Normal debt recovery procedure followed by banks

Normal debt recovery procedure will generally apply to the debtors who are willing to pay the dues with normal recovery process. Based on the regulatory guidelines of procedure of tribunal on debt recovery, following procedure may be outlined for such recovery. However the recovery agents should follow the bank-specific debt recovery procedure as advised by their principal. Below are given the main rules for making telephone calls and visit to the debtor for recovery of dues:

1) The recovery agent has been authorized by the bank to collect the past due debt from the particular customer.

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

3) Making customer calls: This is the first step in recovery procedure and following rules should be followed generally:

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 0700 hours and 1900 hours, unless the special circumstance of his/her business or occupation requires the bank to contact of a different time. Under no circumstances, can the customer be called beyond 2100 hours. All calls where the customer becomes abusive or threatening should be appropriately documented. Customers 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 Customers notice the obligation and to seek a commitment to pay on a specified date. Once a promise is elicited a call may be made to serve as a reminder and for confirmation of payment.

If the customer is not available during a few calls made by the agent, a message may be left to an adult family member as follows Please leave a message that ABC had called and request the customer to call ABC back at the given phone number. The message should not indicate that the customer ABC has overdue amount , or the call originated from a Recovery agency. 4) Visit to customer (debtor) This would be the second step in collection process. Following procedure should generally be followed.

(i) A customer should be visited for debt collection only after these conditions are satisfied;

The debtor has not paid the due amount within the days of grace and the dues are still outstanding against him/her. The debtor has been notified of the amount due and also of the name of the collection agent. The collection agent has taken an appointment from the debtor for the visit. (ii) During visit, the agent should be in proper dress and appearance, or wear the dress prescribed by the principal and follow the timing and place of the visit as per the principals or RBI/IBA code, unless otherwise agreed by the debtor expressly.

(iii) At the first stance, the agent should utter salutation words (like good morning/eveningsir/madam, as per custom of the bank). The agent should thereafter show his ID card and authority given by the principal for debt collection from the debtor./ Only after these initial formalities, the conversation regarding debt collection should start.

(iv) The time of visiting the customer will be generally between 0700 hours to 2100 hours. Visits earlier or later than the prescribed time may be made only under the following conditions:

When the customer has expressly consented to that timing. When attempts to contact the customer have resulted in information that the customer is normally only available outside these hours and no alternate telephone number is available to contact him/her, When due to nature of the customers employment i.e. working in shifts e.g. call center, hotel. He/she is usually available outside these hours.

(v) The agent should respect privacy of the debtor. Privacy policy as discussed above for calls would apply during visits also.

(vi) During the visit, due respect and courtesy should be shown to the customer and the interactions should be civil and polite as per the principals policy.

(vii) During interactions with the debtor, the agent must not use threats or intimidation verbally or by body language. Under no circumstances, any physical violence be used in debt collection process.

Debt recovery processes followed by Indian Banks

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 Reserve Bank of India(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 the Indian Banks Association.

A bank will normally incorporate its policy and procedure for debt recovery in the arrangement entered into its recovery agents. In terms of the recovery management agreed with the bank, the recovery agents should adhere to the policy, procedure, etc. prescribed by the bank. 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. Legal recovery process: The intervention of the court is required to possess mortgaged immovable property by the or its recovery agent. Also if the charged assets do not exist, or the

debt is unsecured, the debtor will have to be sued for recovery of the dues by the bank/recovery agent.

Debt recovery agent

The phrase Debt Recovery Agent comprises three terms- Debt, Recovery and Agent. Let us understand the meaning of these terms separately, before we explain the meaning of Debt Recovery Agent.

