project on recovery management of banks

RECOVERY MANAGEMENT IN BANKS

CHAPTER 1

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.

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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

“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.

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1.1 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.

1.2 Advantages & Disadvantages of recovery

Advantages:

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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.

1.3 Certain important points for debt recovery

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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.

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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.

1.4 Elements of debt recovery

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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

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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.

1.5 Defaults of loan

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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 criterion

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

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measures and security should taken before the sanctioning

of the loan.

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.

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

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tends to weigh the pros and cons vis-à-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

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

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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

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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.

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 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 take undue advantage of such

natural calamities in order to avoid repayment, thereby

increasing the magnitude of default.

CHAPTER 2

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What is NPA?

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.

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 such a case, any hit on income can jeopardize all

repayments. They, however, can file for bankruptcy under

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Chapters 7, 11 and 13 of the United States Bankruptcy

Code. Indians don't have such an option.

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

2.1 Meaning of NPA

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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 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

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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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2.2 Strategy for 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.

i) The collection process should be compliant to the

bank-specific recovery norms and also regulatory

guidelines.

ii) 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 debtor’s

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.

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iii) 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’.

Doubtful debtors, i.e. whose who can pay the reduced

amount as negotiated with them.

iv) 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 customer’s 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.

v) Record in notebook recovery efforts in chronological

order for each.

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CHAPTER 3

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.

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.

3.1 Loan recovery policy

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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 Bank’s 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

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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:

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 bank’s 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.

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6. Borrower’s 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.

9. 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 bank’s 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

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

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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 borrower’s inability to pay the loan

installments as per the schedule which resulted in the

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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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3.2 Debt recovery processes

Debt recovery processes can be typically of following

kinds, each involving different procedure:

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.

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3.3 Procedure of tribunal

1) Application to the Tribunal:

(1) Where a bank has to recover any debt from any person, it

may make an application to the Tribunal within the local

limits of whose jurisdiction By Act 1 of 2000, sec. 8

(w.r.e.f. 17-1-2000).Subs. by Act 1 of 2000, sec. 9, for

section 19 (w.r.e.f.17-1-2000).

(a) the defendant, or each of the defendants where there are

more than one, at the time of making the application, actually

and voluntarily resides or carries on business or personally

works for gain; or

(b) any of the defendants, where there are more than one, at

the time of making the application, actually and voluntarily

resides or carries on business or personally works for gain;

(c) the cause of action, wholly or in party, arises.

(2) Where a bank, which has to recover its debt from any

person, has filed an application to the Tribunal under

subsection (1) and against the same person another bank

also has claim to recover its debt, then, the later bank or

financial institution may join the applicant bank at any stage

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of the proceedings, before the final order is passed, by

making an application to that Tribunal.

(3) Every application under sub-section (1) or sub-section (2)

shall be in such form and accompanied by such documents

or other evidence and by such fee as may be prescribed

Provided that the fee may be prescribed having regard to the

amount of debt to be recovered Provided further that nothing

contained in this sub-section relating to fee shall apply to

cases transferred to the Tribunal under sub-section of

section 31. On receipt of the application under sub-section

(1) or sub-section, the Tribunal shall issue summons

requiring the defendant to show cause within thirty days of

the service of summons as to why the relief prayed for

should not be granted.

(5) The defendant shall, at or before the first hearing or within

such time as the Tribunal may permit, present a written

statement of his defence.

(6) Where the defendant claims to set-off against the

applicant’s demand any ascertained sum of money legally

recoverable by him from such applicant, the defendant may,

at the first hearing of the application, but not 17 afterwards

unless permitted by the Tribunal, present a written statement

containing the particulars of the debt sought to be set-off.

(7) The written statement shall have the same effect as a

plaint in a cross-suit so as to enable the Tribunal to pass a

final order in respect both of the original claim and of the set-

off.

