Recovery of Magmt

8/6/2019 Recovery of Magmt

1/17

C H A P T E R 1

Introduction

Banks were never so serious in their efforts to ensuretimely recovery and

consequent reduction of NPAs as

theya r e t o d a y . I t i s i m p o r t a n t t o r e m e m b e r t h a t r e c ov e r y management, be of f resh loans or o ld loans , i s centra l toNPA

management. This management process needs to startat the loan initiating

stage i tsel f . Effect ive management

o f r e c o v e r y a n d N P A c o m p r i s e t w o p r o n g e d s t r a t e g y . F i r s t r e l

a t e s t o a r r e s t i n g o f t h e d e f a u l t s a n d c r e a t i o n o f N P A t hereof

and the second is to handling of

loan del inquencies.The tene ts o f f inancia l sec tor refo rms were revol

ut ionarywhich created a sense of urgency in the minds of staff

of bank and gave them a message that either they perform or perish. Theprudential norm has forced the bank to look into the asset

quality.A d e b t f r o m a l o a n , c r e d i t l i n e o r a

c c o u n t s receivable that is recovered either in whole or in part after

ith a s b e e n w r i t t e n o f f o r c l a s s i f i e d a s a b a d d e b

t . I n a c c o u n t i n g , t h e b a d d e b t r e c o v e r y w o u l d c r

e d i t t h e "al lowance for bad debts" or "bad debt reserve"

categories,and reduce the "accounts receivable" category in the books.

1


2/17

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 ofbecoming costs

.

Recovery is a key to the stability of the banking sector there should be no

hesi tat ion in stat ing that Indian

banksh a v e d o n e a r e m a r k a b l e j o b i n c o n t a i n m e n t

o f N o n -

Performing Assets (NPA) consider ing the over al l d i f f icul tenvironm

ent. Recovery management i s a lso l inked to thebanks interest

margins we must recognize that cost

andr e c o v e r y m a n a g e m e n t s u p p o r t e d b y e n a b l i n g l

e g a l framework hold the key to future health and

competitivenesso f t h e I n d i a n b a n k s . N o d o u b t , i m p r o v

i n g r e c o v e r y m ana ge me nt i n I ndi a is a n a rea r equ ir in g

expeditions andeffective actions in legal institutional and judicial

processes.B a n k s a t p r e s e n t e x p e r i e n c e c o n s i d e r a b l e d i f f i c u l t i e

s i n recovering loans and enforcement of securities charged withthem. The

exist ing procedure for recovery of debts due

t o b a n k s h a s b l o c k e d a s i g n i f i c a n t p o r t i o n o f t h e i r f u n d s i n u n p

roductive assets, the value of which deteriorates with thepassage of time.


3/17

RECOVERY MANAGEMENT IN BANKST h e R e c o v e r y O f f i c e r m a y , b y o r d e r , a t a n y s t a g e o f

t h e execution of the certificate of recovery, require any person,and in

case of a company, any of its officers against whomor which the

certificate of recovery is issued, to declare onaffidavit the particulars of his

or its assets.](5) The Recovery Officer may recover any amount of debtdue

from the defendant by distrait and sale of his movableproperty in the

ma nn er la id do wn in th e Th ir d Sc he du le to the Income-Tax Act, 1961 (43

of 1961).

Use oflok adalatT h e H o n o r a b l e S u p r e m e C o u r t a l s o o b s e r v e d t h a t l o a n s ,

personal loans, credit card loans and housing loanswith less than Rs.10

lakh can be referred to Lok Adalats.