Debt: It refers to a sum of money owed by one person or entity (debtor) to another person or entity (creditor). Thus there are two parties to a debt- debtor who receives money by way of a debt; and creditor who lends money to the debtor. Recovery: It means collection or recovery of money from the debtor by, or on behalf of the creditor, after it has become due for payment in accordance with the debt terms agreed between the creditor and the debtor. In the above example, if debtor fails to pay the agreed installment on the due date, the bank may send him notice to remind him to pay the agreed amount within a stipulated period. If he does not pay even after receiving the notice here that a debt becomes payable by the debtor only on or after the due date, but not before that date. If the debt is not paid on the due date it becomes overdue or past due. Agent: It is a legal term defined in section 182 of Indian Contract Act as a person employed to do any act for another or to represent another in dealings with third person. The person for whom such acts are done, or who is represented, is called the Principal. An agent has thus an authority to do acts on behalf of the principal within the limits of the authority and thereby bind the principal for such acts in relation to third parties. There are several kinds of agents e.g. brokers (financial or commodity brokers), auctioneers, insurance agents, estate or property agents, commission agent, selling agents, marketing agents, debt recovery agents.

Debt Recovery Agent may now be defined as a person or entity engaged by a bank for the purpose of collecting specified loans, or advances or other kind of debts from the debtors (or borrowers) in accordance with the specified terms and conditions. Engagement of Recovery Agents Banks are advised to take into account the following specific considerations while engaging recovery agents: Agent in these guidelines would include agencies engaged by the bank and the agents/ employees of the concerned agencies. Banks should have a due diligence process in place for engagement of recovery agents, which should be so structured to cover, among others, individuals involved in the recovery process. The due diligence process should generally conform to the guidelines issued by RBI.Further, banks should ensure that the agents engaged by them in the recovery process carry out verification of

the precursors of their employees, which may include pre-employment policy verification, as a matter of abundant caution. Banks may decide the periodicity at which re-verification of backgrounds 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 the customer that the conversation is being recorded, etc. The up to date details of the recovery agency firms / companies engaged by banks may also be posted on the banks website. Where a grievance/ complaint has been lodged, banks should not forward cases to recovery agencies till they have finally disposed of any grievance / complaint lodged by the concerned borrower. However, where the bank is convinced, with appropriate proof, that the borrower is continuously making frivolous / vexatious complaints, it may continue with the recovery proceedings through the Recovery Agents even if a grievance / complaint is pending with them. In cases where the subject matter of the borrowers dues might be sub judice, banks should exercise utmost caution, as appropriate, in referring the matter to the recovery agencies, depending on the circumstances. Recovery agencies Debt recovery agents are employed Debt Recovery Agencies who work for banks subject to certain terms and condition. Debt recovery agencies are third-party businesses that collect dues past-dues and other receivable of banks in exchange for a fee. DRAs charge the banks/NBFCs for their services in one of two ways: 1. A flat fee and 2. A percentage of amounts collected. Most collection agencies use one of following three methods to collect debts/dues viz. 1. Contact and follow up through telephone 2. Letters,

3. Direct contact by visiting the debtors. Before the debt recovery agent is given the job, banks begin their work banks issue normal reminders to the borrowers. However it is seen that in the case of retail loans the initial reminders could also begin from the DRA. Typically, collection agencies begin the collection process by sending a demand letter followed by phone calls If these efforts do not result in the payment, it will be followed up and supplemented by visit to customers houses to more intensive methods. Besides sending out letters and making phone calls, some recovery agencies also specialize in locating debtors who can no longer be reached at the address or phone number listed on their accounts. Certain act on behalf of banks to collect severely overdue accounts. Training for Recovery Agents In terms of the guidelines on managing risks and code of conduct in outsourcing of financial services by banks, banks were advised that they should ensure that, among others, the recovery agents are properly trained to handle with care and sensitivity, their responsibilities, in particular aspects like hours of calling, privacy of customer information etc. Reserve Bank has requested the Indian Banks Association to formulate, in consultation with Indian Institute of Banking and Finance (IIBF), a certificate course for Direct Recovery Agents with minimum 100 hours of training. Once the above course is introduced by IIBF, banks should ensure that over a period of one year all their Recovery Agents undergo the above training and obtain the certificate from the above institute. Further, the service providers engaged by banks should also employ only such personnel who have undergone the above training and obtained the certificate from the IIBF. Keeping in view the fact that a large number of agents throughout the country may have to be trained, other institutes/ banks own training colleges may provide the training to the recovery agents by having a tieup 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. Soft skills for debt recovery Success in recovery depends on compliance with the regulatory norms added with collection skills and strategy. Both are complementary to each other. Mere regulatory compliance without collection skills and strategy may not result in recovery. Similarly, collection skills and strategy without regulatory compliance may vitiate recovery atmosphere in the long term. In the present unit, we would briefly discuss some of the essential skills and strategy that facilitate and improve debt recovery. The objective is limited to acquainting the readers with the meaning and key elements of skills and strategy required in debt recovery. The learning can, and should, be enhanced through detailed discussions in the classroom of a training institute, including role plays by the participants.

