Recovery Management

Recovery management in public sector banks.
RECOVERY MANAGEMENT IN PUBLIC

SECTOR BANKS.
BACHELOR OF COMMERCE
(BANKING AND INSURANCE)
SEMISTER-V
ACADEMIC YEAR: -2012 2013
SUBMITTED BY:
VIOLLA GONSALVES
ROLL NO: 410
S.S. & L.S PATKAR

COLLEGE OF ARTS & SCIENCE &
V.P VARDE COLLEGE OF COMMERCE & ECONOMICS GOREGAON (W),
MUMBAI-400 062.

SECTOR BANKS.
BACHELOR OF COMMERCE
(BANKING AND INSURANCE)
SEMISTER-V
ACADEMIC YEAR :-2012 2013
Submitted In Partial Fulfillment Of The Requirement For The Award Of Degree Of

Bachelor Of Commerce (Banking & Insurance)
VIOLLA GONSALVES.
ROLL NO:410
S.S. & L.S PATKAR

V.P VARDE COLLEGE OF COMMERCE & ECONOMICS GOREGAON
(W),MUMBAI-400 062.
S.S. & L.S PATKAR

V.P VARDE COLLEGE OF COMMERCE
GOREGAON (W),MUMBAI-400 062.
CERTIFICATE
THIS IS TO CERTIFY MISS. VIOLLA GONSALVES
OF BACHELOR OF COMMERCE (BANKING & INSURANCE),
(ACADEMIC YEAR :2012 2013)
SEMESTER V
HAS SUCCESSFULLY COMPLETED THE PROJECT ON

RECOVERY MANAGEMENT IN PUBLIC SECTOR BANKS
UNDER THE GUIDENCE OF PROF. PRATIBHA SAHAI.
CO-ORDINATOR
PRINCIPAL
PROJECT GUIDE / INTERNAL EXAMINER
EXTERNAL EXAMINER
DECLARATION
3
I, Miss. VIOLLA GONSALVES, the Student Of Bachelor of Commerce (Banking &

Insurance) Semester- V (Academic Year:2012-2013).hereby declare that I have
completed the project on RECOVERY MANAGEMENT IN PUBLIC SECTOR
BANK.
The information submitted is true & original to the best of my
knowledge.
VIOLLA GONSALVES
ROLL NO: 410
INDEX
SR.N
O
CHAPTER
PAGE
NO.
1.
INTRODUCTION.
6 7
2.
DEFINITION OF RECOVERY.
3.
PUBLIC SECTOR BANKS:
4.
5.
WHY IS RECOVERY MANAGEMENT

ESSENTIAL?
DEBT RECOVERY MANAGEMENT:
6.
DEBT RECOVERY MEASURES:
13 16
7.
RECOVERY OF DEBT DETERMINED BY

TRIBUNAL:
17 23
8.
POLICY, PROCESSES AND PROCEDURE OF

24 33
9.
NON PERFORMING ASSETS:
10.
RECOVERY PROCEDURE OF SBI
11.
RECOVERY PROCESS OF SBI
12.
CASE STUDIES
41-42
13.
CONCLUSION
43
14.
QUESTIONARIES
44
15.
BIBLIOGRAPHY
45
8
9 10
11
12
34-37
38
39 40

SECTOR 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, 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 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.
DEFINTION OF RECOVERY:
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 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.
PUBLIC SECTOR BANKS:

DEFINITION OF PUBLIC SECTOR :
The part of the economy concerned with providing basic government services. The
composition of the public sector varies by country, but in most countries the public sector includes
such services as the police, military, public roads, public transit, primary education and healthcare for
the poor. The public sector might provide services that non-payer cannot be excluded from (such as
street lighting), services which benefit all of society rather than just the individual who uses the service
(such as public education), and services that encourage equal opportunity .
THE RATIONALES FOR PUBLIC SECTOR:

Various overlapping political and economic rationales have been advanced for public sector banks.
Politically, public sector banks may be a response to the substantial economic and political power of large
private banks.
A more moderate, post - World War II version of this rationale was that government ownership
of firms in strategic sectors or commanding heights was critical to development and these firms
needed assured, low - cost funding by government banks.
Thus, Countries that adopted socialist or planned economic regimes Nationalized private
banks and / or set up public sector banks.
For example, Indias 1969 nationalization of 14 major banks was mainly justified by the need to
control the commanding heights of the economy and to meet progressively the needs of development of
the economy in conformity with national policy objectives (Preamble of the Banking Companies
[Acquisition and Transfer of Undertakings] Act of 1969).
The continued large role of public sector banks in many countries probably represents an overhang of
these models of development.
The rationale argued that public sector banks were needed to meet some perceived market failures, to be
remedied by public bank loans (rather than Treasury grants).
Why is recovery management essential?

