Recovery management in public sector banks.

RECOVERY MANAGEMENT IN PUBLIC SECTOR BANKS.

BACHELOR OF COMMERCE (BANKING AND INSURANCE)

SEMISTER-V ACADEMIC YEAR: -2012 2013

SUBMITTED BY: VIOLLA GONSALVES ROLL NO: 410

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

RECOVERY MANAGEMENT IN PUBLIC SECTOR BANKS.

BACHELOR OF COMMERCE(BANKING AND INSURANCE)

SEMISTER-VACADEMIC YEAR :-2012 2013

Submitted In Partial Fulfillment Of The Requirement For The Award Of Degree Of Bachelor Of Commerce (Banking & Insurance) VIOLLA GONSALVES. ROLL NO:410

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

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

CERTIFICATE

THIS IS TO CERTIFY MISS. VIOLLA GONSALVESOF BACHELOR OF COMMERCE (BANKING & INSURANCE), SEMESTER V (ACADEMIC YEAR :2012 2013)HAS SUCCESSFULLY COMPLETED THE PROJECT ONRECOVERY MANAGEMENT IN PUBLIC SECTOR BANKSUNDER THE GUIDENCE OF PROF. PRATIBHA SAHAI.

CO-ORDINATOR PRINCIPAL

PROJECT GUIDE / INTERNAL EXAMINER

EXTERNAL EXAMINER

DECLARATION

I, Miss. VIOLLA GONSALVES, the Student Of Bachelor of Commerce (Banking & Insurance) Semester- V (Academic Year:2012-2013).hereby declare that I have completed the project on RECOVERY MANAGEMENT IN PUBLIC SECTOR BANK.

The information submitted is true & original to the best of my knowledge.

VIOLLA GONSALVES ROLL NO: 410

INDEXSR.NOCHAPTERPAGE NO.

1.INTRODUCTION.6 7

2.DEFINITION OF RECOVERY.8

3.PUBLIC SECTOR BANKS:9 10

4.WHY IS RECOVERY MANAGEMENT ESSENTIAL?11

5.DEBT RECOVERY MANAGEMENT:

12

6.DEBT RECOVERY MEASURES:13 16

7.RECOVERY OF DEBT DETERMINED BY TRIBUNAL:

17 23

8.POLICY, PROCESSES AND PROCEDURE OF DEBT RECOVERY MANAGEMENT:

24 33

9.NON PERFORMING ASSETS:

34-37

10.RECOVERY PROCEDURE OF SBI38

11.RECOVERY PROCESS OF SBI39 40

12.

CASE STUDIES41-42

13.CONCLUSION43

14.QUESTIONARIES44

15.BIBLIOGRAPHY45

RECOVERY MANAGEMENT IN PUBLIC SECTOR BANKS.

INTRODUCTION: Banks were never so serious in their efforts to ensure timely recovery and consequent reduction of NPAs as they are today. It is important to remember that recovery management, be of fresh loans or old loans, is central to NPA management. This management process needs to start at the loan initiating stage itself. Effective management of recovery and NPA comprise two pronged strategy. First relates to arresting of the defaults and creation of NPA thereof and the second is to handling of loan delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of urgency in the minds of staff of bank and gave them a message that either they perform or perish. The prudential norm has forced the bank to look into the asset quality.

A debt from a loan, credit line or accounts receivable that is recovered either in whole or in part after it has been written off or classified as a bad debt. In accounting, the bad debt recovery would credit the "allowance for bad debts" or "bad debt reserve" categories, and reduce the "accounts receivable" category in the books. Not all bad debt recoveries are "like-kind" recoveries. For example, a collateralized loan that has been written off may be partially recovered through sale of the collateral. Or, a bank may receive equity in exchange for writing off a loan, which could later result in recovery of the loan and, perhaps, some additional profit.

DEFINTION OF RECOVERY:

Recovery is defined as the process of regaining and saving something lost or in danger of becoming costs. Recovery is a key to the stability of the banking sector there should be no hesitation in stating that Indian banks have done a remarkable job in containment of Non- Performing Assets (NPA) considering the overall difficult environment. Recovery management is also linked to the banks interest margins we must recognize that cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. No doubt, improving recovery management in India is an area requiring expeditions and effective actions in legal institutional and judicial processes. Banks at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to banks has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time.