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(8) A defendant in an application may, in addition to his right

of pleading a set-off under sub-section, set up, by way of

counter-claim against the claim of the applicant, any right or

claim in respect of a cause of action accruing to the

defendant against the applicant either before or after the

filing of the application but before the defendant has

delivered his defence or before the time limited for delivering

his defence has expired, whether such counter-claim is in the

nature of a claim for damages or not.

(9) A counter-claim under sub-section shall have the same

effect as a cross-suit so as to enable the Tribunal to pass a

final order on the same application, both on the original claim

and on the counter-claim.

(10) The applicant shall be at liberty to file a written

statement in answer to the counter-claim of the defendant

within such period as may be fixed by the Tribunal.

(11) Where a defendant sets up a counter-claim and the

applicant contends that the claim thereby raised ought not be

disposed of by way of counter-claim but in an independent

action, the applicant may, at any time before issues are

settled in relation to the counter-claim, apply to the Tribunal

for an order that such counter-claim may be excluded, and

the Tribunal may, on the hearing of such application, make

such order as it thinks fit.

(12) The Tribunal may make an interim order (whether by

way of injunction or stay or attachment) against the

defendant to debar him from transferring, alienating or

otherwise dealing with, or disposing of, any property and

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assets belonging to him without the prior permission of the

Tribunal.

(13) (A) Where, at any stage of the proceedings, the Tribunal

is satisfied, by affidavit or otherwise, that the defendant, with

intent to obstruct 18 or delay or frustrate the execution of any

order for the recovery of debt that may be passed against

him,

(i) is about to dispose of the whole or any part of his property;

or

(ii) is about to remove the whole or any part of his property

from the local limits of the jurisdiction of the Tribunal; or

(iii) is likely to cause any damage or mischief to the property

or affect its value by misuse or creating third party interest,

the Tribunal may direct the defendant, within a time to be

fixed by it, either to furnish security, in such sum as may be

specified in the order, to produce and place at the disposal of

the Tribunal, when required, the said property or the value of

the same, or such portion thereof as may be sufficient to

satisfy the certificate for the recovery of the debt, or to

appear and show cause why he should not furnish security.

(B) Where the defendant fails to show cause why he should

not furnish security, or fails to furnish the security required,

within the time fixed by the Tribunal, the Tribunal may order

the attachment of the whole or such portion of the properties

claimed by the applicant as the properties secured in his

favour or otherwise owned by the defendant as appears

sufficient to satisfy any certificate for the recovery of debt.

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(14) The applicant shall, unless the Tribunal otherwise

directs, specify the property required to be attached and the

estimated value thereof.

(15) The Tribunal may also in the order direct the conditional

attachment of the whole or any portion of the property

specified under subsection.

(16) If an order of attachment is made without complying with

the provisions of sub-section, such attachment shall be void.

(17)In the case of disobedience of an order made by the

Tribunal under sub-sections (12), (13) and (18) or breach of

any of the terms on which the order was made, the Tribunal

may order the properties of the person guilty of such

disobedience or breach to be attached an may also order

such person to be detained in the civil prison for a term not

exceeding three months, unless in the meantime the Tribunal

directs his release.

(18) Where a certificate of recovery is issued against a

company registered under the Companies Act, 1956 (1 of

1956) the Tribunal may order the sale proceeds of such

company to be distributed among its secured creditors in

accordance with the provisions of section 529A of the

Companies Act, 1956 and to pay the surplus, if any, to the

company.

(19) The Tribunal may, after giving the applicant and the

defendant an opportunity of being heard, pass such interim

or final order, including the order for payment of interest from

the date on or before which payment of the amount is found

31


due up to the date of realization or actual payment, on the

application as it thinks fit to meet the ends of justice.

(20) The Tribunal shall send a copy of every order passed by

it to the applicant and the defendant.

(21) The Presiding Officer shall issue a certificate under his

signature on the basis of the order of the Tribunal to the

Recovery Officer for recovery of the amount of debt specified

in the certificate.

