Bad debt recovery

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Bad Debt Recovery is recovered revenues from collections that were originally written off as bad debt (Chart of Accounuts for Health Care Organizations 1999). Bad debts are the debts that are never expected to be realised. It is also called unrealisable or irrecoverable debts.The bad debts should be transferred to the Profit&Loss Account in the year in which the sale took place to conform to the matching concept otherwise income of the folowing accounting year will be understated. It is treated as a business loss. Bad debts recovery occurs when a bad debt is realised. Often a debt which was considered as bad and written off previosly is recovered afterwards either partly or fully. (Accounting for C.A. Professional Education Course - 1, S.K. Chakravarty 2002).

Debt write-off

A delinquent loan becomes a defaulted loan when the chance of recovery becomes minimal. Defaulted loans result in loan write-offs. Write-offs sholud be considered after a certain period of time has passed and the loan has not been repaid. The decision to write off a loan and the timing of doing so are based on the policies of the MFI. Some MFIs choose to write loans off relativly quickly so that their balance sheets do not reflect basically worthless assets. Others choose not to write off loans as long as there is a remote possibility of collecting the loan. Regadless of when write-offs take place it is important that an MFI have an adequate loan loss reserve so that the net value of loans stated on the balance sheet accurately reflects the amount of revenue-generating assets. Once it has been determined that the likelihood of a particular loan being repaid is remote (the borrower has died, left area, or simply will not pay) a write off occurs. Write-offs are only an accounting entry. They do not mean that loan recovery should not continue to be pursued if it makes economic sence. Writing off a loan does not mean the organization has relinquished its legal claim to recover the loan. If a loan that was previosly written off is recovered (the borrwer has repaid the loan) then the full amount recovered as revenue (credit) on the income statement. This is because the principal amount write off was recorded as an expense (throught the loan loss provision that created the loan loss reserve) and therefore if recovered it is recorded as revenue and not as a decrease in outstanding loan portfolio (assets) („Microfinance Handbook”, Joanna Ledgerwood 1999). Bad Debt Expense is acccount used for uncollectible accounts receivable and notes receivable. It is very important that consistent and justifiable method of etimating the periodic charge to provision for bad debts should be applied systematically („Chart of Accounuts for Health Care Organizations”, 1999). Many bad debts are difficult to collect and are often written off. In most cases a organizations take many steps before deeming it a bad debt. Collection attempts can continue even after the debt has been written off. Payment can still be made after the debt has been written off, making it a bad debt recovery. In periods of economic crises, the number of companies that get into difficulties increases, which results in losses in business and increased problems in the collection of claims and a greater number of bankruptcies. The most important segment of working capital management in difficult business conditions is the collection of receivables, which should ensure an adequate amount of funds and liquidity. There is a risk of bad debts in every business, because companies will always have customers who will not fulfill their financial obligations, banks, clients who will not repay their loans, health institutions of patients who will not pay their bills, and so on.

Debt collecting

In an effort to reduce the share of uncollectible debts institutions take various preventive measures but also try to collect debts that have already been defined as uncollectible. One way to collect such debts is to hire companies or agencies for the collection of bad debts. The basic activity of banks is the granting of loans and it is therefore specific because they must continuously assume the risk of non-payment by the debtor. In order to preserve stability and liquidity they implement strategies for assessing the creditworthiness of clients and, in case of debt collection impossibility they sometimes also apply the strategy of selling risky receivables. A large increase in the share of bad loans can create difficulties in the operations of banks, and consequently can affect the entire economy. Also, for example the healthcare industry is often plagued by

  • unpaid bills
  • collection agency fees and
  • outstanding medical testing costs.

All these factors contribute significantly to the rising cost of healthcare. Health care providers often have to treat patients on credit, especially in emergency and trauma cases. Unlike financial institutions health care providers do not collect financial information about their patients. This lack of information makes it difficult to evaluate whether a particular patient-debtor is likely to pay bill. In recent years researchers have started to recognize the potential of data mining methods in improving our understanding of medical bad-debt, but there is relatively little research that examines the effectiveness of data mining methods in classifying bad debt in healthcare (A Neuro-fuzzy Approach to Bad Debt Recovery in Healthcare, by Donghui Shi, Jozef Zurada, Jian Guan, 2014, „47th Hawaii International Conference on System Science”). The post bad-debt recovery strategies that are being used by MFIs currently such as recovery fromsavings or guarantos income, reminders, promise register and legal actions are less result oriented. The findings denoted that pre-debt recovery strategies such as high quality formal and informal pre-lending customer screening process, enhancement of skills of the field officers, who's given with the responsibility of assuring the feasibiity of the customer and portfolio tracking after the disbursement of the loan, enhancement of social capital among the group network system by providing business development services, improving financial literacy of customer can make a huge influence of the loan repayments which is possibly minimizes the default risk of non-performing loans (A study on the Impact of Debt Recovery Strategies Used by Micro Finance Institutions: Evidence from Sabaragamuwa Province 2019).

References

Author: Ivana Miškić

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