PUBLIC SECTOR BANKS: DEFINITION OF PUBLIC SECTOR:

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

THE RATIONALES FOR PUBLIC SECTOR:

Various overlapping political and economic rationales have been advanced for public sector banks. Politically, public sector banks may be a response to the substantial economic and political power of large private banks. A more moderate, post - World War II version of this rationale was that government ownership of firms in strategic sectors or commanding heights was critical to development and these firms needed assured, low - cost funding by government banks. Thus, Countries that adopted socialist or planned economic regimes Nationalized private banks and / or set up public sector banks.

For example, Indias 1969 nationalization of 14 major banks was mainly justified by the need to control the commanding heights of the economy and to meet progressively the needs of development of the economy in conformity with national policy objectives (Preamble of the Banking Companies [Acquisition and Transfer of Undertakings] Act of 1969). The continued large role of public sector banks in many countries probably represents an overhang of these models of development. The rationale argued that public sector banks were needed to meet some perceived market failures, to be remedied by public bank loans (rather than Treasury grants).

Why is recovery management essential? Bank deserves to be paid for their products and services. The collection professionals in Recovery Management Systems will work to see that. Reasonable fees with no up-front costs. They get paid only when it is collect. Recovery Management Systems will design a collection strategy to meet banks objectives. Bank can recover their debts without losing customers. Monthly settlements with meaningful reporting. Status updates on demand. Extensive experience obtaining and collecting money judgments in Ohio. Garnishments, liens, and levies Recovery Management Systems will collect when legal action is the only option. 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.

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

DEBT RECOVERY MEASURES:Measures have been considered for faster legal process to enable the banks to bring down the level of NonPerforming Advances. These broadly relates to:

1. Setting up Lok Adalat Institution to help bank settle disputes involving accounts in doubtful and loss category with outstanding balance of Rs. 5 Lakh for compromise settlement.

2. Empowering debt recovery tribunals to organize Lok Adalat to decide on cases of Non Performing Advances of Rs. 10 Lakh and above.

3. Strengthening the functioning of debt recovery tribunals through amendment of the act of recovery of debts.

These measures of expected to provide necessary teeth to the debt recovery tribunals and spread of the recovery of NonPerforming Advances in time to come. However, these measures have not contributed to any perceptible recoveries from the defaulting entries although they have served as negative basket of steps shutting off fresh loans to these defaulters measures are also being contemplated that in all cases of defaults of cases of Rs 1 Cr and above to file criminal cases.

IMPORTANT POINTS FOR DEBT RECOVERY:-On the basis of the foregoing procedure for normal recovery process, we may list below certain Donts for the dent recovery, which are as follows: 1) Dont violate or breach the recovery policy, procedure etc. prescribed by the principal. 2) Dont exceed the authority given in the recovery arrangement. 3) Dont make a call to the debtor before 0700 hours or after 2100 hours. 4) Dont make anonymous calls or bunched calls to the debtor, which may be perceived as harassment. 5) Dont conceal or misrepresent your identity during calls and visit or other interaction with the debtor. 6)Dont show uncivil/indecent/dirty behavior or use such language during calls and visits to the debtor. 7) Dont harass/humiliate/intimidate/threaten the debtor- verbally or physically.

ADVANTAGES & DISADVANTAGES OF RECOVERY OF DEBTS:- ADVANTAGES:

1) The process of assigning debt collection to outsides enables officials from Banks to develop more remunerative new business. 2) Third party involvement in debt collection has proven time and again to improve the chances of recovering bank dues as these people are specialists in negotiating with debtors and the result usually speak for themselves; 3) A skillfully negotiated debt collection could mean saving on litigation cost. 4)The process of assigning debt collection to outsides enables officials of non-Banks. Cost to develop more beneficial new business.

DISADVANTAGES:

1) Debt collection does cost money; 2) The debt collection agency will be establishing a relationship with the banks customers, which could be potentially harmful if they sour that relationship by not dealing with customers in a courteous manner.

Elements of debt recovery:-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 recoverywould generally include:1) Specific tasks to be accomplished e.g. the amount to be recovered from the specified loan accounts in default and the broad time frame.2) Debt Recovery Policy and Procedure of the bank.2) Code of conduct in recovery process may include dress code, verbal and written communication rules top be followed by the individuals employed by the agency for the purpose of collection.3) Rights of the agent, including the commissions/fees payable by the principal to the agent/agency for the recovery of debt/other services.

