CHAPTER -2 RECOVERY MANAGEMENT SYSTEM IN INDIAN … · CHAPTER-2 RECOVERY MANAGEMENT SYSTEM IN INDIAN BANK 94 difficulties in recovering loans and enforcement of securities charged

CHAPTER-2 RECOVERY MANAGEMENT SYSTEM IN INDIAN BANK

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CHAPTER -2

RECOVERY MANAGEMENT SYSTEM IN INDIAN BANK

Sr.

No.

Name of the Topics Page

No. 2.1 Introduction 93

2.2 Why Recovery Management 94

2.3 Advantages of Recovery Management 94

2.4 Disadvantages of Recovery Management 95

2.5 Certain Important Points for Debt Recovery 95

2.6 Elements of Debt Recovery 96

2.7 Default of Loan 96

2.8 Non-Performing Assets (NPA) 100

2.9 Strategy for Recovery 101

2.10 Policy, Processes and Procedure of Debt Recovery Management 102

2.11 Procedure of Tribunal 107

2.12 Normal Recovery Procedure 112

2.13 Other Mode of Recovery 114

2.14 Use of Lok Adalat 117

2.15 Programs of Bank 118

2.16 Debt Recovery Agents 118

2.17 Conclusion 128

References 129


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2.1 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 state 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

load 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 pat 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.

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 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


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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.

2.2 WHY RECOVERY MANAGEMENT

Banks 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 collected.

Recovery Management Systems will design a collection strategy to meet bank’s

objectives. Bank can recovery 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 System will collect when

legal action is the only option.

Cutting edge skip- tracing tools and techniques Recovery Management Systems

can work 1st; 2

nd; and 3

rd placements and even turn bank old judgment in to

money.

2.3 ADVANTAGES OF RECOVERY MANAGEMENT

The process of assigning debt collection to outsides enables officials from Banks

to develop more remunerative new business.

Third party involvement in debt collection has proven time and again to improve

the chance of recovering bank dues as these people are specialists in negotiating

with debtors and the result usually speak for themselves

A skillfully negotiated debt collection could mean saving on litigation cost.

The process of assigning debt collection to outsides enables officials of non-

Banks. Cost to develop more beneficial new business.


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2.4 DISADVANTAGES OF RECOVERY MANAGEMENT

Debt collection does cost money

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.

2.5 CERTAIN IMPORTANT POINTS FOR DEBT RECOVERY

On the basis of the foregoing procedure for normal recovery process, we may list

below certain Don’ts for the debt recovery, which are as follows:

Don’t violate or breach the recovery policy, procedure etc. prescribed by the

owner

Don’t exceed the authority given in the recovery arrangement

Don’t make a call to the debtor before 07:00 Hours or after 21:00 Hours.

Don’t make anonymous calls or bunched calls to the debtor, which may be

perceived as harassment.

Don’t conceal or misrepresent your identity during calls and visit or other

interaction with the debtor.

Don’t show uncivil/indecent/dirty behavior or use such language during calls and

visits to the debtor.

Don’t harass/humiliate/intimidate/threated the debtor verbally or physically.

Don’t intrude into the privacy of the debtor’s family members, friends/colleagues.

Don’t disclose the customer’s debts/dues account information to unauthorized

person.

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.


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2.6 ELEMENTS OF DEBT RECOVERY

The agency regarding debt recovery contains the main terms and conditions

agreed by the principal (Bank) and the agent. The main elements of the debt

recovery would generally include:

Specific tasks to be accomplished e.g. the amount to be recovered from the

specified loan accounts in default and the broad time frame.

Debt Recovery Policy and Procedure of the bank to be followed

Code of conduct in recovery process may include dress code, verbal and written

communication rules to be followed by the individuals employed by the agency

for the purpose of collection.

Duties of the agent

Right 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 there in, 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.

2.7 DEFAULT 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


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interviewed for finding out the causes of defaults. These reasons may be useful for the

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:

(a) Improper selection of an entrepreneur:

Selection of thee right Entrepreneur is one of the major factors in the profitability of

Banks. Two major criterion names 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 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 thee investment of a bank, thereby

ensuring proper and timely repayment. Unbiased survey report 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

take before the sanctioning of the loan.

