The concept of Debt Recovery Management

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Banks were never so serious in their efforts to ensure timely recovery and consequent
reduction of Non-Performing Assets (NPAs) as they are today. It is important to remember
that recovery management, be of 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 Non-Performing Assets 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.

“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 over all difficult environment. Recovery management is also linked to
the bank’s interest margin’s we must recognize that cost and recovery management supported
by enabling legal framework hold the key to future health and competitiveness 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.

Why 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 bank’s
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.

Advantages & Disadvantages of recovery

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.

Important points for debt recovery

On the basis of the foregoing procedure for normal recovery process, we may list below
certain Don’ts for the dent recovery, which are as follows:

1)   Don’t violate or breach the recovery policy, procedure etc. prescribed by the principal.

2)   Don’t exceed the authority given in the recovery arrangement.

3)   Don’t make a call to the debtor before 0700 hours or after 2100 hours.

4)   Don’t make anonymous calls or bunched calls to the debtor, which may be perceived as
harassment.

5)   Don’t conceal or misrepresent your identity during calls and visit or other interaction with
the debtor.

6)   Don’t show uncivil/indecent/dirty behavior or use such language during calls and visits to
the debtor.
7)   Don’t harass/humiliate/intimidate/threaten the debtor-verbally or physically.

8)   Don’t intrude into the privacy of the debtor’s family members, friends/colleagues.

9)   Don’t disclose the customer’s debts/dues/account information to unauthorized person.

10)  Don’t 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.

Elements of debt recovery

The agency regarding debt recovery contains the main terms and conditions agreed by the
principal (say a bank) and the agent.  The main elements of the debt recovery would
generally include:

1)   Specific tasks to be accomplished e.g. the amount to be recovered from the specified loan
accounts in default and the broad time frame.

2)   Debt Recovery Policy and Procedure of the bank.

3)   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.

4)   Duties of the agent.

5)   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
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.

Normal debt recovery procedure followed by banks

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Normal debt recovery procedure will generally apply to the debtors who are willing to pay
the dues with normal recovery process.  Based on the regulatory guidelines of procedure of
tribunal on debt recovery, 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:

1)   The recovery agent has been authorized by the bank to collect the past due debt from the
particular customer.

2)   The customer has been notified by the bank of the details of the recovery agent for
collection of the past-due debt.

3)   Making customer calls:   This is the first step in recovery procedure and following rules
should be followed generally:

1. Calls are made from the same number as advised by the bank to the customer.
2. The agents disclose his identity and authority at the first instance.
3. 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.
4. All calls where the customer becomes abusive or threatening should be appropriately
documented.
5. Customer’s question be answered in full. They should be provided with information
requested and given assistance in making recovery.  Minor issues should be resolved.
6. How often to call customer/ The purpose of a collection call as to bring to the
Customer’s 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.
7. 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
message should not indicate that the customer ABC has overdue amount , or the call
originated from a Recovery agency.

4)   Visit to customer (debtor)   This would be the second step in collection process. 
Following procedure should generally be followed.

(i) 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.

(ii) 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 principal’s
or RBI/IBA code, unless otherwise agreed by the debtor expressly.
(iii) 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.

(iv) The time of visiting the customer will be generally between 0700 hours to 2100 hours. 
Visits earlier or later than the prescribed time 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,
 When due to nature of the customer’s employment i.e. working in shifts e.g. call
center, hotel. He/she is usually available outside these hours.

(v) The agent should respect privacy of the debtor.  Privacy policy as discussed above for
calls would apply during visits also.

(vi) During the visit, due respect and courtesy should be shown to the customer and the
interactions should be civil and polite as per the principal’s policy.

(vii) 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.

Modes of debt recovery other than normal debt recovery

procedure
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(1) 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 section
25, recover the amount of debt by any one or more of the modes provided under this section.

(2) 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).
(3) (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 to any
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 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
defendant’s 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 fully discharged 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 defendant’s 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

(4) 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.]

(5) 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).