The Debt Recovery Policy and code of conduct in the debt recovery will be regulations compliant, i.e. in accordance with the directives and guidelines of the Reserve Bank of India issued from time to time. If, however these are not incorporated therein, it is advisable for agents to seek clarification from the principal, as compliance with the regulations is mandatory for the banks and also their recovery agents.The Debt Recovery Agreement between the credit institution and the debt recovery agent/agency serves as the contractual arrangement that is legally binding on both. Such an arrangement, being bank specific may vary from bank to bank in details. The duties of the agent/agency the authority delegated and code of conduct prescribed by the bank in the process of recovery function would to be carefully noted for strict compliance by the agent.

RECOVERY OF DEBT DETERMINED BY TRIBUNAL

Modes of recovery of debts:

The Recovery Officer shall, on the receipt of the copy of the certificate under sub - section (7) of section 19, proceed to recover the amount of debt specified in the certificate by one or more of the following modes, namely:-- (a) Attachment and sale of the movable or immovable property of the defendant. (b) Arrest of the defendant and his detention in prison.

(c) Appointing a receiver for the management of the movable or immovable properties of the defendant.

DEFAULTS OF LOAN: One major problem which the banks in India are facing is the problem of recovery and overdue of loans. The reasons behind this may vary for different financial institutions as it depends upon the respective nature of loans. Here an attempt is made to find out the some causes of default of loans due to which financial Institutions are facing the problems of overdue of loans. The recovery officers of different banks are interviewed for finding out the causes of defaults. These reasons may be useful for the and Banks for the better recovery of loans in future. After surveying different banks, the following can be said to be some of the main causes of default of loans from industrial sector:-

1. Improper selection of an entrepreneur:- Selection of the right Entrepreneur is one of the major factors in the profitability of Banks. Two major criterions namely the intention to repay and the capacity to repay should be properly dealt with in Credit Evaluation. The entrepreneurs who have the willingness, capabilities, qualities and the requisite expertise for successfully setting up and running an industrial unit, should be identified with proper prudence and judiciousness. This is the best way of safeguarding the investment of a bank, thereby ensuring proper and timely repayment. Unbiased survey reports of the site and capability of the Entrepreneur must be verified by the surveyor. In other words the credit worthiness of the entrepreneur as well as the project should undergo very careful scrutiny before the sanctioning of the loan. Strict measures and security should taken before the sanctioning of the loan.

2. Deficient analysis of project Viability:- One of the important reasons for poor recovery of loan is attributable to wrong selection of projects. Success of any project depends upon the viability of the project, and the viability in turn, depends upon the easy availability of raw material, transportation, railways, skilled labour, communication facilities, markets etc. If any of the above is not easily available to the entrepreneur it results in an increase in the cost of the project and also in delay of production. This inevitably causes default in repayment of loans. There are many examples where the banks accede to finance projects deficient in one or more of these areas. In usual practice, when an entrepreneur approach for a loan he presents his project in such a way that no one can easily comprehend the non-availability of the primary prerequisites. All the weak points are camouflaged and only strong points of the project are highlighted.

3. Inadequacy of Collateral Security / Equitable Mortgage against Loan:- Collateral Security by way of mortgage of immovable property or other fixed assets, thereby creating a charge, trains the mind of the borrower to be prepared to pay the dues to the lenders. But when he is free from this fear of losing his encumbered asset in the event of his defaulting in the payment of dues to banks, he often takes the liberty, and tends to weigh the pros and cons vis--vis default. Security against loan, though at times may fall harsh on the borrower, serves a worthwhile purpose in that it creates promoters' stake in the borrowers and thus, disciplines the borrower to be more committed in paying the dues to Banks.

4. Unrealistic Terms and Schedule of Repayment - Occasions are not few when there develops a tendency on the part of the financers to paint a rosy picture of the project at the time of appraisal. If the sanctioning authority is guided by considerations of personal interests, many things may happen. The breakeven point of a project may be shown at an unrealistically low level of operation, or profitability may be shown at an unduly high level just to brighten the chances of acceptability of the project by the financial institution; or cash inflow may be shown in an unduly optimistic manner and, therefore, Debts Service Coverage Ratio(DSCR) worked out incorrectly, fixing unrealistically high installments and conservative schedule of repayments. These inner pulls and pressures may find reflection in fixing excessive amounts of installments in order to show an early period of repayment. The borrower at this stage finds himself in an unenviable position of a 'Yes Master' and nods his head at whatever conditions are attached or whatever repayment schedule is fixed by the financial institutions, in all probability, covering up his design to evade payment of the future dues. And, the real problem surfaces when repayment of installment/payment of interest falls due and the borrower conveniently and blissfully ignores calls for clearance of the said dues, not so much due to his intention to defraud the loans, as due to him already bleeding white to keep his concern going.