(b) 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 labor, and 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 thee weak

points are camouflaged and only strong points of the project are highlighted.


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(c) 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-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.

(d) 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 consideration 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.


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(e) 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 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.

(f) 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 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.


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(g) 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 seem 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.

2.8 NON-PERFORMING ASSETS (NPA)

An asset is classified as non-performing assets (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 concerned banks. 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.


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(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.

2.9 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.

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 debtor’s account, normally at the month

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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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:

i. Normal Debtors, i.e. who ‘can pay’ and ‘will pay’ if reminded or/and

persuaded to pay.

ii. Difficult Debtors, i.e. those who ‘can pay’, but ‘will not pay’.

iii. Doubtful Debtors, i.e. those who can pay the reduced amount as negotiated

with them.

Different strategies are required for different types of debtors, but, following are

the common phenomena to be following in all kinds of recovery strategies:

i. 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.

ii. Go through the ‘Know Your Customer’ papers furnished by the bank and

know the customer’s identify and personal profile.

iii. 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.

iv. Record in notebook recovery efforts in chronological order for each attempt.

2.10 POLICY, PROCESSES AND PROCEDURE OF DEBT RECOVER

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 The RBI directives on

recovery of debt, including recovery agents engaged by the bank and The Model

Policy on collection of Dues and Repossession of security framed by Indian Banks’

Association. A bank will normally incorporate its policy and procedure for debt


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recovery in the arrangement entered in to 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.

(A) 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

Instalments (EMI) or payments through any other mode or 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 SAESI Act or acquiring the property as non-banking asset

through enforcement of the 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.


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General Guidelines:

All the members of the staff or any person authorized to represent the Bank in

collection and/ or security repossession would follow the guidelines set out below:

i. 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.

ii. 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.

iii. The bank would respect privacy of its borrowers.

iv. 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

v. Normally the bank’s representatives will contact the borrower between 07:00 Hrs.

and 19:00 Hrs. unless circumstances warrant visiting the borrower at odd hours

and occasions. Such circumstances would include continuous irregularity in the

accounts.

vi. Borrower’s requests to avoid calls at a particular time or at a particular place

would be honoured as far as possible.

vii. 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.

viii. All or differences regarding dues is mutually acceptable in and an orderly manner.

ix. In appropriate occasions such as bereavement in the family or such other

calamitous occasions will be avoided for making calls/visits to collect dues.


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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 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 repossession but before concluding sale transaction


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of the property, provided the bank dues are paid in full. If satisfied with the

genuineness of borrower’s inability to pay the loan instalments as per the schedule

which resulted in the repossession of security, the bank may consider handing over

the property after receiving the instalments 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 instalments in future.

(B) Debt Recovery Processes

Debt recovery processes can be typically of following kinds, each involving different

procedure:

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.

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.

Legal recovery process: The intervention of the court is required to possess

mortgaged immovable property by the 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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2.11 PROCEDURE OF TRIBUNAL

(1) Application to the Tribunal:

i. 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, Section 8, and (W.r.e.f.17/01/2000). Subs. by Act 1 of 2000,

Sec. 9, for section 19 (W.r.e.f. 17/01/2000). (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 ause of action, wholly or in party, arises.

ii. Where a bank, which has to recover its debt from any person, has filed an

application to the Tribunal under sub section (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 of the

proceedings, before the final order is passed, by making an application to

that Tribunal.

iii. 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 thee 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.

iv. 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.

v. 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 afterwards


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unless permitted by the Tribunal, present a written statement containing the

particulars of the debt sought to be set-off.

vi. The written statement shall have the same effect as applicant 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.

vii. 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 thee

time limited for delivering his defence has expired, whether such counter-

claim is in the nature of a claim for damages or not.

viii. 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.

ix. 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.

x. Where a defendant within such period as may be fixed by the Tribunal.

xi. 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, an thee Tribunal may, on the

hearing of such application, make such order as it thinks fit.

xii. 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 assets

belonging to him without the prior permission of the Tribunal.