1) Communication skill: Communication is the process of exchanging information, ideas and thought etc. between at least two persons in order to create a common understanding. In recovery process, communication takes place between the debtor and agent by words, in writing, eye contact or body language (during personal meeting) Communication is of two types:

Verbal communication by spoken words, Non-verbal communication e.g. face language (facial expression, eye contact), voice language (voice tone, voice pitch), and body language (body position, body movement) All or any of these elements of non-verbal language communicate some message (whether intended or unintended by the communicator) to the receiver.

Following are the main principles of effective communication, which could be followed by a recovery agent (communicator) in communication with the debtor (receiver).

The agents language (verbal as well as body language) should be civil and courteous, as per the bank-specific requirement. The objective of the communication should be clear. The language used should be clear simple and courteous. The language used should be easily understood by the receiver. The agent should be watchful and sensitive to the receivers responses (including his/her body language as mentioned above). Make sure that the non-verbal communication (or body language) is not adverse to debtor, though unintentional

2) Listening skill: Listening is another skill which is recovery in process. A good recovery agent should be a good communicator and a good listener. Listening refers to all the ways in which communication is being received from the other party and includes not only hearing but also facial body expressions, attentiveness or lack of it. Following are the requisites of good listening, which help improve communication and make if effective:

Hear attentively to what the debtor is saying. One may hear, but not listen, if he/she is distracted or inattentive. Lack of listening conveys lack of regard/ respect for the communicator; hence it should be avoided.

Do not show impatience or haste while listening to the debtor. You may lose some important information the debtor washes to say. Do not show anger or disapproval, or other such facial/ body expression, while listening to the debtors 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.

3) Inter-personal skill: Inter-personal skill refers to communication plus skill that enhances the relationship and understanding between two or more persons. It thus include communication and listening skills, plus something more. This something more would be explained here. Generally, person relate to each other favorably when they find support to their dignity, self-respect, self-esteem, ideas and values. Establishing good interpersonal 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 counterproductive overall. Following are some of the elements of inter-personal skill for recovery agent :

Communicate and listen properly and effectively, as described in the preceding paragraph. Show empathy and respect to other party, not with standing the fact that he/she debtor to the principal. Do not make the debtor feel anxious/ insecure/ threatened by your communication verbal or non-verbal. On the contrary, try to remove such apprehension, if any, of the debtor. Give all the information the debtor asks for in connection with the debt and its repayment. This would help improve inter-personal relation and also the recovery prospects.

4) 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 others as per the terms would enable the bank to pay the deposits when demanded by the depositors. Explain your task/ duty of collection of dues on behalf of the principal and that you have no authority to waive/ reduce or unduly postpone the recovery, which only the principal can do. Show interest/ concern for the debtor by understanding his/her problem and say that you would try to give assistance to the possible, within the authority, as agent, given to you by the principal. Explain that non-payment may adversely impact the debtors credit history, which may make his/her future borrowing with any bank costlier and difficult. This should induce the debtor to pay. Also explained that non-repayment of the loan dues would amount to breach of the loan agreement and would result in the bank charging higher interest rate.