5.Lack of Follow up Measures:- "A stitch in time saves nine" Follow-up measures taken regularly and systematically keep the borrowing unit under constant vigil of the banks. Many ills can be checked through such follow-up measures by keeping the borrowing units on their alertness and guiding them to rectify their mistakes in the first opportunities or extending them a helping hand in tiding over their tight times. Normally, such close follow-up programs are conspicuous by their absence. In the result, the borrowing units not only ignore payment of their dues to banks but also often tread on wrong tracks, much to the detriment of their own financial health and that of the banks. Performance of the borrowing units, if carefully and systematically monitored through regular inspections by scrutiny of returns, annual balance sheet and inspection of site, can be significantly improved. Naturally, such inspections prevent the borrowers from deviating from the terms and conditions of the loan or from diverting any fund for purpose other than those earmarked in the sanction letter and keep the financial health of the units in good order.

6. Labor problems:- The labour situation in India can be broadly classified into two categories namely availability and welfare related problems. Skilled labour is in shortage for many specialized industrial units particularly because of the geographical situation of such units. Shortage of labour results in unwarranted deceleration of production thereby hampering the profitability of the concerned unit. On the other hand labour welfare is grossly neglected by industrial units leading to a feeling of dissatisfaction and disgruntlement among the working force. However, it would be pertinent to mention here, that there are numerous instances where political and vested interests tend to instigate labour problems.

7. Default due to natural calamities:- A certain proportion of default can be attributed to natural calamities such as floods, earthquakes, storms, etc. Prima-facie this was seen to be a factor beyond human control. A more detailed insight, would however, suggest that certain precautionary preventive measures such as proper meteorological and topographical analysis of the industrial sight can go a long way in reducing this element of risk. Natural calamities not only affect the unit directly but also exert additional burden on the Government in terms of relief measures, waivers etc. A further fraction, albeit nominal, is of such borrowers who tend to take undue advantage of such natural calamities in order to avoid repayment, thereby increasing the magnitude of default.

STRATEGY FOR DEBT RECOVERY:-Devising a strategy helps in achieving a set goal or objective. Recovery agents should therefore devise a strategy for debt recovery. The following guidelines would help in preparing proper strategy for debt recovery: The collection process should be compliant to the bank-specific recovery norms and also regulatory guidelines. The collection timing should be synchronized to the cash inflow pattern of the debtors: For example, recovery from salaried employees should be timed when salary is received by or credited to the debtors account, normally at the moth-end. In case of SME borrowers the effort should coincide with cash flow on account of sales. In case a collection from agriculturist should be made, then it should be soon after the crops are sold. This will call for knowledge of bank products on the part of agents. It should be the Endeavour of the agent that collection should be made well before the cash inflows are spent away by the debtor for meeting other expenses. Types: This is based on the dictum that one size does not Adopt different collection strategy for different debtor fit all. In the foregoing paragraphs, three types of debtors have been described and they need different strategies for recovery success: Normal debtors, i.e. who can pay and will pay if reminded or/and persuaded to pay. Difficult debtors, i.e. those who can pay, but will not pay. Doubtful debtors, i.e. whose who can pay the reduced amount as negotiated with them.

While different strategies are required for different types of debtors, the following are the common points to be followed in all kinds of recovery strategies:

Recovery effort should start with the establishing a good rapport with the debtor. Communication, listening and persuasive skills would be applied in building good interpersonal relations. Go through the know Your Customer papers furnished by the bank and know the customers identify and personal profile. Go through the copy of the loan agreement of the debtor furnished by the bank and note down the financial position, cash flow pattern, and assets charged to the bank.

Record in notebook recovery efforts in chronological order for each.

