project on debt recovery management in banks
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INTRODUCTION
Banks were never so serious in their efforts to ensure timely recovery and consequent
reduction of NPAs as they are today. It is important to remember that recovery management, beof fresh loans or old loans, is central to NPA management. This management process needs to
start at the loan initiating stage itself. Effective management of recovery and NPA comprise two
pronged strategy. First relates to arresting of the defaults and creation of NPA thereof and the
second is to handling of loan delinquencies. The tenets of financial sector reforms were
revolutionary which created a sense of urgency in the minds of staff of bank and gave them a
message that either they perform or perish. The prudential norm has forced the bank to look into
the asset quality.
A debt from a loan, credit line or accounts receivable that is recovered either in whole or
in part after it has been written off or classified as a bad debt. In accounting, the bad debt
recovery would credit the "allowance for bad debts" or "bad debt reserve" categories, and reduce
the "accounts receivable" category in the books.
Not all bad debt recoveries are "like-kind" recoveries. For example, a collateralized loan
that has been written off may be partially recovered through sale of the collateral. Or, a bank
may receive equity in exchange for writing off a loan, which could later result in recovery of the
loan and, perhaps, some additional profit.
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CHAPTER 1- Non-Performing Assets
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1.1 Meaning:-
An asset is classified as non-performing asset (NPAs) if dues in the form of principal and
interest are not paid by the borrower for a period of 180 days.However with effect from March 2004, default status would be
given to a borrower if dues are not paid for 90 days. If any
advance or credit facilities granted by bank to a borrower
become non-performing, then the bank will have to treat all the
advances/credit facilities granted to that borrower as non-
performing without having any regard to the fact that there may
still exist certain advances / credit facilities having performing
status.
For a bank, an NPA or bad debt is usually a loan that is
not producing income. Earlier it was largely applicable to businesses. But things have changed
with banks widely extending consumer loans (home, car, personal and education, among others)
and strict asset classification norms.
If a borrower misses paying his equated monthly installment (EMI) for 90 days, the loan
is considered bad, or an NPA. High NPAs are a sign of bad financial health. This has wide-
ranging ramifications for a bank, especially in the stock market and money market. So, as soon
as a debt goes bad, the banks want it either made better or taken out of their books.
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1.2 The Genesis (origin) of an NPA:-
There are many reasons as to why a loan goes bad. For a business, it could be because it
fails to take off.Such a situation may arise because of sudden health expenditure or job loss or death.
Often, as in the US today, it can be because of over-leveraging, when consumers borrow against
most of their assets and, maybe, have unsecured loans too.
In India, the situation has worsened due to banks aggressively pushing loans, even
unsecured ones, to individuals to prevent idle assets on their books. President and founder of
International Consumer Rights Protection Council, an NGO, says most customers in India are
not financially educated and banks are luring them to take more and more loans, often without
checking their financial position
1. Why such huge levels of NPAs exist in the Indian banking system
(IBS)?
The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk
by the banks concerned. What is needed is having adequate preventive measures in place
namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify
accounts that have potential to become non-performing.
2. Why NPAs have become an issue for banks in India?
To start with, performance in terms of profitability is a benchmark for any business
enterprise including the banking industry. However, increasing NPAs have a direct impact on
banks profitability as legally banks are not allowed to book income on such accounts and at the
same time banks are forced to make provision on such assets as per the Reserve Bank of India
(RBI) guidelines.
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system
through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of
burgeoning non-performing assets.
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1.3 Provisions for NPAs:-
SR.NO ASSETS CLASSIFICATION PROVISION
1 Standard assets (Over due upto 90
days)
For agriculture & SME 0.25 %
Commercial & others 0.40%
2.
a.
b.
Non- performing assets
Sub standard (NPA) upto 12 months
Doubtful (NPA over) 12 months
10% on secured portion & 20%
on un-secured portion
Upto 1 year 20 %
1 to 3 year 30 %
3 & above 100% unsecured
loans 100%
3. Loss assets 100 %
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CHAPTER 2- Recovery
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2.1 Meaning:-
Recovery is defined as the process of regaining and saving something lost or in danger of
becoming costs.
Recovery is a key to the stability of the banking sector
there should be no hesitation in stating that Indian banks have done
a remarkable job in containment of Non-Performing Assets (NPA)
considering the overall difficult environment. Recovery
management is also linked to the banks interest margins we must
recognize that cost and recovery management supported by
enabling legal framework hold the key to future health andcompetitiveness of the Indian banks. No doubt, improving
recovery management in India is an area requiring expeditions and effective actions in legal
institutional and judicial processes. Banks at present experience considerable difficulties in
recovering loans and enforcement of securities charged with them. The existing procedure for
recovery of debts due to banks has blocked a significant portion of their funds in unproductive
assets, the value of which deteriorates with the passage of time.
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2.2 Reasons for Recovery Management :-
Bank deserves to be paid for their products and services. The
collection professionals in Recovery Management Systems will
work to see that.
Reasonable fees with no up-front costs. They get paid only
when it is collect.
Recovery Management Systems will design a collection
strategy to meet banks objectives. Bank can recover their debts without losing customers.
Monthly settlements with meaningful reporting. Status updates on demand.
Extensive experience obtaining and collecting money judgments in Ohio. Garnishments,
liens, and levies Recovery Management Systems will collect when legal action is the only
option.
Cutting edge skip-tracing tools and techniques recovery Management Systems can work
1st, 2nd, and 3rd placements and even turn bank old judgments into money.
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2.3 Advantages & Disadvantages of Recovery Management:- Advantages :-
The process of assigning debt collection to outsides enables
officials from Banks to develop more remunerative new
business.
Third party involvement in debt collection has proven time and
again to improve the chances of recovering bank dues as these
people are specialists in negotiating with debtors and the result
usually speak for themselves.
A skillfully negotiated debt collection could mean saving on litigation cost.
The process of assigning debt collection to outsides enables officials of non-Banks.
Cost to develop more beneficial new business.
Disadvantages :-
Debt collection does cost money;
The debt collection agency will be establishing a relationship with the banks
customers, which could be potentially harmful if they sour that relationship by not
dealing with customers in a courteous manner.
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2.4 Important Points for Debt Recovery:-
On the basis of the foregoing procedure for normal recoveryprocess, we may list below certain Donts for the dent recovery, which
are as follows:
Dont violate or breach the recovery policy, procedure etc.
prescribed by the principal.
Dont exceed the authority given in the recovery arrangement.
Dont make a call to the debtor before 07.00 hours or after 21.00 hours.
Dont make anonymous calls or bunched calls to the debtor, which may be perceived as
harassment.
Dont conceal or misrepresent your identity during calls and visit or other interaction
with the debtor.
Dont show uncivil/indecent/dirty behavior or use such language during calls and visits
to the debtor.
Dont harass/humiliate/intimidate/threaten the debtor-verbally or physically.
Dont intrude into the privacy of the debtors family members, friends/colleagues.
Dont disclose the customers debts/dues/account information to unauthorized person.
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Dont forget that the debtor is a human being and deserves to be treated with fairness and
courtesy, despite the fact that he/she is a debtor for the time being.
2.5 Elements of Debt Recovery:-
The agency regarding debt recovery contains the main terms and conditions agreed by
the principal (bank) and the agent. The main elements of the debt recovery would generally
include:
Specific tasks to be accomplished e.g. the amount to be recovered from the specified loan
accounts in default and the broad time frame.
