Debt Segmentation for Collections and Recoveries Management in the Spanish Market. Impact of a Crisis: COVID-19 Case Study

Collections and recoveries (C&R) activities are essential for effective credit risk management, particularly in light of post-2007-2008 financial crisis regulations. Despite their importance, this area is often underexplored. Accurate unpaid debt segmentation is crucial for optimizing collection strategies and assessing collection potential. Our objective is to identify the key determinants influencing recovery rates for unsecured debt portfolios that banks and financial institutions have written off, and to assess how these determinants were affected by the COVID-19 crisis. Specifically, we aim to identify which variables significantly predict short-term repayment behaviour before, during, and after the pandemic. To this end, we developed statistical models utilizing the CHAID classification tree methodology to identify the most discriminating variables. Our findings indicate that the COVID-19 crisis had a notable impact, causing significant alterations in these variables. The insights from this research are expected to be valuable to key stakeholders in the C&R sector, including creditors, servicers, and regulators/supervisors. In this research, we utilized a database from a prominent Investment Firm, containing information on 900.000 accounts of unsecured debt portfolios sourced from the Spanish non-performing loans market, and their payment behaviour from 2018 to 2023, along with macroeconomic data from the “Instituto Nacional de Estadística”.