Policy, Processes and procedure of debt recovery management: Collection of post due debt or receivables of the bank that has engaged a recovery agent is the core function of the agent. All other functions, as discussed in the preceding unit, revolve around this core function. We will discuss in detail the policy, processes and procedure for debt recovery function in this unit. Banks lay down their policy and procedure for collection of past due debts in conformity with the legal and regulatory framework. The banks will in particular, abide by:1) The RBI directives on recovery of debt, including recovery agents engaged by the bank and,2) The Model Policy on collection of Dues and Repossession of security framed by the Indian Banks Association.3) A bank will normally incorporate its policy and procedure for debt recovery in the arrangement entered into its recovery agents. In terms of the recovery management agreed with the bank, the recovery agents should adhere to the policy, procedure, etc. prescribed by the bank.

Loan recovery policy:- The debt collection policy (recovery policy) of the bank is built around dignity and respect to customers. The Bank will not follow policies that are unduly coercive in recovery of dues from borrowers. The policy is built on courtesy, fair treatment and persuasion. The bank believes in following fair practices with regard to recovery of dues from borrowers and taking possession of security (properties / assets charged to the bank as primary or collateral security) (known as security repossession) and thereby fostering customer confidence and long-term relationship. The repayment schedule for any loan sanctioned by the Bank will be fixed taking into account the repaying capacity and cash flow pattern of the borrower. The bank will explain to the customer upfront the method of calculation of interest and how the Equated Monthly Installments (EMI) or payments through any other mode of repayment will be appropriated against interest and principal due from the customers. The bank would expect the customers to adhere to the repayment schedule agreed to and approach the Bank for assistance and guidance in case of genuine difficulty in meeting repayment obligations. The Banks Security Repossession Policy (taking possession of the mortgaged properties under SARFESI Act or acquiring the property as non banking asset through enforcement of decree) aims at recovery of dues in the event of default and is not aimed at whimsical deprivation of the property. The policy recognizes fairness and transparency in repossession, valuation and realization of security. All the practices adopted by the bank for follow up and recovery of dues and repossession of security will be in consonance with the law.

General Guidelines:-All the members of the staff or any person authorized to represent our Bank in collection and / or security repossession would follow the guidelines set out below:

1. The customer would be contacted ordinarily at the place of his / her choice and in the absence of any specified place, at the place of his / her residence and if unavailable at his / her residence, at the place of business / occupation.2. Identity and authority of persons authorized to represent the Bank for follow up and recovery of dues would be made known to the borrowers at the first instance. The bank staff or any person authorized to represent the bank in collection of dues or / and security repossession will identify himself / herself and display the authority letter issued by the bank upon request.3. The bank would respect privacy of its borrowers.4. The bank is committed to ensure that all written and verbal communication with its borrowers will be in simple business language and the bank will adopt civil manners for interaction with borrowers.5. Normally the banks representatives will contact the borrower between 0700 hrs and 1900 hrs, unless circumstances warrant visiting the borrower at odd hours and occasions. Such circumstances would include continuous irregularity in the accounts.

6. Borrowers requests to avoid calls at a particular time or at a particular place would be honored as far as possible.7. The bank will document the efforts made for the recovery of dues and the copies of communication, if any, sent to the customers will be kept on record.8. All assistance will be given to resolve disputes or differences regarding dues in a mutually acceptable and in an orderly manner.1. Inappropriate occasions such as bereavement in the family or such other calamitous occasions will be avoided for making calls / visits to collect dues.

1. Giving notice to borrowers: While written communication, telephonic reminders or visits by the banks representatives to the borrowers place or residence will be used as loan follow up measures, the bank will not initiate any legal or other recovery measures including repossession of the security without giving due notice in writing. The Bank will follow all such procedures as required under law for recovery / repossession of security.

2. Repossession of Security:- Repossession of security is aimed at recovery of dues and not to deprive the borrower of the property. The recovery process through repossession of security will involve repossession, valuation of security and realization of security through appropriate means. All these would be carried out in a fair and transparent manner. Repossession will be done only after issuing the notice as detailed above. Due process of law will be followed while taking repossession of the property. The bank will take all reasonable care for ensuring the safety and security of the property after taking custody, in the ordinary course of the business.

3. Valuation and Sale of Property:- Valuation and sale of property repossessed by the bank will be carried out as per law and in a fair and transparent manner. The bank will have right to recover from the borrower the balance due, if any, after sale of property. Excess amount, if any, obtained on sale of property will be returned to the borrower after meeting all the related expenses provided the bank is not having any other claims against the borrower.