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.
10
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.

MEANING OF DEBT RECOVERY IN PUBLIC SECTOR:
Measures introduced all these years
to contain the problem loans, have no doubt helped
to create sufficient awareness about the seriousness
of the problem among lenders, but have hardly made
any impact on the borrowers to be more responsible
and accountable on their part and extending
cooperation to banks through timely repayments.
While genuine difficulties of borrowers to repay the
dues to banks because of circumstances beyond their
control are understandable, misuse of the funds by
the borrowers and taking under the weaknesses of
the legal system in order to avoid delay payment of banks dues is deliberate.
Banks have evolved policies for recoveries and write off of bad loans by incorporating
compromise and negotiated settlement cases falling under the category of Non-Performance Advances. Banks
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have also set-up independent settlement Advisory Committees headed by retired judges of the High courts, to
scrutinize and recommend compromise proposals. Other measures introduced, include onetime non-discretionary
and non-discriminatory settlement of Non Performing Advances of small scale sector, special guidelines for
recovery of the stock of Non Performing Advances of Rs. 5 Cr and less as on 31 st March, 1997 and one time
settlement scheme covering advances of Rs. 25000/- and below.
DEBT RECOVERY MEASURES:

Measures have been considered for faster legal process to enable the banks to bring down the level of Non
Performing Advances. These broadly relates to:
1. Setting up Lok Adalat Institution to help bank settle disputes involving accounts in doubtful and loss category
with outstanding balance of Rs. 5 Lakh for compromise settlement.
2. Empowering debt recovery tribunals to organize Lok Adalat to decide on cases of Non Performing Advances
of Rs. 10 Lakh and above.
3. Strengthening the functioning of debt recovery tribunals through amendment of the act of recovery of debts.
These measures of expected to provide necessary teeth to the debt recovery tribunals and spread of the
recovery of NonPerforming Advances in time to come. However, these measures have not contributed to any
perceptible recoveries from the defaulting entries although they have served as negative basket of steps shutting
off fresh loans to these defaulters measures are also being contemplated that in all cases of defaults of cases of Rs
1 Cr and above to file criminal cases.
12
IMPORTANT POINTS FOR DEBT RECOVERY:On the basis of the foregoing procedure for normal recovery process, we may list below certain Donts for the
dent recovery, which are as follows:
1)
Dont violate or breach the recovery
policy, procedure etc. prescribed by the

principal.
2)
Dont exceed the authority given in
the recovery arrangement.

3)
Dont make a call to the debtor before
0700 hours or after 2100 hours.

4)
Dont make anonymous calls or
bunched calls to the debtor, which may be perceived as harassment.

5)
Dont conceal or misrepresent your identity during calls and visit or other interaction with the debtor.
6)
Dont show uncivil/indecent/dirty behavior or use such language during calls and visits to the debtor.
7)
Dont harass/humiliate/intimidate/threaten the debtor- verbally or physically.
13
ADVANTAGES & DISADVANTAGES OF RECOVERY OF

DEBTS: ADVANTAGES:
1)
The process of assigning debt collection to outsides enables officials from Banks to develop more
remunerative new business.
2)
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;
3)
A skillfully negotiated debt collection could mean saving on litigation cost.
4)
The process of assigning debt collection to outsides enables officials of non-Banks. Cost to develop more
beneficial new business.
DISADVANTAGES:
1)
Debt collection does cost money;
2)
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.
Elements of debt recovery:-
14
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.
2) 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.
3) 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.
RECOVERY OF DEBT DETERMINED BY TRIBUNAL
Modes of recovery of debts:

15
The Recovery Officer shall, on the receipt of the copy of the certificate under sub - section (7) of section 19,
proceed to recover the amount of debt specified in the certificate by one or more of the following modes,
namely:-(a) Attachment and sale of the movable or immovable property of the defendant.
(b) Arrest of the defendant and his detention in prison.
(c) Appointing a receiver for the management of the movable or immovable properties of the defendant.
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
16
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:-
1. 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.
2. Deficient analysis of project Viability: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.
3. 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
17
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.
4. 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
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.
5.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.
18
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.
6. Labor 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 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. However, it would be pertinent to mention here, that there are
numerous instances where political and vested interests tend to instigate labour problems .
7. 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 was 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 long way 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
19
take undue advantage of such natural calamities in order to avoid repayment, thereby increasing the
magnitude of default.
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 also
regulatory 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.
Types:
This is based on the dictum that one size does not Adopt different collection strategy for
different debtor fit all. In the foregoing paragraphs, three types of debtors have been described and they
need different strategies for recovery success:
20
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.
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.
Record in notebook recovery efforts in chronological order for each.
21
Policy, Processes and procedure of debt recovery management:

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.
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:
1)
The RBI directives on recovery of debt, including recovery agents engaged by the bank and,
2)
The Model Policy on collection of Dues and Repossession of security framed by the Indian
Banks Association.
3)
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.
Loan recovery policy:22
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 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 to the 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
SARFESI 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:
23
1.
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.
2.
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.
3.
The bank would respect privacy of its borrowers.
4.
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.
5.
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.
6.
Borrowers requests to avoid calls at a particular time or at a particular place would be honored as far as
possible.
7.
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.
8.
All assistance will be given to resolve disputes or differences regarding dues in a mutually acceptable and
in an orderly manner.
1.
Inappropriate occasions such as bereavement in the family or such other calamitous occasions will be
avoided for making calls / visits to collect dues.
1. 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.
24
2. Repossession of Security: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.
3. 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.
4. 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.
25
DEBT RECOVERY PROCESSES
Debt recovery processes can be typically of following kinds, each involving different procedure:
26
1) 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.
2) 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.
3) Legal recovery process:

The intervention of the court is required to possess mortgaged immovable property by the 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.
OBJECTIVES OF THE ACT:

1) To improve and expedite the process of recovery of loans given by Banks & financial institutions.
2) To fasten the process of adjudication by following a summary procedure in dealing with the applications.
3) To protect the Banks interest. Banks interest is public interest & public interest is nations interest.
4) Recovery process blocks huge funds in unproductive assets, the value of which deteriorates over the time.
For example: The Supreme Court in the Union Bank of India vs. DRT, observed that the total amount recovered
by the public sector bank was ` 5,662 crore & ` 139 crore towards financial institution.
27
PROCEDURE OF RECOVERY:
The procedure will generally be applied 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:
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:
(i)
Calls are made from the same number as advised by the bank to the customer.
(ii)
The agents disclose his identity and authority at the first instance.
(iii)
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.
(iv)
(v)
All calls where the customer becomes abusive or threatening should be appropriately documented.
Customers question should be answered properly. They should be provided with information requested
and given assistance in making recovery. Minor issues should be resolved.
(vi)
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.
28
(vii)
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 principals 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/eveningsir/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 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 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.
29
(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 principals 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.
NON PERFORMING ASSETS:

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,
30
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.
MEANING OF NPA: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.
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
continuously monitor loans to identify accounts that have potential to become non-performing.
2) Why NPAs have become an issue for banks in India?