(22) Where the Tribunal, which has issued a certificate of

recovery, is satisfied that the property is situated within the

local limits of the jurisdiction of two or more Tribunals, it may

send the copies of the certificate of recovery for execution to

such other Tribunals where the property is situated:

Provided that in a case where the Tribunal to which the

certificate of recovery is sent for execution finds that it has no

jurisdiction to comply with the certificate of recovery, it shall

return the same to the Tribunal which has issued it.

(23)The Tribunal may made such orders and give such

directions as may be necessary or expedient to give effect to

its orders or to prevent abuse of its process or to secure the

ends of justice.

2) Appeal to the Appellate Tribunal.

(1) Save as provided in subsection

(2) any person aggrieved by an order made, or deemed to

have been made, by a Tribunal under this Act, may prefer an

appeal to an Appellate Tribunal having jurisdiction in the

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matter. No appeal shall lie to the Appellate Tribunal from an

order made by a Tribunal with the consent of the parties.

(3) Every appeal under sub-section shall be filed within a

period of forty-five days from the date on which a copy of the

order made, or deemed to have been made, by the Tribunal

is received by him and it shall be in such form and be

accompanied by such fee as may be prescribed: Provided

that the Appellate Tribunal may entertain an appeal after the

expiry of the said period of forty-five days if it is satisfied that

there was sufficient cause for not filing it within that period.

(4) On receipt of an appeal under sub-section, the Appellate

Tribunal may, after giving the parties to the appeal, an

opportunity of being heard, pass such orders thereon as it

thinks fit, confirming, modifying or setting aside the order

appealed against.

(5) The Appellate Tribunal shall send a copy of every order

made by it to the parties to the appeal and to the concerned

Tribunal.

(6) The appeal filed before the Appellate Tribunal under sub-

section shall be dealt with by it as expeditiously as possible

and endeavor shall be made by it to dispose of the appeal

finally within six months from the date of receipt of the

appeal.

3) Deposit of amount of debt due, on filing appeal.

Where an appeal is preferred by any person from

whom the amount of debt is due to a bank or a consortium of

banks, such appeal shall not be entertained by the Appellate

33


Tribunal unless such person has deposited with the

Appellate Tribunal seventy-five per cent of the amount of

debt so due from him as determined by the Tribunal under

section 19: Provided that the Appellate Tribunal may, for

reasons to be recorded in writing, waive or reduce the

amount to be deposited under this section.

4) Procedure and Powers of the Tribunal and the

Appellate Tribunal.

(1) The Tribunal and the Appellate Tribunal shall not be

bound the procedure laid down by the Code of Civil

Procedure, 1908 (5 of 1908), but shall be guided by the

principles of natural justice and, subject to the other

provisions of this Act and of any rules, the Tribunal and the

Appellate Tribunal shall have powers to regulate their own

procedure including the places at which they shall have their

sittings.

(2) The Tribunal and the Appellate Tribunal shall have, for

the purposes of discharging their functions under this Act, the

same powers as are vested in a civil court under the Code of

Civil Procedure, 1908 (5 of 1908), while trying a suit, in

respect of the following matters, namely:--

(a) Summoning and enforcing the attendance of any person

and examining him on oath;

(b) Requiring the discovery and production of documents;

(c) Receiving evidence on affidavits;

(d) Issuing commissions for the examination of witnesses or

documents;

34


(e) Reviewing its decisions;

(f) Dismissing an application for default or deciding it ex

parte;

(g) Setting aside any order of dismissal of any application for

default or any order passed by it ex parte;

(h) Any other matter which may be prescribed.

(3) Any proceeding before the Tribunal or the Appellate

Tribunal shall be deemed to be a judicial proceeding within

the meaning of sections 193 and 228, and for the purposes

of section 196, of the Indian Penal Code (45 of 1860) and the

Tribunal or the Appellate Tribunal shall be deemed to be a

civil court.