Debt Recovery Policy and Procedure of the bank.
Code of conduct in recovery process may include dress code, verbal and written
communication rules top be followed by the individuals employed by the agency for the
purpose of collection.
Duties of the agent.
Rights of the agent, including the commissions/fees payable by the principal to the
agent/agency for the recovery of debt/other services.
The Debt Recovery Policy and code of conduct in the debt recovery will be regulations
compliant, i.e. in accordance with the directives and guidelines of the Reserve Bank of India
issued from time to time. If, however these are not incorporated therein, it is advisable for
agents to seek clarification from the principal, as compliance with the regulations is mandatory
for the banks and also their recovery agents.
The Debt Recovery Agreement between the credit institution and the debt recovery
agent/agency serves as the contractual arrangement that is legally binding on both. Such an
arrangement, being bank specific may vary from bank to bank in details. The duties of the
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agent/agency the authority delegated and code of conduct prescribed by the bank in the process
of recovery function would to be carefully noted for strict compliance by the agent.
2.6 Strategy for Debt Recovery:-
Devising a strategy helps in achieving a set goal or objective. Recovery agents should
therefore devise a strategy for debt recovery. The
following guidelines would help in preparing proper
strategy for debt recovery:
The collection process should be compliant to
the bank-specific recovery norms and alsoregulatory guidelines.
The collection timing should be synchronized to the cash inflow pattern of the debtors:
For example, recovery from salaried employees should be timed when salary is received
by or credited to the debtors account, normally at the moth-end. In case of SME
borrowers the effort should coincide with cash flow on account of sales. In case a
collection from agriculturist should be made, then it should be soon after the crops are
sold. This will call for knowledge of bank products on the part of agents. It should be
the endeavour of the agent that collection should be made well before the cash inflows
are spent away by the debtor for meeting other expenses.
Adopt different collection strategy for different debtor types: This is based on the dictum
that one size does not fit all. In the foregoing paragraphs, three types of debtors have
been described and they need different strategies for recovery success:
Normal debtors, i.e. who can pay and will pay if reminded or/and persuaded to
pay.
Difficult debtors, i.e. those who can pay, but will not pay.
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Doubtful debtors, i.e. whose who can pay the reduced amount as negotiated with
them.
While different strategies are required for different types of debtors, the following are the
common points to be followed in all kinds of recovery strategies:
Recovery effort should start with the establishing a good rapport with the debtor.
Communication, listening and persuasive skills would be applied in building good
interpersonal relations.
Go through the know Your Customer papers furnished by the bank and know the
customers identify and personal profile.
Go through the copy of the loan agreement of the debtor furnished by the bank and
note down the financial position, cash flow pattern, and assets charged to the bank.
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2.7 DEFAULTS OF LOAN:-
One major problem which the banks in India are facing is
the problem of recovery and overdue of loans. The reasons behind
this may vary for different financial institutions as it depends upon
the respective nature of loans. Here an attempt is made to find out the
some causes of default of loans due to which financial Institutions are
facing the problems of overdue of loans. The recovery officers of
different banks are interviewed for finding out the causes of defaults.
These reasons may be useful for the and Banks for the better recovery
of loans in future. After surveying different banks, the following can
be said to be some of the main causes of default of loans from
industrial sector:-
Improper selection of an entrepreneur :-
Selection of the right Entrepreneur is one of the major factors in the profitability of
Banks. Two major criterions namely the intention to repay and the capacity to repay should be
properly dealt with in Credit Evaluation. The entrepreneurs who have the willingness,
capabilities, qualities and the requisite expertise for successfully setting up and running an
industrial unit, should be identified with proper prudence and judiciousness. This is the best way
of safeguarding the investment of a bank, thereby ensuring proper and timely repayment.
Unbiased survey reports of the site and capability of the Entrepreneur must be verified by the
surveyor. In other words the credit worthiness of the entrepreneur as well as the project should
undergo very careful scrutiny before the sanctioning of the loan. Strict measures and security
should taken before the sanctioning of the loan.
Deficient analysis of project Viability:-
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One of the important reasons for poor recovery of loan is attributable to wrong selection
of projects. Success of any project depends upon the viability of the project, and the viability in
turn, depends upon the easy availability of raw material, transportation, railways, skilled labour,
communication facilities, markets etc. If any of the above is not easily available to the
entrepreneur it results in an increase in the cost of the project and also in delay of production.
This inevitably causes default in repayment of loans.
There are many examples where the banks accede to finance projects deficient in one or
more of these areas. In usual practice, when an entrepreneur approach for a loan he presents his
project in such a way that no one can easily comprehend the non-availability of the primary
prerequisites. All the weak points are camouflaged and only strong points of the project are
highlighted.
Inadequacy of Collateral Security/Equitable Mortgage against Loan:-
Collateral Security by way of mortgage of immovable property or other fixed assets,
thereby creating a charge, trains the mind of the borrower to be prepared to pay the dues to the
lenders. But when he is free from this fear of losing his encumbered asset in the event of his
defaulting in the payment of dues to banks, he often takes the liberty, and tends to weigh the pros
and cons vis--vis default. Security against loan, though at times may fall harsh on the borrower,
serves a worthwhile purpose in that it creates promoters' stake in the borrowers and thus,
disciplines the borrower to be more committed in paying the dues to Banks.
Unrealistic Terms and Schedule of Repayment:-
Occasions are not few when there develops a tendency on the part of the financers to
paint a rosy picture of the project at the time of appraisal. If the sanctioning authority is guided
by considerations of personal interests, many things may happen. The breakeven point of a
project may be shown at an unrealistically low level of operation, or profitability may be shown
at an unduly high level just to brighten the chances of acceptability of the project by the financial
institution; or cash inflow may be shown in an unduly optimistic manner and, therefore, Debts
Service Coverage Ratio(DSCR) worked out incorrectly, fixing unrealistically high installments
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and conservative schedule of repayments. These inner pulls and pressures may find reflection in
fixing excessive amounts of installments in order to show an early period of repayment. The
borrower at this stage finds himself in an unenviable position of a 'Yes Master' and nods his head
at whatever conditions are attached or whatever repayment schedule is fixed by the financial
institutions, in all probability, covering up his design to evade payment of the future dues. And,
the real problem surfaces when repayment of installment/payment of interest falls due and the
borrower conveniently and blissfully ignores calls for clearance of the said dues, not so much
due to his intention to defraud the loans, as due to him already bleeding white to keep his
concern going.
Lack of Follow up Measures:-
"A stitch in time saves nine"
Follow-up measures taken regularly and systematically keep the borrowing unit under
constant vigil of the banks. Many ills can be checked through such follow-up measures by
keeping the borrowing units on their alertness and guiding them to rectify their mistakes in the
first opportunities or extending them a helping hand in tiding over their tight times. Normally,
such close follow-up programs are conspicuous by their absence. In the result, the borrowing
units not only ignore payment of their dues to banks but also often tread on wrong tracks, much
to the detriment of their own financial health and that of the banks.
Performance of the borrowing units, if carefully and systematically monitored through
regular inspections by scrutiny of returns, annual balance sheet and inspection of site, can be
significantly improved. Naturally, such inspections prevent the borrowers from deviating from
the terms and conditions of the loan or from diverting any fund for purpose other than those
earmarked in the sanction letter and keep the financial health of the units in good order.