31
should
To start with, performance in terms of profitability is a bench mark 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.
THE REASONS BEHIND RISE IN NPA:

As usual, bankers have raised the issue of interest rate hike before RBI Governor and
requested for a pause or stop on interest rate which have been hiked many times during last 15 months.
Bankers have pleaded that high interest rate will adversely affect loan growth and also increase the
amount of bad loan. I have been advocating for last three four years that uniform rate of interest for
deposits and advances should be decided by RBI keeping in view national and international situation and
the same should be followed by all banks so that banks do not compete each other on the issue of
interest rate and customers do not get the opportunity to adopt frequent change of bank for availing cheap
loan and in turn adversely affecting the quality and quantity of loan portfolio of banks.
Loan portfolio of one bank may grow at the cost of that of others. Good customers seldom care for
interest rate whereas bad customers may cheat the bank even if the rate is too low. NPA are creation of period
when low interest rates were charged to customers. Amount of bad assets has been growing consistently in
government banks largely and mainly due to prevalent corrupt practices, due to ill motivated decision on lending
taken by corrupt executives of the banks and due to inaction of corrupt officials.
32
PROVISION FOR NPAs

SR.NO
1
ASSETS CLASSIFICATION
PROVISION
Standard assets (Over due up to 90 days)
For agriculture & SME

0.25%Commercial & others
0.40%
2.
Non- performing assets
a.
Sub standard (NPA) up to 12 months
10% on secured portion &

20% on un-secured portion
b.
Upto 1 year 20 %
Doubtful (NPA over) 12 months
1 to 3 year 30 %
3 & above 100% unsecured
loans 100%
3.
Loss assets
100 %
33
VARIOUS RECOVERY PROCEDURES OF STATE BANK OF

INDIA:
State Bank of India adopts various recovery procedures to recover the debt from its defaulters. The
various recovery procedures are mentioned below:
Reasons For Default :

There are various reasons for default like mis-management, diversification of fund, short fall in
investment, will fall default etc. So a credit manager should take various factors into account before lending a
loan.
Demand Notice:
When a defaulter does not repays loan a demand notice is issued to him that he has to repay his loan
with a stipulate time period.
Legal Notice:
When a defaulter does not respond to the demand notice a direct notice is issued to him that if he does not
repay the loan action would be taken against him legally and the court notice is issued against him.
Transfer To NPA Account:

When a defaulter does not respond to respond to any legal notice or he becomes bankrupt the Whole
account is transferred to NPA account.
34
VARIOUS DEBT RECOVERY PROCESS OF STATE BANK OF

INDIA:
1.
2.
3.
4.
5.
6.
APPOINMENT OF MRT TEAM.

CONDUCT OF RECOVERY CAMP.
COMPROMISE PROPOSAL.
LOK ADALAT.
APPOINMENT OF DEBT RECOVERY OFFICER.
OUT OF COURT SETTLEMENT.
1) APPOINMENT OF MRT TEAM:

This is a special team appointed but SBI under different branches. Here the officers are appointed
mainly for debt recovery purpose. When the amount of loan are not properly recovered or received then those
amount are converted into probable NPA account and further also they are not recovered they are converted into
NPA account., so to overcome this difficulty MRT team are appointed to recover the amount outstanding from the
loan holder.
2) CONDUCT OF RECOVERY CAMP:

This is a kind of gathering done by MRT team and the loan holder, whose accounts are converted
into NPA account. Here the MRT team divides the NPA account holder into different regions and districts and
calls a meeting with those loan holder and discuss the matter and give them ways and directions how to return the
money which they have taken.
3) COMPRISE PROPOSAL:
This is a kind of joint agreement between the bank and the loan holder, that if they return back the
money, certain amount of money will be relieved.
4) LOK ADALAT:
35
This is a kind of dispute settlement done between the bank and the loan holder with the help of a
court i.e. the dispute is settled between them by court judgment. Here the bank files a case against the loan holder
and based on the evidence and legality the court gives a decision which the bank and the loan holder are bound to
follow through various legal proceeding. The claims settled at the Lok Adalat organised include Rs 20.82crore
pertaining to 14 borrowers of State Bank of India (SBI), Rs 15.60 crore.
5) DEBT RECOVERY OFFICERS:

These officers are specially appointed for debt recovery purpose. Their key responsibilities lies on
how they could recover all the debt that the bank holds. These are the various methods that State Bank India
adopts to recover the debt which are outstanding from the loan holder.
6) OUT OF COURT SETTELMENT:

BANKS should try to enter into out of-court settlement with defaulters, as far as possible. The
process of getting a degree takes a long time and even if a bank obtains a degree in its favour, it usually
encounters difficulties in executing the decree. And, even then, it is usually a distress-sale of the seized asset,
which may not fetch a good price in the market. Therefore, it is better that the bankers settle to a compromise
with the defaulters.
36
CASE STUDIES:
Bad loans of 19 PSU banks touch Rs 1 lakh crore
NEW DELHI:
Bad loans of 19 government banks have gone above Rs 1 lakh crore till March this year, though most of
these banks have been reporting profits.
"The government has advised these banks to take a number of new initiatives to increase the pace of
recovery and manage NPAs," minister of state for finance Namo Narain Meena said on Thursday. The gross nonperforming assets of public sector banks as of March 2012 amounts to Rs 1,12,489 crore.
Meena said banks have also been asked to include appointment of nodal officers to conduct special drives for
recovery of bad assets, to put in place early warning systems, to replace system of post dated cheques with
Electronic Clearance System and to proactively pursue loan issues with state governments.
The channels of recovery available to banks include recourse to Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, Debt Recovery Tribunals, Lok Adalats etc.
Bad loans of these banks may rise further with many sectors reporting late or no recoveries of payments. An
assessment study by Bank of Baroda indicated that loans of Rs 35,000 crore of textile units may have to be
restructured by banks or they may turn bad.
Taking note of this fact, the government has advised all public sector banks to set up a separate window for
considering restructuring proposals in the textile industry on a case-to-case basis.
The RBI, which has examined the study, said there was no need for any special regulatory dispensation and banks
can provide two year moratorium on term loans and convert working capital into working capital terms loans
with repayment period of 3-5 year as part of restructuring.
Revised RBI norms push up IOB's bad loan provisioning by Rs 165 cr

37
CHENNAI, MAY 26:

For Indian Overseas Bank, the prospect of recovering Rs 107 crore from a written-off bad loan (of Prakruti
Infrastructure) in the current quarter, comes at an opportune time. For, the recovery would soften the blow of the
additional Rs 165 crore of provision for bad debts the bank would have to make for April-June, on account of the
revised provisioning norms.
The RBI recently raised the provisioning requirement across debt categories. For instance, the provisioning for
loans where interest is overdue for over 90 days has been raised by 5 percentage points to 15 per cent. Similarly,
for bad loans not backed by collateral, the provision requirement has been raised by 5 percentage points to 25 per
cent.
Mr. M. Narendra, Chairman and Managing Director, IOB, told Business Line on Wednesday that the bank would
have make a provision of Rs 145 crore for bad loans and Rs 20 crore for restructured assets.
Sour accounts
IOB has been in the grip of delinquent loans in the last couple of years, mainly because of a few accounts of the
real estate industry having gone sour.
The bank reduced its total bad loans to Rs 3,089 crore as on March 31, 2011, from Rs 3,611 crore the previous
year. However, the bank could have shown better performance on bad loans front if it were not for fresh slippage
of Rs 873 crore during the fourth quarter of 2010-11.
One of the headache accounts was that of Prakruti Infrastructure, but thankfully the borrower is repaying the
loan. The Rs 107-crore expected to come in the current quarter will soften the blow on account of the higher
provisioning, says Mr. A. P. Singh, General Manager-Recovery, IOB.
CONCLUSION:
To conclude with, till recent past, 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.
38
In case of banks, 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.
QUESTIONARIES:
What is recovery management?
Ans:
Recovery management 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.
39
What is debt recovery?

Ans:
Various strategies, processes and procedures are taken into consideration in
case of debt
recovery.
What is NPA?
Ans:
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.
What are the types of default?

Ans:
Default can be of two types: Debt services default and technical default. Debt service default
occurs when the borrower has not made a scheduled payment of interest or principal. Technical default occurs
when an affirmative or a negative covenant is violated.
What is a loan recovery?

Ans:
When a loan has been taken by a person from a bank then he has to repay it according to the EMI
fixed by the bank but if the person has failed to pay the EMI regularly for a fixed period then the account is
named as NPA and after that bank start recovery procedure means to take back his loan amount from the
mortgaged property of the person according to the procedure of SECURITISATION ACT.
BIBLIOGRAPHY:
Book reference:
Recovery management in banks.

By R .C. KOHLI.
40
Website reference:
www.bbi.co.in
www.rbi.com
41

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