NORMAL RECOVERY PROCEDURE:

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:

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:

35


(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) All calls where the customer becomes abusive or

threatening should be appropriately documented.

(v) 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.

(vi) 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.

(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

36


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.

37


(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.

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3.4 Other modes of recovery

(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.

39


(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

40


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

41


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).

Use 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 Adalats for recovery of personal loans, credit card

loans or housing loans with less than Rs.10 lakh as

suggested by the Honorable Supreme Court.

42


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.

3.5 Programs of bank

Credit counseling

43


It is the process of education to borrower about how

to avoid incurring debts that cannot be repaid as also how to

manage the debts burden and repayment commitments in

respect of a number of debts. This process is actually more

debt counseling than a function of credit education. Credit

counseling often involves negotiating with bank to establish a

debt management plan (DMP) for a customer. A DMP may

help the debtor repay his/her debt by working out a

repayment plan with the bank. DMPs, usually offer reduced

payments, fees and interest rates to the borrower. Recovery

agents refer to the terms dictated by the bank to determine

payments or interest reduction offered to customer in a debt

management plan.

Debt Management Programs

Once a customer has come under a DMP, the bank

will close the customer’s various accounts and restrict any

future charges in the accounts. The most common benefit of

a DMP is the consolidation of multiple monthly payments into

one monthly payment, which is usually less than the sum of

the individual payments previously paid by the customer.

Some DMPs advertise that payment can be cut by 50%,

although a reduction of 10-20% is more common.

CHAPTER 4

ICICI bank & its avenue

44


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

45


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 it’s 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. This includes wholly owned

subsidiaries in the UK, Canada and Russia, offshore

banking units in 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.

4.1 Recovery management of ICICI bank

Here how it works

Defaults are classified into two baskets – Soft and

Hard.

46


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 the supervision

of the bank.

The recovery agencies usually give the borrower a

stipulated time period within which the amount has to be

repaid back.

47


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 didn’t reply for bank notice, hence the

securitization and reconstruction of financial assets and

enforcement of security interest act, 2002 (securitization

act) comes into play.

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.

4.2 Article

ICICI Bank fined Rs500, 000 for rough recovery methods

48


A consumer commission has ordered ICICI Bank, the

country’s largest private sector lender, to pay a fine of

Rs500, 000 for use of force by the bank’s recovery agent on

a defaulting customer. The client who defaulted on loan had

approached the consumer affairs commission in Delhi

complaining of use of force by the bank’s recovery agents.

He alleged the recovery agents impounded his

vehicle and beat a friend’s 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 aren’t and outfits

independent are agents the methods. Recovery regarding

India of Bank Reserve the guidelines strict despite hires

country across)

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

49


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.

CHAPTER 5

50


Debt recovery agent

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

51


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 debt

becomes 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 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.

5.1 Engagement of Recovery Agents

52


Banks are advised to take into account the following

specific considerations while engaging recovery agents:

Agent’ in these guidelines would include agencies

engaged by the bank and the agents/ employees of the

concerned agencies. Banks should have a due diligence

process in place for engagement of recovery agents, which

should be so structured to cover, among others, individuals

involved in the recovery process. The due diligence process

should generally conform to the guidelines issued by RBI on

outsourcing of financial services vide circular

DBOD.No.BP.40/ 21.04.158/ 2006-07 dated November 3,

2006.Further, banks should ensure that the agents engaged

by them in the recovery process carry out verification of the

antecedents of their employees, which may include pre-

employment police verification, as a matter of abundant

caution. Banks may decide the periodicity at which re-

verification of antecedents should be resorted to.

To ensure due notice and appropriate authorization,

banks should inform the borrower the details of recovery

agency firms / companies while forwarding default cases to

the recovery agency.