Labour problems:-The labour situation in India can be broadly classified into two categories namely
availability and welfare related problems. Skilled labour is in shortage for many specialized
industrial units particularly because of the geographical situation of such units. Shortage of
labour results in unwarranted deceleration of production thereby hampering the profitability of
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the concerned unit. On the other hand labour welfare is grossly neglected by industrial units
leading to a feeling of dissatisfaction and disgruntlement among the working force.
There are numerous instances where political and vested interests tend to instigate labour
problems.
Default due to natural calamities:-
A certain proportion of default can be attributed to natural calamities such as floods,
earthquakes, storms, etc. Prima-facie this would seen to be a factor beyond human control. A
more detailed insight, would however, suggest that certain precautionary preventive measures
such as proper meteorological and topographical analysis of the industrial sight can go a longway in reducing this element of risk. Natural calamities not only affect the unit directly but also
exert additional burden on the Government in terms of relief measures, waivers etc. A further
fraction, albeit nominal, is of such borrowers who tend to take undue advantage of such natural
calamities in order to avoid repayment, thereby increasing the magnitude of default.
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CHAPTER 3- Policy, Processes and Procedure of Debt Recovery
Management
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3.1
Meaning:-
Collection of post due debt or receivables of the bank that has engaged a recovery agent
is the core function of the agent. All other functions, as discussed in the preceding unit, revolve
around this core function. We will discuss in detail the policy, processes and procedure for debt
recovery function in this unit.
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Banks lay down their policy and procedure for collection of past due debts in conformity
with the legal and regulatory framework. The banks will in particular, abide by:
The RBI directives on recovery of debt, including recovery agents engaged by the bank.
The Model Policy on collection of Dues and Repossession of
security framed by the Indian Banks Association.
A bank will normally incorporate its policy and procedure for
debt recovery in the arrangement entered into its recovery
agents. In terms of the recovery management agreed with the
bank, the recovery agents should adhere to the policy,
procedure, etc. prescribed by the bank.
3.2 Loan Recovery Policy:-
The debt collection policy (recovery policy) of the bank is built around dignity and
respect to customers. The Bank will not follow policies that are unduly coercive in recovery of
dues from borrowers. The policy is built on courtesy, fair treatment and persuasion. The bank
believes in following fair practices with regard to recovery of dues from borrowers and taking
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possession of security (properties / assets charged to the bank as primary or collateral security)
(known as security repossession) and thereby fostering customer confidence and long-term
relationship.
The repayment schedule for any loan sanctioned by the Bank will be fixed taking into
account the repaying capacity and cash flow pattern of the borrower. The bank will explain tothe customer upfront the method of calculation of interest and how the Equated Monthly
Installments (EMI) or payments through any other mode of repayment will be appropriated
against interest and principal due from the customers. The bank would expect the customers to
adhere to the repayment schedule agreed to and approach the Bank for assistance and guidance
in case of genuine difficulty in meeting repayment obligations.
The Banks Security Repossession Policy (taking possession of the mortgaged properties
under SRESI Act or acquiring the property as non banking asset through enforcement of decree)
aims at recovery of dues in the event of default and is not aimed at whimsical deprivation of the
property. The policy recognizes fairness and transparency in repossession, valuation and
realization of security. All the practices adopted by the bank for follow up and recovery of dues
and repossession of security will be in consonance with the law.
General Guidelines :-
All the members of the staff or any person authorized to represent our Bank in collection
and / or security repossession would follow the guidelines set out below:
The customer would be contacted ordinarily at the place of his / her choice and in the
absence of any specified place, at the place of his / her residence and if unavailable at
his / her residence, at the place of business / occupation.
Identity and authority of persons authorized to represent the Bank for follow up and
recovery of dues would be made known to the borrowers at the first instance. The
bank staff or any person authorized to represent the bank in collection of dues or /
and security repossession will identify himself / herself and display the authority
letter issued by the bank upon request.
The bank would respect privacy of its borrowers.
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The bank is committed to ensure that all written and verbal communication with its
borrowers will be in simple business language and the bank will adopt civil manners
for interaction with borrowers.
Normally the banks representatives will contact the borrower between 0700 hrs and
1900 hrs, unless circumstances warrant visiting the borrower at odd hours and
occasions. Such circumstances would include continuous irregularity in the accounts.
Borrowers requests to avoid calls at a particular time or at a particular place would
be honored as far as possible.
The bank will document the efforts made for the recovery of dues and the copies of
communication, if any, sent to the customers will be kept on record.
All assistance will be given to resolve disputes or differences regarding dues in amutually acceptable and in an orderly manner.
Inappropriate occasions such as bereavement in the family or such other calamitous
occasions will be avoided for making calls / visits to collect dues.
Giving notice to borrowers :-
While written communication, telephonic reminders or visits by the banks
representatives to the borrowers place or residence will be used as loan follow up measures, the
bank will not initiate any legal or other recovery measures including repossession of the security
without giving due notice in writing. The Bank will follow all such procedures as required under
law for recovery / repossession of security.
Repossession of Security :-
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Repossession of security is aimed at recovery of dues and not to deprive the borrower of
the property. The recovery process through repossession of security will involve repossession,
valuation of security and realization of security through appropriate means. All these would be
carried out in a fair and transparent manner. Repossession will be done only after issuing the
notice as detailed above. Due process of law will be followed while taking repossession of the
property. The bank will take all reasonable care for ensuring the safety and security of the
property after taking custody, in the ordinary course of the business.
Valuation and Sale of Property :-
Valuation and sale of property repossessed by the bank will be carried out as per law and
in a fair and transparent manner. The bank will have right to recover from the borrower the
balance due, if any, after sale of property. Excess amount, if any, obtained on sale of property
will be returned to the borrower after meeting all the related expenses provided the bank is not
having any other claims against the borrower.
Opportunity for the borrower to take back the security :-
As indicated earlier in the policy document, the bank will resort to repossession of
security only for the purpose of realization of its dues as the last
resort and not with intention of depriving the borrower of the
property. Accordingly, the bank will be willing to consider
handing over possession of property to the borrower any time
after repossession but before concluding sale transaction of the
property, provided the bank dues are paid in full. If satisfied with
the genuineness of borrowers inability to pay the loan
installments as per the schedule which resulted in the
repossession of security, the bank may consider handing over the
property after receiving the installments in arrears. However, this
would be subject to the bank being convinced of the arrangements made by the borrower to
ensure timely repayment of remaining installments in future.
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3.3 Debt Recovery Process:-
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Debt recovery processes can be typically of following kinds, each involving different
procedure:
Difficult recovery process where the debtors are not willing to pay and who
intentionally resist or avoid recovery efforts: The recovery agent has to follow special
process of recovery against the recalcitrant defaulters, in consultation with the bank.
Assets possession process: If the recalcitrant debtors
do not eventually pay the dues, the movable assets
charged to the bank by way of hypothecation or
pledge, can be possessed by the bank or the recovery
agent and thereafter auctioned or otherwise sold to
recover the dues. The detailed procedure for such
recovery is discussed later, after explaining the
meaning of pledge, hypothecation etc. in another Unit.