4. Opportunity for the borrower to take back the security: As indicated earlier in the policy document, the bank will resort to repossession of security only for the purpose of realization of its dues as the last resort and not with intention of depriving the borrower of the property. Accordingly, the bank will be willing to consider handing over possession of property to the borrower any time after repossession but before concluding sale transaction of the property, provided the bank dues are paid in full. If satisfied with the genuineness of borrowers inability to pay the loan installments as per the schedule which resulted in the Repossession of security, the bank may consider handing over the property after receiving the installments in arrears. However, this would be subject to the bank being convinced of the arrangements made by the borrower to ensure timely repayment of remaining installments in future.

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.

OBJECTIVES OF THE ACT:1) To improve and expedite the process of recovery of loans given by Banks & financial institutions.

2) To fasten the process of adjudication by following a summary procedure in dealing with the applications.

3) To protect the Banks interest. Banks interest is public interest & public interest is nations interest.

4) Recovery process blocks huge funds in unproductive assets, the value of which deteriorates over the time.For example: The Supreme Court in the Union Bank of India vs. DRT, observed that the total amount recovered by the public sector bank was ` 5,662 crore & ` 139 crore towards financial institution.

PROCEDURE OF RECOVERY: The procedure will generally be applied to the debtors who are willing to pay the dues with normal recovery process. Based on the above-mentioned regulatory guidelines, following procedure may be outlined for such recovery. However the recovery agents should follow the bank-specific debt recovery procedure as advised by their principal. Below are given the main rules for making telephone calls and visit to the debtor for recovery of dues:1) The recovery agent has been authorized by the bank to collect the past due debt from the particular customer.

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

3) Making customer calls: This is the first step in recovery procedure and following rules should be followed generally:(i) Calls are made from the same number as advised by the bank to the customer.(ii) The agents disclose his identity and authority at the first instance.(iii) The agent contacts the debtor between 0700 hours and 1900 hours, unless the special circumstance of his/her business or occupation requires the bank to contact of a different time. Under no circumstances, can the customer be called beyond 2100 hours.(iv) All calls where the customer becomes abusive or threatening should be appropriately documented.(v)Customers question should be answered properly. They should be provided with information requested and given assistance in making recovery. Minor issues should be resolved.(vi)How often to call customer/ The purpose of a collection call as to bring to the Customers notice the obligation and to seek a commitment to pay on a specified date. Once a promise is elicited a call may be made to serve as a reminder and for confirmation of payment.(vii) If the customer is not available during a few calls made by the agent, a message may be left to an adult family member as follows Please leave a message that ABC had called and request the customer to call ABC back at the given phone number. The message should not indicate that the customer ABC has overdue amount, or the call originated from a Recovery agency.4) Visit to customer (debtor), this would be the second step in collection process. Following procedure should generally be followed. (i) A customer should be visited for debt collection only after these conditions are satisfied;The debtor has not paid the due amount within the days of grace and the dues are still outstanding against him/her.The debtor has been notified of the amount due and also of the name of the collection agent.The collection agent has taken an appointment from the debtor for the visit.(ii) During visit, the agent should be in proper dress and appearance, or wear the dress prescribed by the principal and follow the timing and place of the visit as per the principals or RBI/IBA code, unless otherwise agreed by the debtor expressly.(iii) At the first stance, the agent should utter salutation words (like good morning/eveningsir/madam, as per custom of the bank). The agent should thereafter show his ID card and authority given by the principal for debt collection from the debtor./ Only after these initial formalities, the conversation regarding debt collection should start. The time of visiting the customer will be generally between 0700 hours to 2100 hours. Visits earlier or later than the prescribed time may be made only under the following conditions:When the customer has expressly consented to that timing.When attempts to contact the customer have resulted in information that the customer is normally only available outside these hours and no alternate telephone number is available to contact him/her, When due to nature of the customers employment i.e. working in shifts e.g. call center, hotel. He/she is usually available outside these hours. The agent should respect privacy of the debtor. Privacy policy as discussed above for calls would apply during visits also.(vi) During the visit, due respect and courtesy should be shown to the customer and the interactions should be civil and polite as per the principals policy.(vii) During interactions with the debtor, the agent must not use threats or intimidation verbally or by body language. Under no circumstances, any physical violence be used in debt collection process.

