DEBT COLLECTION IN DEVELOPING COUNTRIES. CIS

The Ukrainian debt collection industry was only in its formative stages when it met the challenges of the world financial crisis in the middle November 2008. The collapse of the world’s banking system, high and rising unemployment and the subsequent panic led to rapidly increasing bad loans portfolios of up to 20%, with 30% of bad debts being a critical line for the Ukrainian banking system.

Nevertheless, financial institutions outsource debt collection for 7% of their total debt portfolios only leaving them exposed to high levels of risk.

In addition to the misadventures mentioned above, B2C collection suffered a lot from government endeavours to license the collection industry.

The President’s and Ministry’s of justice statements about the illegality of the collection business has led to a decrease in the rates of collection and subsequent effectiveness along with the client’s interest to cooperate with collectors.

As a logical reaction, the collectors looked to protect their professional interests and establish an appropriate legal basis for their activities. In March 2009 an association of Ukrainian collection companies was established, with its first endeavours directed on protecting the collector’s reputation and the development of fair debt collection practice rules.

However, the licensing of the collection companies can an is likely to cause small and medium companies to withdraw from the marketplace. Only 6-8 financially strong collection companies can survive, yet the Ukrainian market is full of dozen’s of small start up collection companies that commenced business in Q1 2009, owing to mass media hype talking about “unbelievable profitability of the collection business in crisis times”.

The situation is much better in the commercial sphere; a lot of trading companies have recovered after the economic shock in February-March 2009 and now are able to pay their debts.

However, B2B collection is less developed than the collection of consumer debts. Commercial debt collection was not a very popular or well-known service for Ukrainian businessmen, until the economic crisis which has changed their outlook.

The share of delinquent debts increased fourfold over the past year; internal collection efforts being not so effective, businessmen are now paying attention to the services offered by B2B collectors.

Thus, the endeavours of B2B collectors are heavily directed on popularization of B2B collection idea. “It is cheaper to outsource collection than to try to do it yourselves”, “Commercial debt collection is fast, efficient and an easy way to recover debts”, - such slogans can be seen in the promotional material of B2B collectors.

Generally, this market is increasing, and as result, nearly 7 collection companies declared their intention to deal with B2B debts in 2009. Experts have stated “it will be hard for them to survive in tough traditional competition with lawyers”, and so it is necessary to for the competition offered by B2B collection companies to became more focused in producing fast efficient and cost effective results, as a lot of legal companies have reduced their prices for legal collection due to the competition..

The future of the Ukrainian collection business is yet to be seen, owing to its infancy, the financial crisis and what is considered in many quarters to be the unreasonable attention of the government.

Irrespective, there is no doubt that the collection business is “hard money”, as Ukrainians say, implying it will be not easy to develop high profits dealing in this sphere.

About the Author:
Vitaly Shevel is a debt collection expert. He manages GCS Ukraine, a company that is part of a global network operating in eighty one countries.