Int h i s c o n n e c t i o n , b a n k s ' a t t e n t i o n i s i n v i t e d t o C i r c u l a r

DBOD.No.Leg.BC.21/09.06.002/2004-05 dated August 3,2004

w h e r e i n t h e y w e r e a d v i s e d t o u s e t h e f o r u m o f

L o k A d a l a t s o r g a n i z e d b y C i v i l C o u r t s f o r r e c o v e r y o f l o a n s . Ba

nks are advised that they should preferably use the forumof Lo k Adalats fo r

recovery of personal loans, creditcardl o a n s o r h o u s i n g l o a n s w i t h l e s s t h a n R s . 1 0 l

a k h a s suggested by the Honorable Supreme Court.Banks, as principals, are

responsible for the actionsof their agents. Hence, they should ensure that

their agentsengaged for recovery of their dues should strictly adhere

tothe above guidelines and instructions.Complaints received by Reserve Bank

regardingviolation of the above guidelines and adoption of

a bus iv ep r a c t i c e s f o l l o w e d b y b a n k s r e c o v e r y a g e n t s w o u l d b

e

42

RECOVERY MANAGEMENT IN BANKS

viewe d s erious ly. Res erve Bank may c onside r imp osing aban on a

bank from engaging recovery agents in a particular area, either jurisdictional or


4/17

functional, for a limited period.

Inc a s e o f p e r s i s t e n t b r e a c h o f a b o v e g u i d e l i n e s . S i m i l a r

supervisory action could be attracted when the High Courtsor th e

Sup rem e Cour t pas s str ict ures or impo se pena ltie sagainst any bank or

its Directors/ Officers/ agents withregardt o p o l i c y , p r a c t i c e a n d p r o c e d u r e r e l a t e d t o t h e r e c o v e r

y process.

3.5 Programs ofbank

Credit counseling

It is the process of education to borrower about howto avoid incurring debts that

cannot be repaid as also how toma na ge the de bt s bu rde n and

re pa yme nt co mm it me nt s inrespect of a number of debts. This process

is actually more43


debt counsel ing than a funct ion of credit education.

Creditcounseling often involves negotiating with bank to establish adebt

management plan (DMP) for a customer. A DMP

mayh e l p t h e d e b t o r r e p a y h i s / h e r d e b t b y w o r k i n

g o u t a repayment plan with the bank. DMPs, usually offerreducedpayments, fees and interest rates to the borrower. Recoveryagents

refer to the terms dictated by the bank to de terminepayments or interest

reduction offered to customer in a debtmanagement plan.

Debt Management Programs

Once a customer has come under a DMP, the bankwil l close the customers

var ious accounts and restr ict anyfuture charges in the accounts. The most

common benefit of a DMP is the consolidation of multiple monthly payments

intoone monthly payment, which is usually less than the sum

of the individual payments previously paid by the customer.S o me

D M P s a d v e r t i s e t h a t p a y m e n t c a n b e c u t b y 5 0 % , although a

reduction of 10-20% is more common.

C H A P T E R 4

ICICI bank & its avenue


5/17

To understand about this big bank, we need tounders ta nd ho w i t be came

so big a force to reckon with.

44


IC I C I ( Industr ia l Credi t Investment Corporat ion of

I

ndia)promoted the ICICI bank in 1994 with its stake reducing to46% after

the IPO in 1998. ICICI is a well-known name inI n d i a a lo n g w i t h

IDBI

a n d w a s f o r m e d i n 1 9 5 5 a t t h e initiative of the World Bank,

Indian Government and IndianIndus tr ies . B ot h of thes e i nst itut ions

ha ve an exc ep ti on al brand-image and one of the highest possible

ratings

fromC R I S I L a n d o t h e r r a t i n g o r g a n i z a t i o n s . I C I C I c a n b e co

nsidered an ol igopol ist ic corporation along with IDB I . ICIC l i sted in

NYSE in 2000. In 2001 i t underwent a

t ightm a r r i a g e w i t h B a n k o f M a d u r a i n a s t

o c k - o n l y amalgamation.

ICICI Bank


6/17

(BSE: ICICI) (formerly

IndustrialCredit and Investment Corporat ion of India

)

i sIndia's largest pr ivate sector bank in market capital i zat ion andseco

nd largest overall in terms of assets. ICICI Bank hastotal assets of

about USD 100 Bi l l ion (end-Mar 2008), anetwork of over 1308

b r a nc h e s a n d o f f ic e s , a b ou t 3 9 50 A T M s , a n d 2 4 m i l l i o n

c u s t o m e r s ( a s o f e n d J u l y 2 0 0 7 ) . I CI CI Ba n k o f fe r s a wi de ra n ge