Legal recovery process: The intervention of the court is required to possess mortgaged
immovable property by the bank or its recovery agent. Also if the charged assets do not
exist, or the debt is unsecured, the debtor will have to be sued for recovery of the dues by
the bank/recovery agent.
3.4 Normal Recovery Procedure:-
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As mentioned above, this procedure will generally apply to the debtors who are willing to
pay the dues with normal recovery process. Based on the above-mentioned regulatory
guidelines, following procedure may be outlined for such recovery. However the recovery
agents should follow the bank-specific debt recovery procedure as advised by their principal.
Below are given the main rules for making Telephone Calls
and visit to the debtor for recovery of dues:
Making customer calls:-
This is the first step in recovery procedure. Following rules
should be generally followed:
Calls are made from the same number as advised by the
bank to the customer.
The agents disclose his identity and authority at the first instance.
The agent contacts the debtor between 0700 hours and 1900 hours, unless the special
circumstance of his/her business or occupation requires the bank to contact of a different
time. Under no circumstances, can the customer be called beyond 2100 hours.
All calls where the customer becomes abusive or threatening should be appropriately
documented.
Customers question be answered in full. They should be provided with information
requested and given assistance in making recovery. Minor issues should be resolved.
How often to call customer/ The purpose of a collection call as to bring to the Customers
notice the obligation and to seek a commitment to pay on a specified date. Once a
promise is elicited a call may be made to serve as a reminder and for confirmation of
payment.
If the customer is not available during a few calls made by the agent, a message may be
left to an adult family member as follows Please leave a message that ABC had called
and request the customer to call ABC back at the given phone number. The messageshould not indicate that the customer ABC has overdue amount , or the call originated
from a Recovery agency.
Visit to customer (debtor):-
This is the second step in collection process. Following procedure should generally be
followed:
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A customer should be visited for debt collection only after these conditions are
satisfied:
The debtor has not paid the due amount within the days of grace and the dues are still
outstanding against him/her.
The debtor has been notified of the amount due and also of the
name of the collection agent.
The collection agent has taken an appointment from the debtor
for the visit.
During visit, the agent should be in proper dress and appearance,
or wear the dress prescribed by the principal and follow the
timing and place of the visit as per the principals or RBI/IBA
code, unless otherwise agreed by the debtor expressly.
At the first stance, the agent should utter salutation words (like good morning/evening
sir/madam, as per custom of the bank). The agent should thereafter show his ID card
and authority given by the principal for debt collection from the debtor./ Only after these
initial formalities, the conversation regarding debt collection should start.
The time of visiting the customer will be generally between 07.00 hours to 21.00 hours.
Visits earlier or later than the prescribed time 07.00 hrs.- 21.00 hrs.) may be made
only under the following conditions:
When the customer has expressly consented to that timing.
When attempts to contact the customer have resulted in information that the customer is
normally only available outside these hours and no alternate telephone number is
available to contact him/her,
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When due to nature of the customers employment i.e. working in shifts e.g. call center,
hotel. He/she is usually available outside these hours.
The agent should respect privacy of the debtor. Privacy policy as discussed above for
calls would apply during visits also.
During the visit, due respect and courtesy should be shown to the customer and the
interactions should be civil and polite as per the principals policy.
During interactions with the debtor, the agent must not use threats or intimidation verbally
or by body language. Under no circumstances, any physical violence be used in debt
collection process.
3.5 Other Modes of Recovery:-
Where a certificate has been issued to the Recovery Officer under Sub-section of section
19, the Recovery Officer may, without prejudice to the modes of recovery specified in
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section 25, recover the amount of debt by any one or more of the modes provided under
this section.
If any amount is due from any person to the defendant, the Recovery Officer may require
such person to deduct from the said amount, the amount of debt due from the defendant
under this Act and such person shall comply with any such requisition and shall pay the
sum so deducted to the credit of the Recovery Officer Provided that nothing in this sub-
section shall apply to any part of the amount exempt from attachment in execution of a
decree of a civil court under section 60 of the Code of Civil Procedure, 1908 (5 of 1908).
(i) The Recovery Officer may, at any time or from time to time, by notice in writing,
require any person from whom money is due or may become due to the defendant or toany person who holds or may subsequently hold money for or on account of the
defendant, to pay to the Recovery Officer either forthwith upon the money becoming due
or being held or within the time specified in the notice (not being before the money
becomes due or is held) so much of the money as is sufficient to pay the amount of debt
due from the defendant or the whole of the money when it
is equal to or less than that amount.
(ii) A notice under this sub-section may be issued to
any person who holds or may subsequently hold any
money for or on account of the Defendant jointly with any
other person and for the purposes of this subsection, the
shares of the joint holders in such amount shall be
presumed, until the contrary is proved, to be equal.
(iii) A copy of the notice shall be forwarded to the defendant at his last address known
to the Recovery Officer and in the case of a joint account to all the joint holders at their
last addresses known to the Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a notice is
issued under the sub-section shall be bound to comply with such notice, and, in
particular, where any such notice is issued to a post office, bank, financial institution, or
an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other
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document to be produced for the purpose of any entry, endorsement or the like to be
made before the payment is made notwithstanding any rule, practice or requirement to
the contrary.
(v) Any claim respecting any property in relation to which a notice under this sub-
section has been issued arising after the date of the notice shall be void as against any
demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section is sent objects to it by a
statement on oath that the sum demanded or the part thereof is not due to the defendant or
that he does not hold any money for or on account of the defendant, then, nothing
contained in this sub-section shall be deemed to require such person to pay any such sum
or part thereof, as the case may be, but if it is discovered that such statement was false in
any material particular, such person shall be personally liable to the Recovery Officer to
the extent of his own liability to the defendant on the date of the notice, or to the extent
of the defendants liability for any sum due under this Act, whichever is less.
(vii) The Recovery Officer may, at any time or from time to time, amend or revoke
any notice under this sub-section or extend the time for making any payment in
pursuance of such notice.
(viii) The Recovery Officer shall grant a receipt for any amount paid in compliance
with a notice issued under this sub-section, and the person so paying shall be fullydischarged from his liability to the defendant to the extent of the amount so paid.
(ix) Any person discharging any liability to the defendant after the receipt of a notice
under this sub-section shall be personally liable to the Recovery Officer to the extent of
his own liability to the defendant so discharged or to the extent of the defendants
liability for any debt due under his Act, whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make
payment in pursuance thereof to the Recovery Officer, he shall be deemed to be a
defendant in default in respect of the amount specified in the notice and further
proceedings may be taken against him for the realization of the amount as if it were a
debt due from him, in the manner provided in sections 25, 26 and 27.
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The Recovery Officer may apply to the court in whose custody there is money belonging
to the defendant for payment to him of the entire amount of such money, or if it is more
than the amount of debt due an amount sufficient to discharge the amount of debt so due.
The Recovery Officer may, by order, at any stage of the execution of the certificate of
recovery, require any person, and in case of a company, any of its officers against whom
or which the certificate of recovery is issued, to declare on affidavit the particulars of his
or its assets.
The Recovery Officer may recover any amount of debt due from the defendant by distrait
and sale of his movable property in the manner laid down in the Third Schedule to the
Income-Tax Act, 1961 (43 of 1961).
CHAPTER 4- DEBT RECOVERY AGENT
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4.1 Meaning:-
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The phrase Debt Recovery Agent comprises three terms- Debt, Recovery and Agent.
