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RECOVERY MANAGEMENT IN BANKS


CHAPTER 1
Introduction
Banks were never so serious in their efforts to ensure timely recovery and consequent reduction
of NPAs as they are today. It is important to remember that recovery management, be of fresh
loans or old loans, is central to NPA management. This management process needs to start at the
loan initiating stage itself. Effective management of recovery and NPA comprise two pronged
strategy. First relates to arresting of the defaults and creation of NPA thereof and the second is to
handling of loan delinquencies. The tenets of financial sector reforms were revolutionary which
created a sense of urgency in the minds of staff of bank and gave them a message that either they
perform or perish. The prudential norm has forced the bank to look into the asset quality.
A debt from a loan, credit line or accounts receivable that is recovered either in whole or in part
after it has been written off or classified as a bad debt. In accounting, the bad debt recovery
would credit the "allowance for bad debts" or "bad debt reserve" categories, and reduce the
"accounts receivable" category in the books.
1
RECOVERY MANAGEMENT IN BANKS
Not all bad debt recoveries are "like-kind" recoveries. For example, a collateralized loan that has
been written off may be partially recovered through sale of the collateral. Or, a bank may receive
equity in exchange for writing off a loan, which could later result in recovery of the loan and,
perhaps, some additional profit.
Recovery
“Recovery is defined as the process of regaining and
saving something lost or in danger of becoming costs.”
Recovery is a key to the stability of the banking sector there should be no hesitation in stating
that Indian banks have done a remarkable job in containment of Non- Performing Assets (NPA)
considering the over all difficult environment. Recovery management is also linked to the bank’s
interest margin’s we must recognize that cost and recovery management supported by enabling
legal framework hold the key to future health and competitiveness of the Indian banks. No doubt,
improving recovery management in India is an area requiring expeditions and effective actions in
legal institutional and judicial processes. Banks at present experience considerable difficulties in
recovering loans and enforcement of securities charged with them. The existing procedure for
recovery of debts due to banks has blocked a significant portion of their funds in unproductive
assets, the value of which deteriorates with the passage of time.
2
RECOVERY MANAGEMENT IN BANKS
1.1 Why recovery management?

Bank deserves to be paid for their products and services. The collection professionals in
Recovery Management Systems will work to see that.

Reasonable fees with no up-front costs. They get paid
only when it is collect.

Recovery Management Systems will design a collection strategy to meet bank’s objectives. Bank
can recover their debts without losing customers.

Monthly settlements with meaningful reporting. Status
updates on demand.

Extensive experience obtaining and collecting money judgments in Ohio. Garnishments, liens,
and levies Recovery Management Systems will collect when legal action is the only option.

Cutting edge skip-tracing tools and techniques recovery Management Systems can work 1st, 2nd,
and 3rd placements and even turn bank old judgments into money.
3

RECOVERY MANAGEMENT IN BANKS


1.2 Advantages & Disadvantages of recovery
Advantages:
1) The process of assigning debt collection to outsides enables officials from Banks to develop
more remunerative new business.
2) Third party involvement in debt collection has proven time and again to improve the chances
of recovering bank dues as these people are specialists in negotiating with debtors and the result
usually speak for themselves;
3) A skillfully negotiated debt collection could mean saving
on litigation cost.
4)The process of assigning debt collection to outsides
enables officials of non-Banks. Cost to develop more
beneficial new business.
Disadvantages:
1) Debt collection does cost money;
2) The debt collection agency will be establishing a relationship with the banks customers, which
could be potentially harmful if they sour that relationship by not dealing with customers in a
courteous manner.
4
RECOVERY MANAGEMENT IN BANKS
1.3 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 dent recovery, which are as follows:
1) Don’t violate or breach the recovery policy, procedure
etc. prescribed by the principal.
2) Don’t exceed the authority given in the recovery
arrangement.
3) Don’t make a call to the debtor before 0700 hours or
after 2100 hours.
4) Don’t make anonymous calls or bunched calls to the
debtor, which may be perceived as harassment.
5) Don’t conceal or misrepresent your identity during calls
and visit or other interaction with the debtor.
6)Don’t show uncivil/indecent/dirty behavior or use such
language during calls and visits to the debtor.
7) Don’t harass/humiliate/intimidate/threaten the debtor-
verbally or physically.
5
RECOVERY MANAGEMENT IN BANKS
8) Don’t intrude into the privacy of the debtor’s family
members, friends/colleagues.
9) Don’t disclose the customer’s debts/dues/account
information to unauthorized person.
10)Don’t forget that the debtor is a human being and deserves
to be treated with fairness and courtesy, despite the fact that
he/she is a debtor for the time being.
6
RECOVERY MANAGEMENT IN BANKS
1.4 Elements of debt recovery
The agency regarding debt recovery contains the main
terms and conditions agreed by the principal (say a bank)
and the agent. The main elements of the debt recovery
would generally include:
1) Specific tasks to be accomplished e.g. the amount to be recovered from the specified loan
accounts in default and the broad time frame.
2) Debt Recovery Policy and Procedure of the bank.
3)Code of conduct in recovery process may include
dress code, verbal and written communication rules top be followed by the individuals employed
by the agency for the purpose of collection.
4) Duties of the agent.
5) Rights of the agent, including the commissions/fees payable by the principal to the
agent/agency for the recovery of debt/other services.
The Debt Recovery Policy and code of conduct in the debt recovery will be regulations
compliant, i.e. in accordance with the directives and guidelines of the Reserve Bank of India
issued from time to time. If, however these are not incorporated therein, it is advisable for agents
to seek clarification from the principal, as compliance with the
7
RECOVERY MANAGEMENT IN BANKS
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.8