NON PERFORMING ASSETS: For a bank, an NPA or bad debt is usually a loan that is not producing income. Earlier it was largely applicable to businesses. But things have changed with banks widely extending consumer loans (home, car, personal and education, among others) and strict asset classification norms. If a borrower misses paying his equated monthly installment (EMI) for 90 days, the loan is considered bad, or an NPA. High NPAs are a sign of bad financial health. This has wide-ranging ramifications for a bank, especially in the stock market and money market. So, as soon as a debt goes bad, the banks want it either made better or taken out of their books.

MEANING OF NPA:- An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower become non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status.

1) Why Such Huge Levels Of NPAs Exist In The Indian Banking System (IBS)? The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned 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 bench mark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets.

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

PROVISION FOR NPAsSR.NOASSETS CLASSIFICATIONPROVISION

1Standard assets (Over due up to 90 days) For agriculture & SME 0.25%Commercial & others 0.40%

2.a.

b.Non- performing assetsSub standard (NPA) up to 12 months

Doubtful (NPA over) 12 months 10% on secured portion & 20% on un-secured portion

Upto 1 year 20 % 1 to 3 year 30 % 3 & above 100% unsecured loans 100%

3.Loss assets 100 %

VARIOUS RECOVERY PROCEDURES OF STATE BANK OF INDIA:

State Bank of India adopts various recovery procedures to recover the debt from its defaulters.The various recovery procedures are mentioned below: Reasons For Default : There are various reasons for default like mis-management, diversification of fund, short fallin investment, will fall default etc. So a credit manager should take various factors into account before lending a loan. Demand Notice:

When a defaulter does not repays loan a demand notice isissued to him that he has to repay his loan witha stipulate time period. Legal Notice:

When a defaulter does not respond to the demand notice adirect notice is issued to him that if hedoes not repay the loan action would be taken against him legally and the court notice is issued against him. Transfer To NPA Account: When a defaulter does not respond to respond to any legalnotice or he becomes bankrupt the Whole account is transferred to NPA account.

VARIOUS DEBT RECOVERY PROCESS OF STATE BANK OF INDIA:1. APPOINMENT OF MRT TEAM.2. CONDUCT OF RECOVERY CAMP.3. COMPROMISE PROPOSAL.4. LOK ADALAT.5. APPOINMENT OF DEBT RECOVERY OFFICER.6. OUT OF COURT SETTLEMENT.

1) APPOINMENT OF MRT TEAM: This is a special team appointed but SBI under different branches. Here the officers are appointed mainly for debt recovery purpose. When the amount of loan arenot properly recovered or received then those amount are converted into probable NPA account and further also they are not recovered they are converted into NPA account., so to overcome this difficulty MRT team are appointed to recover the amount outstanding from the loanholder.2) CONDUCT OF RECOVERY CAMP: This is a kind ofgathering done by MRT team and the loan holder, whose accounts are converted into NPA account. Here the MRT team divides the NPA account holder into different regions and districts and calls a meeting with those loan holder and discuss the matter and give them ways anddirections how to return the money which they have taken.3) COMPRISE PROPOSAL: This is a kind of joint agreement between the bank and the loanholder, that if they return back the money, certain amount ofmoney will be relieved.4) LOK ADALAT: This is a kind of dispute settlement done between the bank and the loanholder with the help of a court i.e. the dispute issettled between them by court judgment. Here the bank files acase against the loan holder and based on the evidence and legality the court gives adecision which the bank and the loanholder are bound to follow through various legal proceeding. The claims settled at the Lok Adalatorganised include Rs 20.82crore pertaining to 14 borrowers of State BankofIndia (SBI), Rs 15.60 crore.

5) DEBT RECOVERY OFFICERS: These officers are specially appointed for debt recovery purpose. Their key responsibilities lies on how they could recover all thedebt that the bank holds.These are the various methods that StateBank India adopts to recover the debt which areoutstanding from the loan holder.6) OUT OF COURT SETTELMENT: BANKS should try to enter into out of-court settlement with defaulters, as far as possible. The process of getting adegree takes a long time and even if a bank obtains a degree in its favour, it usually encounters difficulties in executing the decree. And, even then, it is usually a distress-sale of the seized asset, which may not fetch a good price in the market. Therefore, it is better that the bankers settle to a compromise with the defaulters.

