageable level which enabled dividend payment whilst at the same time statutory reserve was strengthened. Comprehensive risk assessment process was put in place to ensure policies and operating procedures are complied with on an ongoing basis.
Investment returns were improved by 30%. Budget, cost control, and forecasting systems put in place.

*DMAIC - Six Sigma is a highly disciplined process that helps us focus on developing and delivering near-perfect products and services.

Define the problem, Measure how we are doing, Analyse what's wrong, Improve by fixing what's wrong, Control to guarantee performance