ACH Direct Debit could help improve loan recovery – GhIPSS

Lending institutions could turn to Direct Debit to improve on their loan recovery rate. This is because it has some flexibilities that lenders can explore for repayment of loans.

Poor loan recovery is a major challenge to many lending institutions, especially the savings and loans as well as microfinance companies. It has even led to the collapse of some of these institutions. But it appears that Direct Debit could help them improve on their recovery rate.

The Automated Clearing House (ACH) Direct Debit is an arrangement made with a bank that allows a third party to transfer money from a person’s account on agreed dates; typically, in order to pay bills or pay back loans. Lending institutions can therefore make it mandatory for borrowers to sign a Direct Debit mandate that will authorise the borrower’s bank to credit the lending institutions’ account with a specific amount of money.

Lending institutions can use Direct Debit as their default loan repayment mode, or it can serve as an alternative that would be triggered in the event of a default. Lenders using Direct Debit can set a range for the amount to be deducted; such that even if the amount in the bank account is less than the regular repayment amount, automatic deductions will still occur on the account.

Some borrowers, after issuing standing orders or post-dated cheques to repay loans, deliberately keep a smaller amount of money in their bank account to avoid the automatic deductions. But with Direct Debit a range can be set with a low minimum, such that regardless of the amount in the account, automatic deduction will take place. Depending on how the Direct Debit mandate is set, there could be multiple deductions on the account the moment any amount of money is paid into it. This has proved useful to lenders which have resorted to Direct Debit.

About 200,000 Direct Debit transactions took place between January and June this year. Although this year’s first quarter volume of transactions is higher than the same period last year, the Chief Executive of Ghana Interbank Payment and Settlement Systems (GhIPSS), Archie Hesse, believes that the volumes can go a lot higher if institutions and individuals appreciate the various ways they can use Direct Debit.

He said GhIPSS will continue to educate the public on the benefits of Direct Debit, and encouraged lenders to explore Direct Debit for loan repayments.

Mr. Hesse also noted that Direct Debit can also be used for other repetitive payments, such as utility bills, fixed subscriptions for gyms, magazines, pay-TV and association membership dues among others.