Further, since in some of the cases, the borrower might

not have received the details about the recovery agency due

to refusal / non-availability / avoidance and to ensure

identification, it would be appropriate if the agent also carries

a copy of the notice and the authorization letter from the

bank along with the identity card issued to him by the bank or

the agency firm / company. Further, where the recovery

53


agency is changed by the bank during the recovery process,

in addition to the bank notifying the borrower of the change,

the new agent should carry the notice and the authorization

letter along with his identity card.

The notice and the authorization letter should, among

other details, also include the telephone numbers of the

relevant recovery agency. Banks should ensure that there is

a tape recording of the content / text of the calls made by

recovery agents to the customers, and vice-versa. Banks

may take reasonable precaution such as intimating the

customer that the conversation is being recorded, etc.

The up to date details of the recovery agency firms /

companies engaged by banks may also be posted on the

bank’s website. Where a grievance/ complaint has been

lodged, banks should not forward cases to recovery agencies

till they have finally disposed of any grievance / complaint

lodged by the concerned borrower. However, where the bank

is convinced, with appropriate proof, that the borrower is

continuously making frivolous / vexatious complaints, it may

continue with the recovery proceedings through the

Recovery Agents even if a grievance / complaint is pending

with them. In cases where the subject matter of the

borrower’s dues might be sub judice, banks should exercise

utmost caution, as appropriate, in referring the matter to the

recovery agencies, depending on the circumstances.

5.2 Recovery agencies

54


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.

5.3 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/ bank’s 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 there is uniformity in the standards of training. However,

every agent will have to pass the examination conducted by

IIBF all over India.

5.4 Soft skills for debt recovery

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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 the

regulatory 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.

1) 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,

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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 agent’s language (verbal as well as body language)

should be civil and courteous, as per the bank-specific

requirement.

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

receiver’s responses (including his/her body language as

mentioned above).

Make sure that the non-verbal communication (or body

language) is not adverse to debtor, though unintentional

2) 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

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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 debtor’s poit 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.”

3) 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 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

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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.

2) 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

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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.

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

debtor’s credit history, which may make his/her future

borrowing with any bank costlier and difficult.

This should induce the debtor to pay.

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.

5.5 Function of recovery agents

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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:

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1) Existence of loan or advance agreement between the

creditor and debtor.

2) Due date on or after which the obligation is required to be

discharged by the debtor in favour of the creditor.

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:

1) The loan agreement, and

2) 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

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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 sperate for each principal.

IT following would constitute the minimum requirement of

book-keeping for a recovery agent.

1) 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 agent’s

activities and also the book-keeping required. These should

therefore be carefully kept on record in chronological order.

2) 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.

3) Copies of loan/advances: Agreements between the

debtors and the bank is obliged to keep confidentiality of its

customer’s accounts and recovery and these should not be

divulged to third parties without the customer’s sent. As

such, a debt recovery agent must take all due care to the

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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.

Case study

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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 Kaushik’s 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 for the 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

don’t 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 don’t 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.

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Kaushik requests the concerned authority to take some

action on this.

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 XY’s 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

XY’s wife and daughters to make recovery. During one of

the visits to XY’s house, Z and his colleagues took away

forcibly some of the things that were available in XY’s 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.

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Following the suicide death of XY, the local police

arrested Z and his colleagues (who used to accompany Z

during his visits to XY’s 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 lakhs to the

deceased’s family. The incident has also been published in

the press and has damaged the Bank’s reputation in public

eye, at least for the time being.

Conclusion

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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 bonanza for investors in banking sector stocks that in

turn resulted into an improvement in their share prices.

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BIBLIOGRAPHY

PRIMARY DATA:

IDBI Bank (Cuffe Parade, Mumbai)

SECONDARY DATA:

Book reference

Handbook on debt (Indian Institution of banking and

finance)

Business economics (T.Y.B.COM)

Hindustan times (newspaper)

Web reference

www.rbi.co.in

www.icicibank.com

www.iibf.org.in

- Mandar

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http://www.iibf.org.in/

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