xiii. (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


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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 part 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 or the same, or such portion

there of 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.

xiv. The applicant shall, unless the Tribunal otherwise directs, specify the

property required to be attached and the estimated value thereof.

xv. The Tribunal may also in the order direct the conditional attachment of the

whole or any portion of the property specified under sub section.

xvi. If an order of attachment is made without complying with the provisions of

sub-section, such attachment shall be void.

xvii. 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, unles in

the meantime the Tribunal directs his release.

xviii. 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 sale proceeds of such company to be distributed among

its secured creditor in accordance with the provisions of section 529 A of the

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


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xix. The Tribunal may, after giving the applicant and the defendant an

opportunity of being heard, pas such interim or final order, including the

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

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

xx. The Tribunal shall send a copy of every order passed by it to the applicant

and the defendant.

xxi. 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.

xxii. 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 issue it.

xxiii. 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.

i. As provided in sub section

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

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

iii. 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.


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iv. 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.

v. The Appellate Tribunal shall send a copy of every order made by it to the

parties to the appeal and to the concerned Tribunal.

vi. The appeal filed before the Appellate Tribunal under sub-section shall be dealt

with by it as expeditiously as possible and endeavour 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

Tribunal unless such person has deposited with the Appellate Tribunal seventy-five

percent 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

i. 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.

ii. 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;


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b) Requiring the discovery and production of documents;

c) Receiving evidence on affidavits;

d) Issuing commissions for the examination of witnesses or documents;

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 as may be prescribed.

iii. 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.

2.12 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:

i. The recovery agent has been authorized by the bank to collect the past due

debt from the particular customer.

ii. The customer has been notified by the bank of the details of the reecovery

agent for collection of the past-due debt.

iii. Making customer calls: This is the first step in recovery procedure and

following rules should be followed generally:

Calls are made from the same number as advised by the bank to the

customer.

The agents disclose his identity and authority at the first instance.

The agent contacts the debtor between 07:00 Hours and 19:00 Hours,

unless the special circumstances of his/her business or occupation required


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the bank to contact of a different time. Under no circumstance, can the

customer be called beyond 21:00 Hours.

All calls where the customer becomes abusive or threatening should be

appropriately documented.

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.

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.

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.

iv. 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


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should thereafter show his Identity 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.

iv. The time of visiting the customer will be generally between 07:00 Hours to

21:00 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 centre, 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.

2.13 OTHER MODE OF RECOVERY

i. 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, recovery the amount of debt by anyone or

more of the modes provided under this section.

ii. 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 Recover

Officer: Provided that nothing in this sub-section shall apply to any part of the


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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).

iii. Duty of Recovery Officer are as follows:

a) 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.

b) 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 sub section, the

shares of the joint holders in such amount shall be presumed, until the

contrary is proved, to be equal.

c) 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.

d) 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.

e) 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.

f) 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


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due to the defendant or that he does not hold any money for or on account

of the 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.

g) 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.

h) 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.

i) 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.

j) 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 realization of the

amount as if it were a debt due from him, in the manner provided in

section 25, 26 and 27.

iv. 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


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certificate of recovery is issued, to declare on affidavit the particulars of his or

its assets.

v. 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).

2.14 USE OF LOK ADALAT

The Honourable 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 preferable use the forum of Lok Adalats for recovery of

personal loans, credit card loans or housing loans with less than Rs. 10 Lakhs as

suggested by the Honourable Supreme Court. 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 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.


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2.15 PROGRAMS OF BANK

(a) Credit Counselling

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

counselling than a function of credit education. Credit counselling 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.

(b) 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.

2.16 DEBT RECOVERY AGENTS

The phase “Debt Recovery Agent” comprises of three terms – Debt; Recovery; and

Agent.

(a) Meaning of 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 Lakhs from a bank for purchasing a car, Ram becomes the

debtor/borrower, the bank is the creditor/lender and the loan of Rs. 3 Lakhs is thee

debt/principal. Ram would be required to repay the loan in equated, monthly

instalment (EMI) comprising the principal and interest, spread over the repayment

period of, say, 3 years which is also known as debt tenure.


