NON LEGAL MEASURES FOR RECOVERY

MANAGEMENT
PROJECT REPORT BY

MR. AMIT MADHUKAR BHERE.

ROLL NO. 4803

Under the Guidance of

SHRI. JIVRAJ PATKI

Higher Diploma in Co-operative Management

HDCM (Correspondence course)
Academic Year 2023 – 2024

SESSION NO. 48
24/04/2023 TO 21/10/2023

DR. VITTHALRAO VIKHE PATIL

INSTITUTE OF CO-OPRATIVE MANAGEMENT
PUNE 43/16-A, ERANDWANE, PUNE-411004
 CERTIFICATE

This is to certify that the work incorporated in the project “NON LEGAL
MEASURES FOR RECOVERY MANAGEMENT” submitted by Mr.
AMIT MADHUKAR BHERE was carried out by the candidate under my
guidance. Material obtained from other sources has been duly acknowledged in
the project report.

Examiners

Supervisor

Date:
Place:
 DECLARATION

This is to certify that the project titled “ NON LEGAL MEASURES FOR
RECOVERY MANAGEMENT ” is prepared by me and is being submitted
in partial fulfilment for the award of the Higher Diploma in Co-operative
Managementoffered by Dr. Vitthalrao Vikhe Patil Institute of Co-operative
Management,Pune. Material obtained from various sources has been duly
acknowledged in theProject Report. This report has not been submitted earlier
either to this Instituteor any other Institute for the fulfilment of the requirement
of a course of study.

_____________

Date:
 ACKNOWLEDGEMENT
This project report for project name titled “NON LEGAL MEASURES
FOR RECOVERY MANAGEMENT ” is prepared and submitted by me
towards partial fulfilmentfor the award of the Higher Diploma in Co-operative
Management(Correspondence) offered by Dr. Vitthalrao Vikhe Patil Institute of
Co-operativeManagement, Pune. I am thankful to my guide Shri. Jivraj
Patki Sir for his valuable guidance time-to-time while preparing this project
report.

I would also like to thank all Director and Programme Co-ordinator for
constantencouragement and support. Similarly, I would like to thank all the
faculty members and employees of the Institute for their valuable co-operation
whileundergoing this programme.

Support from management of my organization, especially Mr.Jivraj Patki who

helped me a lot for this project was equally important. I thank them all
frombottom of my heart.

Finally, I thank one and all who helped me directly or indirectly to complete
thisproject work.
 CHAPTER-1
INTRODUCTION
1. Introduction
Non-legal measures for loan recovery include different strategies to ensure recovery of
non- performing loan other than resorting to debt recovery related court. Various such
measures. are presented bewlow. Communication: The most successful approach to loan
recovery is keeping the borrower in.

Recovery of loan refers to the repayment of the loan amount by the borrower to the lender.
When a borrower repays the loan amount, it reduces the outstanding balance of the loan.
This, in turn, reduces the value of the asset that was pledged as collateral to obtain the loan.
 CHAPTER 2
NON LEGAL MEASURES FOR LOAN RECOVERY
DIFFERENT STATEGIES
 2) Non legal measures for Loan Recovery different strategies-
Non –Legal measures for loan Recovery include different strategies to ensure recovery of
non-performing loan other than resorting to debt recovery related court. Various such
measures are presented below.

i) Communication-
The most successful approach to loan recovery is keeping the borrower in
touch ,arranging meeting of the borrowers at a regular intervals ;making frequent
telephone calls, issuing letters and visiting the business centre and residence of the
borrower .The personal visit might be done by the branch ,regional office and head office
personal based in the complexity of the situation .The bank mat think of the formal and
informal visit to borrower ‘ s business premises and residence . The communication

should be aimed at an integrative ‘win- win’interest –based negotiation.

ii) Persuasion-
iii) The borrowers might be persuaded to repay the loan providing him/her counseling
on the negative aspects of non-repayment from legal and ethical point of
view:offering some kind of incentives to the borrowers including rescheduling of loan
,waiver of interest,etc for timely payment of instalment .some short of relief will be
offered only when the borrower is sincere and comes forward for instant adjustment if
the outstanding liabilities .
Simultaneously bank can put pressure on the borrower through family
members ,relatives,guarantors,business associates ,trade associations ,employer in
case of a salaried person ,and local influential person .Bank can initiate
 CHAPTER -3
NON-PERFORMING ASSETS AND THE RECOVERY
MECHANISMS
3) Non-Performing Assets and The Recovery Mechanisms-

India is facing a growing problem of non-performing assets (NPA) which is dangerous

as it is a symptom of an ailing banking sector which in-turn affects the economy of
India as well. In the Financial Year of 2017 the value of Non- performing assets for
the private sector banks stood at approximately 940 billion rupees.