Let us understand the meaning of these terms separately, before we explain the meaning of
Debt Recovery Agent.
Debt:
It refers to a sum of money owed by one person or entity
(debtor) to another person or entity (creditor). Thus there are two
parties to a debt- debtor who receives money by way of a debt; and
creditor who lends money to the debtor. To illustrate, if Ram takes a
loan of Rs. 3 lacs from a bank for purchasing a car, Ram becomes the
debtor (or borrower), the bank is the creditor (or lender) and the loan of
Rs. 3 laces is the debt (principal). Ram would be required to repay the
loan in equated ,monthly installment (EMI),comprising the principal and interest, spread over the
repayment period of, say, 3 years ( debt tenor).
Recovery:
It means collection or recovery of money from the debtor by, or on behalf of the creditor,
after it has become due for payment in accordance with the debt terms agreed between the
creditor and the debtor. In the above example, if Ram (debtor) fails to pay the agreed installment
(EMI) on the due date, the bank may send him notice to remind him to pay the agreed amount
within a stipulated period. If he does not pay even after receiving the notice here that a debtbecomes payable by the debtor only on or after the due date, but not before that date. If the debt
is not paid on the due date it becomes over due or past due.
Agent:
It is a legal term defined in section 182 of Indian Contract Act as a person employed to
do any act for another or to represent another in dealings with third person. The person for
whom such acts are done, or who is represented, is called the Principal. An agent has thus an
authority to do acts on behalf of the principal within the limits of the authority and thereby bind
the principal for such acts in relation to third parties. There are several kinds of agents e.g.
brokers (financial or commodity brokers), auctioneers, insurance agents, estate or property
agents, commission agent, selling agents, marketing agents, debt recovery agents.
Debt Recovery Agent may now be defined as a person or entity engaged by a bank for
the purpose of collecting specified loans, or advances or other kind of dents from the debtors (or
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borrowers) in accordance with the specified terms and conditions. In the above examples of the
car loan to Ram, if the bank (creditor) engages XY will be called as Debt Recovery Agent of the
bank.
4.2 Recovery Agencies:-
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Debt recovery agents are employed Debt Recovery Agencies who work for banks subject
to certain terms and condition. Debt recovery agencies are third-party businesses that collect
dues past-dues and other receivable of banks in exchange for a fee. DRAs charge the
banks/NBFCs for their services in one of two ways:
1. A flat fee and
2. A percentage of amounts collected.
Most collection agencies use one of following three methods to collect debts/dues viz.:
1. Contact and follow up through telephone.
2. Letters.
3. Direct contact by visiting the debtors.
Before the debt recovery agent is given the job, banks begin their work banks issue
normal reminders to the borrowers. However it is seen that in the case of retail loans the initial
reminders could also begin from the DRA. Typically, collection agencies begin the collection
process by sending a demand letter followed by phone calls If these efforts do not result in the
payment, it will be followed up and supplemented by visit to customers houses to more
intensive methods. Besides sending out letters and making phone calls, some recovery agencies
also specialize in locating debtors who can no longer be reached at the address or phone number
listed on their accounts. Certain act on behalf of banks to collect severely overdue accounts.
4.3 Training for Recovery Agents:-
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In terms of our Circular DBOD.NO.BP.40/ 21.04.158/ 2006-07 dated November 3, 2006
on guidelines on managing risks and code of conduct in outsourcing of financial services by
banks, banks were advised that they should ensure that,
among others, the recovery agents are properly trained to
handle with care and sensitivity, their responsibilities, in
particular aspects like hours of calling, privacy of customer
information etc.
Reserve Bank has requested the Indian Banks
Association to formulate, in consultation with Indian
Institute of Banking and Finance (IIBF), a certificate course
for Direct Recovery Agents with minimum 100 hours of
training. Once the above course is introduced by IIBF, banks should ensure that over a period of
one year all their Recovery Agents undergo the above training and obtain the certificate from the
above institute. Further, the service providers engaged by banks should also employ only such
personnel who have undergone the above training and obtained the certificate from the IIBF.
Keeping in view the fact that a large number of agents throughout the country may have to be
trained, other institutes/ banks own training colleges may provide the training to the recovery
agents by having a tie-up arrangement with Indian Institute of Banking and Finance so that thereis uniformity in the standards of training. However, every agent will have to pass the
examination conducted by IIBF all over India.
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4.4 Soft Skills for Debt Recovery:-
The previous unit focused on the regulatory requirements in debt collection process,
including the bank-specific policy and procedure. These requirements are mandatory, but may
not automatically lead to full recovery. Success in recovery depends on compliance with theregulatory norms added with collection skills and strategy. Both are complementary to each
other. Mere regulatory compliance without collection skills and strategy may not result in
recovery. Similarly, collection skills and strategy without regulatory compliance may vitiate
recovery atmosphere in the long term.
In the present unit, we would briefly discuss some of the
essential skills and strategy that facilitate and improve debt recovery.
The objective is limited to acquainting the readers with the meaning
and key elements of skills and strategy required in debt recovery.
The learning can, and should, be enhanced through detailed
discussions in the classroom of a training institute, including role
plays by the participants.
Communication skill :-
Communication is the process of exchanging information, ideas and thought etc. between
at least two persons in order to create a common understanding. In recovery process,
communication takes place between the debtor and agent by words, in writing, eye contact or
body language (during personal meeting) Communication is of two types:
Verbal communication by spoken words,
Non-verbal communication e.g. face language (facial expression, eye contact), voice
language (voice tone, voice pitch), and body language (body position, body movement).
All or any of these elements of non-verbal language communicate some message
(whether intended or unintended by the communicator) to the receiver.
Following are the main principles of effective communication, which could be
followed by a recovery agent (communicator) in communication with the debtor (receiver):
The agents language (verbal as well as body language) should be civil and courteous, as
per the bank-specific requirement.
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The objective of the communication should be clear.
The language used should be clear simple and courteous.
The language used should be easily understood by the receiver.
The agent should be watchful and sensitive to the receivers responses (including his/herbody language as mentioned above).
Make sure that the non-verbal communication (or body language) is not adverse to
debtor, though unintentional.
Listening skill :-
Listening is another skill which is recovery in process. A good recovery agent should be
a good communicator and a good listener. Listening refers to all the ways in which
communication is being received from the other party and includes not only hearing but also
facial body expressions, attentiveness or lack of it. Following are the requisites of good listening,
which help improve communication and make if effective:
Hear attentively to what the debtor is saying. One may hear, but not listen, if he/she is
distracted or inattentive.
Lack of listening conveys lack of regard/ respect for the communicator; hence it should
be avoided.
Do not show impatience or haste while listening to the debtor. You may lose some
important information the debtor washes to say.
Do not show anger or disapproval, or other such facial/ body expression, while listening
to the debtors point of view.
Normally, commence speaking only after the other party has finished speaking or making
a point. Normally do not interrupt. In other words, interrupt only when absolutely
necessary, e.g. when the points being spoken are irrelevant or becoming unduly lengthy
or controversial and time is limited or is being exceeded. Also interrupt softly by saying
words like excuse me.