Functions of debt recovery agents

The core function of a debt recovery agent is to collect dues/receivables from specified debtors of the bank as per agency agreement entered with the principal. Remitting the collected funds to principal, keeping account of the receivables collected and yet to be collected and reporting the position and developments to the principal are essential but ancillary to the core function. All these functions will be specified in most agency agreement and would require to be accordingly discharged by the debt recovery agent. Apart from the easily collectible receivables, most banks have on their books 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 specialized collection agencies to process the required expertise. The functions of re-processing the security, initial legal action and tracing the vanished debtors may be called as specialized function of debt collecting agencies. Collecting dues receivable: As mentioned above, collecting dues is the core function of a debt recovery agent. Receivables refer to the sums of money which have become due in the loan/advances accounts and are payable on or after due dates by the debtors to the creditors as per the loan/advances agreements entered between the lenders and creditors. Thus the receivables in a loan/advances account connote the following essential features:

1. Existence of loan or advance agreement between the creditor and debtor. 2. Due date on or after which the obligation is required to be discharged by the debtor in favour of the creditor. In terms of the arrangement between the creditor bank and the debt recovery agency the former authorizes the agent to collect specified receivables from the named debtors on or after the specified due dates. The required particulars of the debtors and receivables to be collected from them are furnished by the bank to the agent, along with copies of the relative loan agreements. Thus the debt recovery agent is legally authorized to collect the specified receivables from the debtors on behalf of the principal: 1. The loan agreement, and 2. The debt collection agency agreement. The procedure and processes of debt collection, code of conduct in collection process and other regulatory requirements that need to be complied with by the recovery agents. Remitted collected funds: The funds collected from the debtors should be sent deposited by the agent to the creditor periodically as per the agency arrangement. Statement of collections remitted should also be sent along with the remittance, preferably in duplicate and the copy acknowledged by the bank be kept on record by the agent, in chronological order, for future reference. These statements of remittance will form the basis of claiming the agreed fee or commission by the agent from the principal in due course. Book keeping of recovery management: While each debt recovery agent may devise his/her own accounting and book keeping methods, he/she has to take care of the reporting requirements of its principal. Further, book-keeping has to be separate for each principal. IT following would constitute the minimum requirement of book-keeping for a recovery agent.

Lists of debtors received from the principal: Collection of receivables is a 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 agents activities and also the book-keeping required. These should therefore be carefully kept on record in chronological order. Ledger account of each debtor: Showing the amounts of receivable collected and balance to be collected should be kept in chronological or this can be maintained in the computer also. It may be note that all the collections/recoveries should be remitted to the bank. Normally agent cannot adjust its dues on account of fee against the recoveries made on behalf of the bank.

Copies of loan/advances: Agreements between the debtors and the bank is obliged to keep confidentiality of its customers accounts and recovery and these should not be divulged to third parties without the customers 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.

Guidelines for preparing a proper strategy for debt recovery

Devising a strategy helps in achieving a set goal or objective. Recovery agents should therefore devise a strategy for debt recovery. The following guidelines would help in preparing proper strategy for debt recovery. i) The collection process should be compliant to the bank-specific recovery norms and also regulatory guidelines. ii) The collection timing should be synchronized to the cash inflow pattern of the debtors: For example, recovery from salaried employees should be timed when salary is received by or credited to the debtors account, normally at the moth-end. In case of SME borrowers the effort should coincide with cash flow on account of sales. In case a collection from agriculturist should be made, then it should be soon after the crops are sold. This will call for knowledge of bank products on the part of agents. It should be the endeavor of the agent that collection should be made well before the cash inflows are spent away by the debtor for meeting other expenses. iii) Adopt different collection strategy for different debtor types: This is based on the saying that one size does not fit all. In the foregoing paragraphs, three types of debtors have been described and they need different strategies for recovery success:

Normal debtors, i.e. who can pay and will pay if reminded or/and persuaded to pay. Difficult debtors, i.e. those who can pay, but will not pay. Doubtful debtors, i.e. those who can pay the reduced amount as negotiated with them.

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

Recovery effort should start with the establishing a good rapport with the debtor. Communication, listening and persuasive skills would be applied in building good interpersonal relations.

Go through the know Your Customer papers furnished by the bank and know the customers identify and personal profile. Go through the copy of the loan agreement of the debtor furnished by the bank and note down the financial position, cash flow pattern, and assets charged to the bank.

v) Record in notebook recovery efforts in chronological order for each.