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(b) Meaning of Recovery

It means collection of 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 instalment (EMI) on the due date, the bank may send him notice to

remind him to pay the agreed amount within a stipulated period. If he doesn’t 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 overdue or past due.

(c) Meaning of 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 broker),

auctioneers, insurance agents, estate or property agents, commission agent, selling

agents, marketing agents, debt recovery agents.

(d) Debt Recover Agent

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 debts from the

debtors/borrowers in accordance with the specified terms and conditions. In thee

above examples of the car loan to Ram, if the bank/creditor engages Mr X as a Debt

Recovery Agent in such case Mr X will be called as Debt Recovery Agent of the

bank.

(e) Engagement of Recovery Agents

Banks are advised to take into account the following specific considerations while

engaging recovery agents:


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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 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 thee 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 still 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


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grievance/complaint is pending with them. In cases where the subject matter of the

borrower’s dues might be sub judicial, banks should exercise utmost caution, as

appropriate, in referring the matter to the recovery agencies, depending on the

circumstances.

(f) Recovery Agencies

Debt recovery agents are employed Debt Recover Agencies who work for banks

subject to certain terms and conditions. Debt Recovery Agencies (DRA) are third

party businesses that collect dues past-dues and other receivable of bank in exchange

for a fee. DRAs charge the banks/NBFCs for their services in one of two ways: (i) A

flat fee and (ii) A percentage of amount collected. Most collection agencies use one of

following three methods to collect debts/dues viz. (a) 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 issues 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 severally overdue accounts.

(g) Training for Recovery Agents

In terms of 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


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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 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.

(h) Soft Skills for Debt Recovery

It is observed 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. It is

briefly discuss some of the essential skills and strategy that facilitate and improve

debt recovery. The objective is limited to acquainting the study with the meaning and

key elements of skills and strategy required in debt recovery. Some important aspects

as are essential for debt recovery is as follows

(i) 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:

(a) Verbal communication by spoken words

(b) 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


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some message (whether intended or non-intended) 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 should be easily understood by the receiver.

The agent should be watchful and sensitive to the receiver’s responses (including

his/her body language).

Make sure that non-verbal communication/Body Language is not adverse to

debtor, though non-intentional.

(ii) Listening Skill:

Listening is another skill which is also essential for recovery 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 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.


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

listening to the debtor’s point 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”.

(iii) 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 favourably 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 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 above.

Show sympathy and respect to other party, notwithstanding the fact that he/she

(debtor) to the principal (Bank/Recovery Agencies).

Do not make the debtor feel anxious/insecure/threatened by agent’s

communication verbal or non-verbal. On the contrary, try to remove such

apprehension, if any, of the debtor.

Giving all the information the debtor asks for in connection with the debt and its

repayment. This would help improve interpersonal relation and also the recovery

prospects.


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(iv) 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 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 other 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 outstanding loan amount to breach of

the loan agreement and would result in the bank for charging higher interest rate.

(i) Function of Recovery Agents

The core function of a debt recovery agent is to collect dues/receivables from

specified debtor 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. A part from the easily collectible receivables, most banks

have on their books overdue 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 specizlied collection


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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.

(i) 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:

Loan or advance agreement must have existing between the creditor and debtor.

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 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 thee debtors on behalf of the principal:

The loan agreement and the debt collection agency agreement must contain 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.

(ii) Remitted collected funds:

The funds collected from thee 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 thee remittance, preferably in duplicate and the copy

acknowledged by the bank be kept on record by the agent, in chronological order, for

future reference. These statements of remittance will from thee basis of claiming the

agreed fee or commission by the agent from the principal in due course.


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(iii) 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 its principal. Further,

book-keeping has to be separate for each principal. 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 on-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 collection/recoveries should be remitted to the 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 thee 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 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.


128

2.17 CONCLUSION

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.


129

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CHAPTER -2 RECOVERY MANAGEMENT SYSTEM IN INDIAN … · CHAPTER-2 RECOVERY MANAGEMENT SYSTEM IN INDIAN BANK 94 difficulties in recovering loans and enforcement of securities charged

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