of banking products andfinancial services to corporate and retail customers

througha variety of delivery channels a nd through its

specializeds u b s i d i a r i e s a n d a f f i l i a t e s i n t h e a r e a s o f i n v e s

t m e n t b a n ki n g, li fe an d n o n -l i fe i n s u r a n c e , ve n tu r e c a p i ta l a n d a s s e t m a n a ge m e n t . B u t th e s e

d a t a a r e d y n a m i c . I C I C I B a n k i s al s o th e la r ges t is s u er o f c r ed i t

ca rd s in In dia . .ICICI Bank has listed its equity shares on stock

exchangesat Kolkata and Vadodara, Mumbai and the National Stock

45


Exchange of India Limited, and its ADRs on the New YorkStock Exchange

(NYSE).The Bank is expanding in overseas markets and hasthe largest

international balance sheet among Indian banks.The Bank now has wholly-

owned subsidiar ies, branchesand representa t ives off ices in 18

countr ies, inc luding

ano f f s h o r e u n i t i n M u m b a i . T h i s i n c l u d e s w h o l l y o w n e d s

u b s i d i a r i e s i n t h e U K , C a n a d a a n d R u s s i a , o f f s h o r e banking

units in Singapore and Bahrain, an advisory branchin Dubai, bra nches in Sri

Lanka, Hong Kong and Belgium,and r ep off ice s i n the US , C hina ,

United Arab

Emirates ,B a n g l a d e s h , S o u t h A f r i c a , I n d o n e s i a , T h a i l a n

d a n d Malaysia. In particular, the bank is targeting the NRI (NonResident

Indian) populationICICI Bank reported marked-to-market loss of $264million

as of January 31, 2008 following the USA subprimemortgage crisis.

4.1 Recovery management ofICICI bank

Here how it works


7/17

D e f a u l t s a r e c l a s s i f i e d i n t o t w o b a s k e t s S o f t a n d Hard.

T h e b o r r o w e r s a r e s e g r e g a t e d i n t o b a s k e t s o n t h e ba sis o f t he

time per iod of default . The baskets are46


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, usuallybelow 90 days.

The default shifts into hard basket i f i t is beyond 90days.

The ba nk se nds reminder mails and makes telephonecalls to the borrower

After several reminders if the borrower still shows nosign of paying up then the

bank sends an employee toborrower to personally remind him of the re-payment.

Even after the notice if the borrower ignores the banksends a legal notice

to the borrower.

If the borrower ignores the legal notice then the

banke i t h e r d e c i d e d t o w r i t e o f f t h e a m o u n t o r r e c o v e r t h

e amount.

The recovery process is most of the times outsourcedto an external

recovery agency.

T h e r e c o v e r y a g e n c y s e n d s i t s r e c o v e r y a g e n t s t o collect the

money from the borrower, under the supervisionof the bank.

T h e r e c o v e r y a g e n c i e s u s u a l l y g i v e t h e b o r r o w e r a s t i p u l a t e d

tim e per iod with in whic h t he amo unt has to berepaid back.


8/17

In some cases, if the bank decides to use SARFAESI,2002, then the

recovery agency has to seize the assets of the borrower.

47

T h e r e c o v e r y a g e n t s e i t h e r m a n a g e t o m a k e t h e b o r r o w e r

p a y b a c k th e m o n e y o r i f th e S A R F A E S I A c tc omes into play the n

they auction off the seized assets of the borrower and pay the

bank.NOTE: I f borrow er di dnt reply for

bank notice, hence thesecur i t i zat ion and reconstruct ion of f inanci

al assets andenforcement of security interest act, 2002

(securitizationact) comes into play.

Securitisation act of2002

Discouraged by the results of debtors in fillingthe coffers of banks,

legislature enacted securitization

a n d r e c o n s t r u c t i o n o f f i n a n c i a l a s s e t s a n d e n f o r c e m e n t o f s e c

urity interest act (securitization act) w.e.f. 21st day

of J u n e 2 0 0 2 . T h e b a n k s w e r e e m p o w e r e d u n d e r s e c t i o n 1 3( 4)

of securitization act to take possession of securedassets of the

borrower including the right to transfer by wayof lease, assignment or sale for

realizing the secured asset.The role of the court was limited to challenge the

measuresunder section 13(4), by way of appeal, that too on deposito f

7 5 % o f a m o u n t c l a i m e d o n t h e n o t i c e u n d e r s e c t i o n 13(2) of

securitization act.