Inter-personal skill :-
Inter-personal skill refers to communication plus skill that enhances the relationship
and understanding between two or more persons. It thus include communication and listening
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skills, plus something more. This something more would be explained here. Generally,
person relate to each other favorably when they find support to their dignity, self-respect, self-
esteem, ideas and values. Establishing good inter-personal relationship with a person means
establishing a rapport with that person. Any transaction that enhances the self would be
helpful for better inter-personal relation. Conversely, any transaction that diminishes the self is
likely to disturb the inter-personal relation. For instance, when a recovery agent assumes a
posture of superiority and belittles the debtor in the communication process, the recovery agent
is really making the recovery difficult. Many recovery agents who think otherwise and
communicate/ behave rudely or harshly in recovery process may turn out to be mostly counter-
productive overall. Following are some of the elements of inter-personal skill for recovery agent:
Communicate and listen properly and effectively, as described in the preceding
paragraph.
Show empathy and respect to other party, not with standing the fact that he/she debtor to
the principal.
Do not make the debtor feel anxious/ insecure/ threatened by your communication verbal
or non-verbal. On the contrary, try to remove such apprehension, if any, of the debtor.
Give all the information the debtor asks for in connection with the debt and its
repayment. This would help improve inter-personal relation and also the recovery
prospects.
Persuasive skill :-
After having established good rapport with the debtor, the next skill required in a good
recovery agent is to be able to persuade the debtor to repay the dues. This may be termed as
persuasive skill. The persuasive skill is built on establishing a good rapport and winning the trust
of the debtor. Some of the elements of the persuasion in debt recovery may be suggested as
follows:
Explain that the bank (principal) lends money out of the deposits collected from the
public and repayment of the loans by the debtor and others as per the terms would enable
the bank to pay the deposits when demanded by the depositors.
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Explain your task/ duty of collection of dues on behalf of the principal and that you have
no authority to waive/ reduce or unduly postpone the recovery, which only the principal
can do.
Show interest/ concern for the debtor by understanding his/her problem and say that you
would try to give assistance to the possible, within the authority, as agent, given to you
by the principal.
Explain that non-payment may adversely impact the debtors credit history, which may
make his/her future borrowing with any bank costlier and difficult.
Also explained that non-repayment of the loan dues would amount to breach of the loan
agreement and would result in the bank charging higher interest rate.
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4.5 Function of Recovery Agents:-
The core function of a debt recovery agent is to collect dues/receivables from specified
debtors of the bank as per agency agreement entered with the
principal. Remitting the collected funds to principal, keeping
account of the receivables collected and yet to be collected and
reporting the position and developments to the principal are
essential but ancillary to the core function. All these functions
will be specified in most agency agreement and would require to
be accordingly discharged by the debt recovery agent.
Apart from the easily collectible receivables, most banks have on their books over due
receivables from debtors who are not traceable, or who show unwillingness pay or who resist
surrendering the security charged. In such cases, the recovery process is difficult and requires
handling by specialized collection agencies to process the required expertise. The functions of
re-processing the security, initial legal action and tracing the vanished debtors may be called as
specialized function of debt collecting agencies:-
Collecting dues receivable :-
As mentioned above, collecting dues is the core function of a debt recovery agent.
Receivables refer to the sums of money which have become due in the loan/advances accounts
and are payable on or after due dates by the debtors to the creditors as per the loan/advances
agreements entered between the lenders and creditors. Thus the receivables in a loan/advances
account connote the following essential features: Existence of loan or advance agreement between the creditor and debtor.
Due date on or after which the obligation is required to be discharged by the debtor in
favour of the creditor.
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In terms of the arrangement between the creditor bank and the debt recovery agency the
former authorizes the agent to collect specified receivables from the named debtors on or after
the specified due dates. The required particulars of the debtors and receivables to be collected
from them are furnished by the bank to the agent, along with copies of the relative loan
agreements.
Thus the debt recovery agent is legally authorized to collect the specified receivables
from the debtors on behalf of the principal:
The loan agreement, and
The debt collection agency agreement.
The procedure and processes of debt collection, code of conduct in collection process and
other regulatory requirements that need to be complied with by the recovery agents are discussed
in subsequent units.
Remitted collected funds :-
The funds collected from the debtors should be sent deposited by the agent to the creditor
periodically as per the agency arrangement. Statement of collections remitted should also be
sent along with the remittance, preferably in duplicate and the copy acknowledged by the bank
be kept on record by the agent, in chronological order, for future reference. These statements of
remittance will from the basis of claiming the agreed fee or commission by the agent from the
principal in due course.
Book keeping of recovery management :-
While each debt recovery agent may devise his/her own accounting and book keeping
methods, he/she has to take care of the reporting requirements of it principal. Further, book-
keeping has to be seperate for each principal. IT following would constitute the minimum
requirement of book-keeping for a recovery agent.
Lists of debtors received from the principal :-
Collection of receivables is an going activity of a recovery agent who may receive the
debtor lists from the principal from time to time. The debtor lists from the basis of agents
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activities and also the book-keeping required. These should therefore be carefully kept on record
in chronological order.
Ledger account of each debtor :-
Showing the amounts of receivable collected and balance to be collected should be kept
in chronological or this can be maintained in the computer also. It may be note that all the
collections/recoveries should be remitted to the a bank. Normally agent cannot adjust its dues on
account of fee against the recoveries made on behalf of the bank.
Copies of loan/advances :-
Agreements between the debtors and the bank is obliged to keep confidentiality of itscustomers accounts and recovery and these should not be divulged to third parties without the
customers sent. As such, a debt recovery agent must take all due care to the required privacy
and confidentiality as regards the records of each due furnished by the bank and also as regards
the collections made remitted by him to the principal.
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CHAPTER 5- Role of Lok Adalat
The Honorable Supreme Court also observed
that loans, personal loans, credit card loans and
housing loans with less than Rs.10 lakh can be
referred to Lok Adalats. In this connection, banks'
attention is invited to Circular
DBOD.No.Leg.BC.21/09.06.002/2004-05 dated
August 3, 2004 wherein they were advised to use the
forum of Lok Adalats organized by Civil Courts for
recovery of loans. Banks are advised that they should preferably use the forum of Lok Adalatsfor recovery of personal loans, credit card loans or housing loans with less than Rs.10 lakh as
suggested by the Honorable Supreme Court.
Banks, as principals, are responsible for the actions of their agents. Hence, they should
ensure that their agents engaged for recovery of their dues should strictly adhere to the above
guidelines and instructions.
Complaints received by Reserve Bank regarding violation of the above guidelines and
adoption of abusive practices followed by banks recovery agents would be viewed seriously.
Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a
particular area, either jurisdictional or functional, for a limited period. In case of persistent
breach of above guidelines. Similar supervisory action could be attracted when the High Courts
or the Supreme Court pass strictures or impose penalties against any bank or its Directors/
Officers/ agents with regard to policy, practice and procedure related to the recovery process.