Modes of debt recovery other than normal debt recovery procedure

(1) Where a certificate has been issued to the Recovery Officer under Sub-section of section 19, the Recovery Officer may, without prejudice to the modes of recovery specified in section 25, recover the amount of debt by any one or more of the modes provided under this section. (2) If any amount is due from any person to the defendant, the Recovery Officer may require such person to deduct from the said amount, the amount of debt due from the defendant under this Act and such person shall comply with any such requisition and shall pay the sum so deducted to the credit of the Recovery Officer: Provided that nothing in this sub-section shall apply to any part of the amount exempt from attachment in execution of a decree of a civil court under section 60 of the Code of Civil Procedure, 1908 (5 of 1908). (3) (I) The Recovery Officer may, at any time or from time to time, by notice in writing, require any person from whom money is due or may become due to the defendant or to any person who holds or may subsequently hold money for or on account of the defendant, to pay to the Recovery Officer either forthwith upon the money becoming due or being held or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount of debt due from the defendant or the whole of the money when it is equal to or less than that amount. (ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or on account of the Defendant jointly with any other person and for the purposes of this subsection, the shares of the joint holders in such amount shall be presumed, until the contrary is proved, to be equal. (iii) A copy of the notice shall be forwarded to the defendant at his last address known to the Recovery Officer and in the case of a joint account to all the joint holders at their last addresses known to the Recovery Officer.

(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under the sub-section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a post office, bank, financial institution, or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose of any entry, endorsement or the like to be made before the payment is made notwithstanding any rule, practice or requirement to the contrary. (v) Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after the date of the notice shall be void as against any demand contained in the notice. (vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or the part thereof is not due to the defendant or that he does not hold any money for or on account of the 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 defendants liability for any sum due under this Act, whichever is less. (vii) The Recovery Officer may, at any time or from time to time, amend or revoke any notice under this sub-section or extend the time for making any payment in pursuance of such notice. (viii) The Recovery Officer shall grant a receipt for any amount paid in compliance with a notice issued under this sub-section, and the person so paying shall be fully discharged from his liability to the defendant to the extent of the amount so paid. (ix)Any person discharging any liability to the defendant after the receipt of a notice under this subsection 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 defendants liability for any debt due under his Act, whichever is less. (x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the Recovery Officer, he shall be deemed to be a defendant in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realization of the amount as if it were a debt due from him, in the manner provided in sections 25, 26 and 27 (4) The Recovery Officer may apply to the court in whose custody there is money belonging to the defendant for payment to him of the entire amount of such money, or if it is more than the amount of debt due an amount sufficient to discharge the amount of debt so due. The Recovery Officer may, by order, at any stage of the execution of the certificate of recovery, require any person, and in case of a company, any of its officers against whom or which the certificate of recovery is issued, to declare on affidavit the particulars of his or its assets.]

(5) The Recovery Officer may recover any amount of debt due from the defendant by distrait and sale of his movable property in the manner laid down in the Third Schedule to the Income-Tax Act, 1961 (43 of 1961). Use of lok adalat The Honorable Supreme Court also observed that loans, personal loans, credit card loans and housing loans with less than Rs.10 lakh can be referred to Lok Adalats. In this connection, banks attention is invited to Circular DBOD.No.Leg.BC.21/09.06.002/2004-05 dated August 3, 2004 wherein they were advised to use the forum of Lok Adalats organized by Civil Courts for recovery of loans. Banks are advised that they should preferably use the forum of Lok Adalats for recovery of personal loans, credit card loans or housing loans with less than Rs.10 lakh as suggested by the Honorable Supreme Court. Banks, as principals, are responsible for the actions of their agents. Hence, they should ensure that their agents engaged for recovery of their dues should strictly adhere to the above guidelines and instructions. Complaints received by Reserve Bank regarding violation of the above guidelines and adoption of abusive practices followed by banks recovery agents would be viewed seriously. Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of above guidelines. Similar supervisory action could be attracted when the High Courts or the Supreme Court pass strictures or impose penalties against any bank or its Directors/ Officers/ agents with regard to policy, practice and procedure related to the recovery process.