The term collection is a general term that refers to an aggregate or group of things. It is also used as a verb to mean the act of gathering something.
In the finance industry, specifically in loan terms, the second definition is used. It means the act of gathering or collecting payment from a borrower.
In any financial institution, collection is very important. The inability to collect receivables will result in lack of liquidity, which in turn can eventually result in bankruptcy. This is especially true if the financial institution that rely heavily on loan repayments instead of investments and savings.
In any loan arrangement, the collection procedure is spelled out in the loan terms and is consistent with the policy of the lending institution. This collection procedure spells out not only the amount to be paid, but other collection details such as due dates, grace periods, penalties for late payments, and any dates that any collateral (if the loan is a secured loan) will be repossessed. It also specifies the amount of time given to the borrower to pay up delinquent account before the loan becomes a collection account and is turned over to a collection agency.
It is not uncommon for lending institutions to have an in-house collections department to ensure that payments come on time and delinquent accounts are followed up on. However, it is also common practice for lending institutions to rely on third party collection agencies to attempt collection of loans that have already defaulted.