This figure almost doubled in 2018 as the value of NPA's was at approximately 1.86
trillion rupees and in the financial year of 2019 this figure stood at approximately 1.84
trillion rupees[1]. In 2020 the problem is set to get even worse as a report of the RBI
revealed that the gross non-performing assets ratio (which is the figure acquired by
dividing net NPA by the total advances given by the bank) of commercial banks could
worsen to as high as 14.7 per cent at the end of financial year 2020-21, from 8.5 per
cent in March 2020, if the economic impact of the pandemic is severe.

The gross non-performing assets ratio is a measure of the overall quality of a bank's
loan book and this report clearly shows that the banks could get even more stressed
resulting in more problems and hardships for the banking sector. The increase in the
NPAs has many adverse effects on the banking institutions as it impacts the bank's
profitability, return on assets, net interest margins etc. and it also has an impact on the
flow of credit as well as the growth of the economy as a whole. Therefore, it is
important to understand what exactly a Non-Performing Asset is, how it works, the
impact it has and the steps taken by the government to solve this problem
 CHAPTER-4

A NON-PERFORMING ASSET
4) A Non-Performing Asset-
The Non-performing assets better known as NPA's are broadly defined as a
classification for loans or advances that are in default or in arrears. To further understand this
definition, it is pertinent to understand what is meant by a loan in arrears and a loan in
default. A loan is in arrears when interest payment or principal is late or missed and a loan is
in default when the lender considers the agreement of loan to be broken and it is not possible
for the debtor to meet his obligations.

This is the general definition of a non-performing asset over the world, however each country
has its own procedure and requirements to declare an asset as non-performing. In India for an
asset to be classified as an NPA the borrower should have the principal or interest on the loan
or advance given by the lender overdue for a period of 90 days.
The NPAs are further classified into three categories depending on the period for which the
asset has remained non-performing and the reasonability of the dues.
 CHAPTER-5
THE CATEGORIES NPAS
5 )The categories NPAs
1. Sub-Standard Assets:

A sub-standard asset was first defined as one which was classified as NPA for
a period not exceeding two years. However, on 31 March 2005 the RBI changed the
duration to 12 months and therefore a sub-standard asset now was that which has
remained an NPA for a period less than or equal to 12 months. In such cases, an asset will
have well defined credit weaknesses which means that the borrower is unable to cover his
total liabilities/exposure which will jeopardize the liquidation of the debt and there is a
distinct possibility that the banks will sustain some loss if the shortcomings are not
corrected.

2. Doubtful Assets:

A doubtful asset was first defined as one which remained as an NPA for a
period exceeding two years. However, on 31 March 2005 the RBI changed the duration to
12 months and therefore a doubtful asset was that which remained an NPA for a period
exceeding 12 months. When a loan is classified as doubtful, the assets have all the same
weaknesses that were found in assets classified as sub-standard but also with the added
aspect that the weaknesses make collection or liquidation in full of the borrower on the
basis of the existing facts, conditions and values highly uncertain and improbable.

3. Loss Assets:
A loss asset is one where a loss has been identified by the bank or by the
internal or external auditors or by the RBI inspection but the amount has not been written
off completely. In other words, such an asset is considered uncollectible and of such little
value that its continuance as a bankable asset is not warranted although there may be some
salvage or recovery value.
These are the three categories in which NPAs are classified as. The RBI has
provided guidelines to banks to efficiently and fairly classify assets as non-performing.
These guidelines in a nut shell state that classification of assets into above categories
should be done by considering the degree of well-defined credit weaknesses and the extent
of dependence on collateral security (for example promoter guarantee, shares, real estate
etc.) for realization of dues.

CHAPTER-6
RECOVERY MECHANISMS
6) Recovery Mechanisms
Recovery mechanism is a process of carrying out the recovery procedures and
mechanisms required to restore the financial assets in the event of failure to repay by the
borrower. An NPA as explained above is an asset that has ceased to generate income and
returns which if not dealt with correctly and promptly can be detrimental to the bank and
therefore the recovery of NPAs plays an important role to sustain the banking industry.

Mainly recovery is done through the following

aspects:
1. Lok Adalats

The Lok Adalat is one of the alternative dispute redressal mechanisms set
up by the government. It is a forum where disputes or cases pending in
the court of law or at pre-litigation stage are settled mutually. Lok
Adalats have been given statutory status under the Legal Services
Authorities Act, 1987. Under the said Act, the decision made by the Lok
Adalats is deemed to be a decree of a civil court and is final and binding
on all parties and no appeal against such an award lies before any court of
law.
If the parties are not satisfied with the award of the Lok Adalat though
there is no provision for an appeal against such an award, however they
can initiate litigation by approaching the appropriate court by filing a case
by following the required procedure exercising their right to litigation.
The jurisdiction of the Lok Adalats is in cases/disputes of less than 10
lakh rupees in value.