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CHAPTER 6- ICICI Bank & its Avenue
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6.1 ICICI Bank:-
To understand about this big bank, we need to understand how it became so big a force
to reckon with. ICICI (Industrial Credit Investment Corporation of India) promoted the
ICICI bank in 1994 with its stake reducing to 46% after the IPO in 1998. ICICI is a well-
known name in India along with IDBI and was formed in 1955 at the initiative of the World
Bank, Indian Government and Indian Industries. Both of these institutions have an exceptional
brand-image and one of the highest possible ratings from CRISIL and other rating
organizations. ICICI can be considered an oligopolistic corporation along with IDBI. ICIC
listed in NYSE in 2000. In 2001 it underwent a tight marriage with Bank of Madura in a stock-
only amalgamation.ICICI Bank(BSE: ICICI) (formerly Industrial Credit and Investment Corporation
of India) is India's largest private sector bank in market capitalization and second largest
overall in terms of assets. ICICI Bank has total assets of about USD 100 Billion (end-Mar
2008), a network of over 1308 branches and offices, about 3950 ATMs, and 24 million
customers (as of end July 2007). ICICI Bank offers a wide range of banking products and
financial services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries and affiliates in the areas of investment banking, life and
non-life insurance, venture capital and asset management. But these data are dynamic. ICICI
Bank is also the largest issuer of credit cards in India. . ICICI Bank has listed its equity shares
on stock exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of
India Limited, and its ADRs on the New York Stock Exchange (NYSE).
The Bank is expanding in overseas markets and has the largest international balance
sheet among Indian banks. The Bank now has wholly-owned subsidiaries, branches and
representatives offices in 18 countries, including an offshore unit in Mumbai, UK, Canada and
Russia, Singapore and Bahrain, an advisory branch in Dubai, branches in Sri Lanka, Hong
Kong and Belgium, and rep offices in the US, China, United Arab Emirates, Bangladesh,
South Africa, Indonesia, Thailand and Malaysia. In particular, the bank is targeting the NRI
(Non Resident Indian) population. ICICI Bank reported marked-to-market loss of $264 million
as of January 31, 2008 following the USA subprime mortgage crisis.
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6.2 RECOVERY MANAGEMENT OF ICICI BANK:-
Following is the working of the RECOVERY MANAGEMENT of the ICICI:-
Defaults are classified into two baskets Soft and Hard.
The borrowers are segregated into baskets on the basis of the time period of default. The baskets
are usually on the basis number on the basis of number of days i.e. 0-30, 0-60, 0-120 and so on.
The soft basket is when the default is at early, usually below 90
days.
The default shifts into hard basket if it is beyond 90 days.
The bank sends reminder mails and makes telephone calls to the
borrower.
After several reminders if the borrower still shows no sign of paying
up then the bank sends an employee to borrower to personally remind him
of the re-payment.
Even after the notice if the borrower ignores the bank sends a legal notice to the borrower.
If the borrower ignores the legal notice then the bank either decided to write off the amount or
recover the amount.
The recovery process is most of the times outsourced to an external recovery agency.
The recovery agency sends its recovery agents to collect the money from the borrower, under thesupervision of the bank.
The recovery agencies usually give the borrower a stipulated time period within which the
amount has to be repaid back.
In some cases, if the bank decides to use SARFAESI, 2002, then the recovery agency has to
seize the assets of the borrower.
The recovery agents either manage to make the borrower pay back the money or if the
SARFAESI Act comes into play then they auction off the seized assets of the borrower and pay the
bank.
NOTE:- If borrower didnt reply for bank notice, hence the securitization and reconstruction of
financial assets and enforcement of security interest act, 2002 (securitization act) comes into play.
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6.3 Securitisation Act of 2002:-
Discouraged by the results of debtors in filling the coffers of banks, legislature
enacted securitization and reconstruction of financial assets and enforcement of security
interest act (securitization act) w.e.f. 21st day of June 2002.The banks were empowered under
section 13(4) of securitization act to take possession of secured assets of the borrower
including the right to transfer by way of lease, assignment or sale for realizing the secured
asset. The role of the court was limited to challenge the measures under section 13(4), by way
of appeal, that too on deposit of 75% of amount claimed on the notice under section 13(2) of
securitization act.
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CHAPTER 7- Articles
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7.1 ICICI Bank fined Rs. 500, 000 for rough recovery methods:-
A consumer commission has ordered ICICI Bank, the countrys largest private sector
lender, to pay a fine of Rs500, 000 for use of force by the banks recovery agent on a defaulting
customer. The client who defaulted on loan had approached the consumer affairs commission inDelhi complaining of use of force by the banks recovery agents.
He alleged the recovery agents impounded his vehicle and beat a friends son with iron
rods, mistaking him as the defaulter. The Delhi Consumer Commission has ordered the bank to
pay the complainant, Tapan Bose, Rs500,000 compensation. (With register to required arent
and outfits independent are agents the methods.
Recovery regarding India of Bank Reserve the guidelines strict despite hires countryacross). Other big lenders like Citibank and HDFC Bank have also dealt with consumer
complaints about the strong-arm tactics of recovery agents. The banks often dismiss the recovery
agents when confronted with such complaints. Earlier, an ICICI Bank customer in Mumbai
committed suicide after alleged harassment by recovery agents. The bank later paid his family
compensation of Rs15 lakh.
Banks suffer the highest default rates on its "small-ticket personal loans" that are usually
below Rs50,000. The rates of default on these loans are 10 per cent, compared to 2 per cent for
credit card defaulters and 1.5 per cent for car loans. The bank is reducing its exposure in the
segment--it now has around 3 million such loans. Banks often run into trouble when recovery
agents target defaulters for these recoveries.
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7.2 HDFC Bank Recovery:-
Mr.Kaushik Agarwal- About 18 months back had purchased 1 Tata Indigo, financed by
HDFC bank. His EMI for this month (May'08) was bounced due to some reasons.
The recovery person called him on the 22nd May for the payment of the same. He was out
of town at that moment so Mr.Kaushik had asked him to send someone to his office on the 24th
to collect cash.
Now on 24th it slipped out of Kaushiks mind that he had to pay cash to HDFC Bank and
hence he did not withdraw any cash from the bank. As it was a Saturday so when the person
came for collection, he requested him to come on Monday, as the bank was already closed forthe day.
On this the person, who had called Kaushik earlier on the 22nd, called him again and
started shouting at him and speaking in a very bad language. The person told Mr. Kaushik that
they know his Residence addresses, so if he dont pay them today they will come to his house
and will insult him in neighborhood. The person also passed threat on him that if Kaushik dont
pay within 5 minutes it would be very bad for him. The person kept using foul words and
shouting at him, until he disconnected the phone.
After this Kaushik had no option to go to his local police station and lodge a complaint
against that person, and Mr. Kaushik have also decided to put a case against that person and
HDFC bank in consumer court as well as civil court.Kaushik has also posted a complaint with
HDFC Grievance cell, docket no. TF22534017.
Kaushik requests the concerned authority to take some action on this.
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7.3 ABC Bank:-
ABC Bank had granted a personal loan of Rs. 60,000 to XY, a lower middle class
individual, for consumption needs. The loan was to be repaid in installments by XY. The loan
was without any tangible security and also without any third party guarantee. The borrower XY
could not repay in time some installments and therefore the loan became overdue.
The ABC Bank gave XYs Case to Z recovery agent, along with other overdue loans for
recovery. The Z recovery agent called XY a couple of times and also visited him at his
residence. As XY was not able to repay the amount in default, Z, used abusive and harsh
languages in front on XYs wife and daughters to make recovery. During one of the visits to
XYs house, Z and his colleagues took away forcibly some of the things that were available in
XYs house in front of his wife and daughters and also used threatening language for payment of
the dues. XY felt very much humiliated and also depressed. Being unable to repay the dues. XY
committed suicide. He left a suicide note, blaming Z for harassing him endlessly. He mentioned
the abuses he had suffered at the hands of Z before his wife and daughters. He also mentioned
the threat Z gave that he would suffer dire consequences if he failed to repay the overdue
amount.Following the suicide death of XY, the local police arrested Z and his colleagues (who
used to accompany Z during his visits to XYs house) on charges of abetment of suicide. A case
was also filed against the ABC Bank, which had to pay an ex-gratia payment of Rs.20 lakh to the
deceaseds family. The incident has also been published in the press and has damaged the
Banks reputation in public eye, at least for the time being.