4.2 Article

ICICI Bank fined Rs500, 000 for rough recovery methods

A consumer commission has ordered ICICI Bank,

thec o u n t r y s l a r g e s t p r i v a t e s e c t o r l e n d e r , t o p a y a f i n e o f Rs

500, 000 for use of force by the banks recovery agent on

48


a defaulting customer. The client who defaulted on loan

h a d a p p r o a c h e d t h e c o n s u m e r a f f a i r s c o m m i s s i o n i n D e l h i c o m p l

aining of use of force by the banks recovery

agents.H e a l l e g e d t h e r e c o v e r y a g e n t s i m p o u n d e d h i s ve


9/17

hicle and beat a friends son with iron rods, mistaking himas the

defaulter.The Delhi Cons umer C ommiss ion ha s ord ered theb a n k to

pa y th e co mp la in an t , Ta pa n Bo se , Rs 50 0, 00 0compensation. (With

register to required arent and outfitsinde pendent are age nts the methods.

Recovery regardingIndia of Bank Reser ve the guidel i nes str ic tde spi te hi re scountry across)Other big lenders l ike Citibank and HDFC

Bank havealso dealt with consumer complaints about the strong-

armtactics of recove ry ag ents. The ba nks ofte n dis miss therecovery

agents when confronted with such complaints.Earlier, an ICICI Bank customer

in Mumbai committedsuicide after a lleged harassme nt by recovery agents.

Thebank later paid his family compensation of Rs15 lakh.Banks suf fer the

hi ghe s t de faul t ra te s o n it s "s ma ll -ticket personal loans" that are usually

below Rs50,000. Therates of default on these loans are 10 per cent, compared to2

per cent for credit card defaulters and 1.5 per cent for car loans. The bank isreducing its exposure in the segment--itnow has around 3 mill ion suc h loans.

Banks often run into

49


trouble when recovery agents target defaulters for theserecoveries.


voice pitch), and body language (body position, bodymovement) All or any of

these elements of non-verballanguage communicate some message

(whether intended or unintended by the communicator) to

thereceiver.F o l l o w i n g a r e t h e m a i n p r i n c i p l e s o f e f f ec t i v e communication, which could be followed by a recovery

agent(communicator) in communication with the debtor (receiver).


10/17

T h e a g e n t s l a n g u a g e ( v e r b a l a s w e l l a s b o d y l ang

uag e) sho uld be civ i l a nd co urt eous , a s per the bank-specific

requirement.

The objective of the communication should be clear.

T h e l a n g u a g e u s e d s h o u l d b e c l e a r s i m p l e a n d cour

teous.

The language used should be easily understood by thereceiver.

T h e a g e n t s h o u l d b e w a t c h f u l a n d s e n s i t i v e t o t h e r e c e i v e r s

responses (including his/her bo dy la nguageas mentioned above).

Make sure that the non-verbal communication (or

bodyl a n g u a g e ) i s n o t a d v e r s e t o d e b t o r , t

h o u g h unintentional

2) Listening skill:

Listening is another skill which is recovery in process.A good recovery agent

should be a good communicator anda g o o d l i s te ne r. L is t e ni ng

r e f e r s t o a l l t h e w a y s i n w h i c h c o mm un ic a ti o n is b ei ng re ce iv ed

fr om the ot he r pa rt y a ndincludes not only hearing but also facial body

expressions,58


attentiveness or lack of i t . Fol lowing are the requis i tes of good

listening, which help improve communication and makeif effective:

Hear attentively to what the debtor is saying. One mayhear, but not listen, if

he/she is distracted or inattentive.

Lack of listening conveys lack of regard/ respect for thecommunicator; hence it

should be avoided.


11/17

Do not show impatience or haste while listening to thedebtor. You may

lose some important information thedebtor washes to say.

