What is recovery rate?

The recovery rate measures how much of a defaulted exposure a lender gets back. Recoveries can come from borrower payments after default, collateral sales, guarantor payments, collections agencies, litigation and sales of charged-off debt. In retail lending, recovery rates often refer to amounts collected after charge-off as a percentage of charged-off balances.

Recovery rates feed loss given default estimates, allowance models and net charge-off reporting, since recoveries reduce net losses. Collections and recovery teams use them to compare in-house work with agency placements and debt sale prices. In commercial lending, recovery depends mainly on collateral, seniority and the length of the workout.

Recoveries can take years, so recent cohorts look artificially low until collections run their course. Gross recovery rates that ignore collection costs, legal fees and the time value of money overstate what the lender actually retains. Changing the mix between debt sales and internal collections affects both the size and timing of recoveries.