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Case Study
Banks offer up to 25% rebate to better farm loan recovery :-
NEW DELHI: Some public sector banks are offering as much as 25% rebate to improve
recovery on their farm loans, providing substantial relief to farmers who have already had same
amount waived off as part of the debt relief scheme. The offer follows a nod from the RBI to the
banks to give discount as per their own internal assessment to settle the loans because not many
farmers were settling their dues despite two extensions.
This is the last chance for farmers, since therell be no further extension to the scheme
and we expect a healthy recovery, said chairman and managing director of Bank of Baroda MD
Mallya. Under the OTS scheme all farmers cultivating (as owner or tenant or share cropper)
agricultural land of more than 2 hectares (more than 5 acres) are covered.
The bank is offering a 25% rebate to the large farmers, over and above the 25% offered
by the government to the large farmers under the one-time settlement scheme or OTS, which
was part of the debt waiver plan. This is over and above the 25% rebate offered by the
government to large farmer under the one time settlement scheme (OTS). The total mount under
the OTS scheme for large farmers is estimated at Rs 10,000 crore. It was open till June 2009, but
has been extended periodically. Farmers have till June end to avail of the scheme.
A bank offering 25% rebate will be able to recover only 75% of the loan, 50% from the
farmer and 25% from the government. Bank of Baroda has already made a provisioning of Rs
212 crore last year towards loans given under the debt relief scheme. Almost all leading public
sector banks are offering schemes to these farmers so as to help them repay their loans. PNB is
giving an additional relief of 15%. Giving such discounts is a logical move as recovery through
other means is a long drawn process, says RIS Sidhu, chief GM, PNB.
SBI is giving a discount of Rs 50,000 for farmers who are unable to repay their loans.
There is a considerable section of farmers who are really unable to pay and such support will
help them to partly pay their dues, said a senior SBI official who do not wish to be named.
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The RBI had earlier allowed the banks to treat accounts under the waiver scheme as
standard provided adequate provision is made by the banks for the loss in present value terms.
The generous offer will not impact the revenue of banks as most of them have already
made provisions for these farm loans classifying them as NPAs or bad assets. Any recovery is
welcome, as weve already made provisions accounting these NPAs, said executive director
OBC, SC Sinha. OBC is not offering any blanket scheme but is giving a case-to-case waiver.
But some banks hold view that giving such rebates will only lead to delay in repayment
of loans from existing farmer community. Already, those farmers who have paid their dues on
time are feeling let down, such schemes will further encourage non-payment. It is better to give
working capital to such farmers but link it with schemes such as loan against jewellery, said
chairman and managing director of a south based public sector bank.
Banks may get more teeth as government speeds up loan recovery :-
NEW DELHI: The government plans to tweak laws
to facilitate seizure of assets from defaulting borrowers to
help banks reduce non-performing assets, which are on the
rise after the recent economic downturn.
The finance ministry is expected to move a proposal
before the cabinet suggesting changes in the Securitisation
and Reconstruction Of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act.
It is a step to ensure that the recovery process is not time-consuming, a finance
ministry official said while assuring that the changes will not lead to harassment for borrowers.
Rating agency CRISIL expects gross NPAs of Indian banking system to swell to around
5% of the advances in March 2011. Currently, banks need permission of the relevant Chief
Metropolitan Magistrate or the district magistrate for seizing an asset. The new rule will require
the district administration to carry out due diligence and take a decision within 120 days of the
request.
The proposed changes are in response to concerns expressed by the Indian Banking
Association over the rising NPAs and the regulatory hurdles that delay the process of recovery.
The current law came into force in 2002 and was widely seen as empowering the lender, but has
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not really helped because of operational issues. There is no timeframe under which the
concerned authority has to take a decision. This leads to the whole process being delayed by
several months, the finance ministry official said, requesting anonymity.
Asset Reconstruction Companies (ARCs), specialized institutions that deal in distressed
assets, feel changes in the rules will incentives the banks to sell bad loans. RBI has given
permission to 13 ARCs. Easy recovery norms will further facilitate the business, said a senior
official with Asset Reconstruction Company of India (ARCIL) who asked not to be named. The
company acquired bad loans worth about of Rs 12,000 crore in the financial year 2009-10.
The new rules will also give banks at least 15 days to reply to the objections raised by the
borrower. The borrowers generally raise a list of objections. It is impossible for the banks to
reply within a week, which is the current time frame. This severely impacts if the case goes to
the debt recovery tribunal, the official said. Banks have also requested for a reduction in the 60
days time they have to provide to the borrower to settle dues before they can send a recovery
notice.
Already, if a borrower is lagging on his payments we keep sending reminders. An
extended period of 60 days further delays the whole process, said an IBA official, requesting
anonymity. CRISIL sees deterioration in asset quality of Indian banks over the medium term on
account of the slowdown and the seasoning of loan portfolio after a period of rapid credit growth
between 2002-03 and 2007-08.The net NPAs of Indias banks stand at 0.99% of their net advances, but gross amount is
much higher, indicating that banks have been able to set aside funds for covering losses but
recovery remains low.
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Field Study
Branch Manager of SBI.
Mrs. Sunita Tikekar.
(Hindustan Naka Branch,
Kandivali west).
1. Why there is a need of Recovery Management in Banking?
It is a part of routine banking because every person cannot arrange to pay their
installment in time. Some borrowers purposely do not pay their debts. In order to
overcome this problem there is a need of Recovery Management.
2. Up to what percentage % the debt get converted into Recovery?
More than 90% of debts get converted into recovery easily.
3. What steps do banks follow if the borrower defaults in making
payment?
Banks first of all calls the customer, then sends legal notice, if he still ignores it
banks file a suit against him in court of law. Then the court takes its own time in
recovering the debts. In extreme cases title deed of property, fixed deposit /insurance
policies get blocked.
4. Do SBI appoint agents for Recovery?
No, SBI does not have recovery agents. RBI has given guidelines to the banks
not to force the Recovery through Recovery agents.
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5. Does NPA affect bank routine work?
No, because banks create the provision against such advance & loans which
banks provide against the security, its value is generally higher than the amount of loan
provided.
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CONCLUSION
To conclude with, till recent past, corporate borrowers even after defaulting continuously
never had any real fear of bank taking any action to recover their dues despite the fact that their
entire assets were hypothecated to the banks. This is because there was no legal Act framed to
safeguard the real interest of banks.
However with the introduction of Securitization Act, 2002 banks can now issue notices
to their defaulters to repay their dues or else make defaulters face hard and tough actions under
the aforementioned Act. This enables banks to get rid of sticky loans thereby improving their
bottom lines. Also a hallmark of a good business is approaching it with a fresh, new perspective
and requires management that is fully awake, fully alive and of course fully focused on making
things better.
Also, the passing of the Securitization Act, 2002 came as a bo