The Lok Adalat cannot decide the matter referred to it on its own but
instead it is to be decided on the basis of the compromise or settlement
between the parties. The members shall assist the parties in an
independent and impartial manner in their attempt to reach amicable
settlement of their dispute. Mobile Lok Adalats are also organized in
various parts of the country which travel from one location to another to
resolve disputes in order to facilitate the resolution of disputes through
this mechanism.
As on 30.09.2015, more than 15.14 lakhs Lok Adalats have been
organized in the country since its inception. More than 8.25 crore cases
have been settled by this mechanism so far.

2.Debt Recovery Tribunals (DRTs)

The Recovery of Debts Due to Banks and Financial Institutions Act,1993

(RDDBFI Act) made provisions for speedy redressal to lenders and
borrowers through filing of Original Applications also known as OAs in
the Debt Recovery Tribunals (DRTs) and appeals in Debts Recovery
Appellate Tribunals (DRATs). Therefore, under the RDDBFI Act the
DRTs and DRATs have been established to help provide for the need of
speedy redressal for banks against NPAs.
The DRT also has the power to decide upon the applications filed against
the secured creditors by the borrower or mortgager for the action taken by
them under the Securitization Act. As of today, the government has established 39 DRTs and
5 DRATs, which are single Member Tribunals. The problem plaguing the
DRTs like several other debt recovery mechanisms is that they are slow
to work out on pending disputes as the process is very long which results
in a high number of pending cases.

3.Sarfaesi Act
The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 better known as the
SARFAESI Act was formed after the considerations carried out by
committees constituted by the government to examine the reforms and
changes that are needed in the banking and legal systems for better
functioning of the debt recovery mechanisms.
The main purpose of this Act is to provide speedy recovery of defaulted
loans and help reduce the mounting stress on the banks due to the
increase in NPAs. The act provides the banks and financial institutions
with a mechanism to better recovery of assets by enabling them to take
possession of securities and sell them to reduce the burden of the Non-
Performing Asset.
 CHAPTER -7
THE ACT AIMS TO ACHIEVE RECOVERY OF NPAS

7 )The Act aims to achieve recovery of NPAs

 The Act aims to achieve recovery of NPAs through three major ways which are the
following:

i. Securitization:
The Section 7 of the SARFAESI Act gives an outlook of what exactly happens in securitization, it
states that any securitization company or reconstruction company, may, after acquisition of any
financial asset offer security receipts to qualified institutional buyers, (other than by offer to
public) who are those who have expertise and sound knowledge to evaluate and make their
investment in the Capital Markets, for subscription in accordance with the provisions of those
Acts.

A securitization company or reconstruction company may raise funds from the qualified
institutional buyers by formulating schemes for acquiring financial assets and shall keep and
maintain separate and distinct accounts in respect of each such scheme for every financial asset
acquired out of investments made by a qualified institutional buyer and ensure that realizations of
such financial asset is held and applied towards redemption of investments and payment of returns
assured on such investments under the relevant scheme. The main advantage of securitization is
that it allows the institutions to raise finances by selling assets or income streams.

ii. Asset Reconstruction:

In Asset Reconstruction the Securitization companies or Reconstruction Companies buy the NPAs
from the banks and take measures to recover the bad loans from the borrower by carrying certain
functions according to the powers vested in them by the Act.

Iii Enforcement of Security Interests:

The Section 13 of the SARFAESI Act makes provisions for enforcement of security interests it states that
notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 any
security interest created in favour of any secured creditor may be enforced, without the intervention of
court or tribunal, by such creditor in accordance with the provisions of this Act.
Conclusion

conclusion
There is a growing problem of NPAs in India which is hurting the banking sector and also the
economy of India as a whole as it is affecting the availability of credit and India is witnessing
more and more of its banks crumbling under the pressure. The Government has realized this
problem and has taken steps to ensure that the banks can keep up and the economy has credit
available.

However, the steps taken by the government have not completely dealt with this problem and
so the government needs to keep pushing for reforms in the banking sector and in the legal
systems governing the sector to help the economy in India not only to survive but thrive and
grow over time.
REFRENCES
 REFRENCES
 https://www.scribd.com/document/514503565/Non-legal-measures
 https://www.slideshare.net/divya111/group-dynamics-11617507 •
 https://www.slideshare.net/ShilpaHimanshi/ppt-of-group-dynamics •
 https://www.slideshare.net/saciima/group-dynamics-and-teamwork
 ACKNOWLEDGEMENT

“NON LEGAL MEASURES FOR RECOVERY MANAGEMENT ”

DR. VITTHALRAO VIKHE PATILINSTITUTE OF CO-OPRATIVE MANAGEMENT, PUNE 31
In this project I am extremely thankful to my project guide Shri. Jivraj Patki for his valuable support
and time. I would like to take this opportunity to acknowledgement the innumerable guidance and
support extended to us by my guide in preparation of the synopsis. My foremost thanks go to my
well-wishers and colleagues. I am graceful to all staff members for helping hand.