CASE STUDIES:

Bad loans of 19 PSU banks touch Rs 1 lakh crore

NEW DELHI: Bad loans of 19government bankshave gone above Rs 1 lakh crore till March this year, though most of these banks have been reporting profits.

"The government has advised these banks to take a number of new initiatives to increase the pace of recovery and manage NPAs," minister of state for financeNamo Narain Meenasaid on Thursday. The gross non-performing assets of public sector banks as of March 2012 amounts to Rs 1,12,489 crore.

Meena said banks have also been asked to include appointment of nodal officers to conduct special drives for recovery of bad assets, to put in place early warning systems, to replace system of post dated cheques with Electronic Clearance System and to proactively pursue loan issues with state governments.The channels of recovery available to banks include recourse to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Debt Recovery Tribunals, Lok Adalats etc.

Bad loans of these banks may rise further with many sectors reporting late or no recoveries of payments. An assessment study by Bank of Baroda indicated that loans of Rs 35,000 crore of textile units may have to be restructured by banks or they may turn bad.

Taking note of this fact, the government has advised all public sector banks to set up a separate window for considering restructuring proposals in the textile industry on a case-to-case basis.

The RBI, which has examined the study, said there was no need for any special regulatory dispensation and banks can provide two year moratorium on term loans and convert working capital into working capital terms loans with repayment period of 3-5 year as part of restructuring.

Revised RBI norms push up IOB's bad loan provisioning by Rs 165 cr

CHENNAI, MAY 26:For Indian Overseas Bank, the prospect of recovering Rs 107 crore from a written-off bad loan (of Prakruti Infrastructure) in the current quarter, comes at an opportune time. For, the recovery would soften the blow of the additional Rs 165 crore of provision for bad debts the bank would have to make for April-June, on account of the revised provisioning norms.The RBI recently raised the provisioning requirement across debt categories. For instance, the provisioning for loans where interest is overdue for over 90 days has been raised by 5 percentage points to 15 per cent. Similarly, for bad loans not backed by collateral, the provision requirement has been raised by 5 percentage points to 25 per cent.Mr. M. Narendra, Chairman and Managing Director, IOB, toldBusiness Lineon Wednesday that the bank would have make a provision of Rs 145 crore for bad loans and Rs 20 crore for restructured assets.Sour accountsIOB has been in the grip of delinquent loans in the last couple of years, mainly because of a few accounts of the real estate industry having gone sour.The bank reduced its total bad loans to Rs 3,089 crore as on March 31, 2011, from Rs 3,611 crore the previous year. However, the bank could have shown better performance on bad loans front if it were not for fresh slippage of Rs 873 crore during the fourth quarter of 2010-11.One of the headache accounts was that of Prakruti Infrastructure, but thankfully the borrower is repaying the loan. The Rs 107-crore expected to come in the current quarter will soften the blow on account of the higher provisioning, says Mr. A. P. Singh, General Manager-Recovery, IOB.

CONCLUSION:To conclude with, till recent past, borrowers even after defaulting continuously never had any real fear of bank taking any action to recover their dues despite the fact that their entire assets were hypothecated to the banks. This is because there was no legal Act framed to safeguard the real interest of banks. In case of banks, bad debt is usually a loan that is not producing income. Earlier it was largely applicable to businesses. But things have changed with banks widely extending consumer loans (home, car, personal and education, among others) and strict asset classification norms.

QUESTIONARIES:

What is recovery management?Ans: Recovery management is a key to the stability of the banking sector there should be no hesitation in stating that Indian banks have done a remarkable job in containment of Non- Performing Assets (NPA) considering the overall difficult environment.

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

What is NPA?Ans:An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days.

What are the types of default?Ans:Default can be of two types: Debt services default and technical default. Debt service default occurs when the borrower has not made a scheduled payment of interest or principal. Technical default occurs when an affirmative or a negative covenant is violated.What is a loan recovery?Ans: When a loan has been taken by a person from a bank then he has to repay it according to the EMI fixed by the bank but if the person has failed to pay the EMI regularly for a fixed period then the account is named as NPA and after that bank start recovery procedure means to take back his loan amount from the mortgaged property of the person according to the procedure of SECURITISATION ACT.

BIBLIOGRAPHY:Book reference:

Recovery management in banks. By R .C. KOHLI.

Website reference:

www.bbi.co.inwww.rbi.com3