Do not show anger or disapproval, or other such facial/body expression, whi le

listening to the debtors poi t of view.

N o r m a l l y , c o m m e n c e s p e a k i n g o n l y a f t e r t h e o t h e r party has

finished speaking or making a point. Normallydo not interrup t. In o ther

words, interrupt only

whena b s o l u t e l y n e c e s s a r y , e . g . w h e n t h e p o i n t s b e i n g s po

ken are irrelev ant o r bec oming unduly le ngthy 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 skillthat enhances the

relationship and understanding betweentw o o r mo r e p e rs o ns . I t

t h u s i n c l u d e c o m m u n i c a t i o n a n d listening skills, plus something more.

This something morewo ul d be ex pla ine d he re . Ge ne ra lly , pe rs on

relate to eachother favorably when they find support to their dignity,

self-respect, se l f-esteem, ideas and values. Establ ishing good

59


inter-personal relationship with a person means establishinga rapport with

that person. Any transaction that enhancesthe self would be helpful for

better inter-personal relation.Conversely, any transaction that diminishes the

self is likelyto disturb the inter-personal relation. For instance, when

arecovery agent assumes a posture of superiority and belittlesthe debtor in the

communication process, the recovery agentis really making the recovery

difficult. Many recovery

agentswho think othe rwise and communicate/ behave rudely o r h a

r s h l y i n r e c o v e r y p r o c e s s m a y t u r n o u t t o b e m o s t l y c o u

n t e r -

p r o d u c t i v e o v e r a l l . F o l l o w i n g a r e s o m e o f t h e elements of

inter-personal skill for recovery agent :


12/17

Communicate and listen pro perly and effective ly,as described in the

preceding paragraph.

Show empathy and respect to other party, not

withs t a n d i n g t h e f a c t t h a t h e / s h e d e b t o r t o t h e principal.

Do not m ake the debtor fee l anxi ous/ insecu re/threatened by your

communication verbal or non-

v e r b a l . O n t h e c o n t r a r y , t r y t o r e m o v e s u c h apprehensio

n, if any, of the debtor.

G i v e a l l t h e i n f o r m a t i o n t h e d e b t o r a s k s f o r i n c o n n e c t i o n

with the debt and its repayment. Thiswo uld he lp imp ro ve int er -pe rs ona l re la ti o n and also the recovery prospects.

2)

Persuasive skill:

60


loan/advances agreements entered between the lenders andcreditors. Thus the

receivables in a loan/advances accountconnote the following essential

features:1)Existence of loan or advance agreement between

thecreditor and debtor.2)Due date on or after which the o bligation is

required tobe discharged by the debtor in favour of the creditor.In terms of the

arrangement between the creditorbanka n d t h e d e b t r e c o v e r y a g e n c y t h e f o r m e r a u t h o r i z e s t h e a

g e n t t o c o l l e c t s p e c i f i e d r e c e i v a b l e s f r o m t h e n a m e d deb

tors on or after the spec i f ied due dates. The requiredpart iculars

of the de bt or s an d rec ei va ble s to be co lle ct ed from them are furnished

by the bank to the agent, along withcopies of the relative loan agreements.Thus


13/17

th e de bt re co ve ry ag en t is le ga lly au th or iz ed 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,

codeo f c o n d u c t i n c o l l e c t i o n p r o c e s s a n d o t h e r r e g u l

a t o r y requirements that need to be complied with by the

recoveryagents are discussed in subsequent units.

Remitted collected funds:

The fun ds col lect ed fro m t he deb to rs sho uld be se ntdeposited by the

agent to the creditor periodically as per theagencyarrangement. Statement of col lect ions remitted

63


should also be sent along with the remittance, preferably induplicate and

the copy acknowledged by the bank be kept

onr e c o r d b y t h e a g e n t , i n c h r o n o l o g i c a l o r d e r , f o r f u t u r

e reference. These statements of remittance will from the basisof claiming theagreed fee or commission by the agent fromthe principal in due course.

