project on debt recovery management in banks

7/29/2019 Project on DEBT RECOVERY MANAGEMENT IN BANKS.

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DEBT RECOVERY MANAGEMENT IN BANKS

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.

1 T.Y.B.COM. (BANKING & INSURANCE)


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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

project on debt recovery management in banks

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