Book keeping ofrecovery management:

While each debt recov ery ag ent ma y dev ise hi s/her own accounting

and book keeping methods, he/she has

tot a k e c a r e o f t h e r e p o r t i n g r e q u i r e m e n t s o f i t p r i n c i p a l

. Further, book-keeping has to be sperate for each principal.IT fo llo wi ng

would constitute the minimum requirement of book-keeping for a

recovery agent.

1)

L i s t s o f d e b t o r s r e c e i v e d fr o m t h e p r i n c i p a l :

Col lect ion of receivables i s an going act iv i ty of a recoveryagent

who ma y rece ive the debto r l ists fro m the principa lfrom time to


14/17

time. The debtor lists from the basis of agentsactivities and also the book-

keeping required. These shouldtherefore be carefully kept on record in

chronological order.

2) Ledger account ofeach debtor:

Showing the amountsof receivable collected and balance to be collected should

bek e p t i n c h r o n o l o g i c a l o r t h i s c a n b e m a i n t a i n e d i n

t h e c o m p u t e r a l s o . I t m a y b e n o t e t

h a t a l l t h e c o l l e c t i o n s / r e c o v e r i e s s h o u l d b e r e m i t t e d

t o t h e a b a n k . N o r m a l l y a g e n t c a n n o t a d j u s t i t s d u e s o n

a c c o u n t o f f e e against the recoveries made on behalf of the bank.

3 ) C o p i e s o f l o a n / a d v a n c e s :

Ag re em en ts be twe en th edebtors and the bank is obliged to keep

confidentiality of its64


customers accounts and recovery and these should not bediv ul ge d to

third part ies without the customers sent. Assuch, a debt recovery

agent mu st ta ke a ll du e care to the required privacy and confidentiality as

regards the records of e a c h du e f ur ni s he d by t he ba nk a nd a ls o as

r e g a r d s t h e collections made remitted by him to the principal.

65


After this Kaushik had no option to go to his local policestation and lodge

a complaint against that person, and Mr.Kaushik have also decided to put a

case against that personand HDFC bank in consumer court as well as civil

court.K a u s h i k h a s a l s o p o s t e d a c o m p l a i n t w i t h H D F C G


15/17

rievance cell, docket no. TF22534017.Kaushik requests the concerned

authority to take someaction on this.

ABC bank:

ABC Bank had granted a personal loan of Rs.60,000t o X Y , a l o w e r m i d d l e c l a s s i n d i v i d u a l , f o r c o n s u m p t i o n

needs. T he loan was to be repaid in instal lments by XY.The loan

was without any tangible security and also withoutany third party

guarantee. The borrower XY could not repayin t im e so me ins ta l lm ents and

there fore the loan became overdue.The ABC B ank gave XYs Case to

Z recovery agent,along with other overdue loans for recovery. The Z

recoveryagent called XY a couple of times and also visited him at

hisr e s i d e n c e . A s X Y w a s n o t a b l e t o r e p a y t h e a m o u n t

i n defaul t , Z , used abus ive and harsh languages in f ront onXYswi fe and daughters to make recovery . Dur ing one of the v i s i ts to

XY s ho us e, Z an d h i s co l l ea gu es to ok a wa yforcibly some of the

things that were available in XYs housein front of his wife and daughters and

also used threateningl a n g u a g e f o r p a y m e n t o f t h e d u e s . X Y

f e l t v e r y m u c h h u m il i ate d a n d a l s o d e p re s s ed . B e in g u n ab l e to

repay the

67


dues. XY committed suicide. He left a suicide note, blamingZ for harassing

him endlessly. He mentioned the abuses hehad suffered at the hands of Z before

his wife and daughters.He also mentioned the threat Z gave that he would sufferdireconsequences if he failed to repay the overdue

amount.F o l l o w i n g t h e s u i c i d e d e a t h o f X Y , t h e l o c a l p o l i c e a r re

sted Z and his col leagues ( who used to accompany Zdur ing his

visit s to XYs house) on c harges of a betme nt o f suic ide. A case was

also f iled against the ABC Bank, whichh a d t o p a y a n e x -


16/17


17/17

www.rbi.co.in

www.icicibank.com

www.iibf.org.in

70

[Abstract]


- Mandar

71

project on recovery

Documents

Recovery of Magmt