RECOVERY MANAGEMENT IN BANKS


1.5 Defaults of loan
One major problem which the banks in India are facing is the problem of recovery and overdue
of loans. The reasons behind this may vary for different financial institutions as it depends upon
the respective nature of loans. Here an attempt is made to find out the some causes of default of
loans due to which financial Institutions are facing the problems of overdue of loans. The
recovery officers of different banks are interviewed for finding out the causes of defaults. These
reasons may be useful for the and Banks for the better recovery of loans in future. After
surveying different banks, the following can be said to be some of the main causes of default of
loans from industrial sector:-
Improper selection of an entrepreneur:-
Selection of the right Entrepreneur is one of the major factors in the profitability of Banks. Two
major criterion namely the intention to repay and the capacity to repay should be properly dealt
with in Credit Evaluation. The entrepreneurs who have the willingness, capabilities, qualities and
the requisite expertise for successfully setting up and running an industrial unit, should be
identified with proper prudence and judiciousness. This is the best way of safeguarding the
investment of a bank, thereby ensuring proper and timely repayment. Unbiased survey reports of
the site and capability of the Entrepreneur must be verified by the surveyor. In other words the
credit worthiness of the
9

RECOVERY MANAGEMENT IN BANKS


entrepreneur as well as the project should undergo very careful scrutiny before the sanctioning of
the loan. Strict measures and security should taken before the sanctioning of the loan.
Deficient analysis of project Viability:-
One of the important reasons for poor recovery of loan is attributable to wrong selection of
projects. Success of any project depends upon the viability of the project, and the viability in
turn, depends upon the easy availability of raw material,
transportation,
railways,
skilled
labour, communication facilities, markets etc. If any of the above is not easily available to the
entrepreneur it results in an increase in the cost of the project and also in delay of production.
This inevitably causes default in repayment of loans.There are many examples where the banks
accede to
finance projects deficient in one or more of these areas. In usual practice, when an entrepreneur
approach for a loan he presents his project in such a way that no one can easily comprehend the
non-availability of the primary prerequisites. All the weak points are camouflaged and only
strong points of the project are highlighted.
Inadequacy
of
Collateral
Security/Equitable
Mortgage against Loan:-
Collateral Security by way of mortgage of immovable property or other fixed assets, thereby
creating a charge, trains the mind of the borrower to be prepared to pay the dues to the lenders.
But when he is free from this fear of
10

RECOVERY MANAGEMENT IN BANKS


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.
Unrealistic Terms and Schedule of Repayment:-
Occasions are not few when there develops a tendency on the part of the financers to paint a rosy
picture of the project at the time of appraisal. If the sanctioning authority is guided by
considerations of personal interests, many things may happen. The breakeven point of a project
may be shown at an unrealistically low level of operation, or profitability may be shown at an
unduly high level just to brighten the chances of acceptability of the project by the financial
institution; or cash inflow may be shown in an unduly optimistic manner and, therefore, Debts
Service Coverage Ratio (DSCR) worked out incorrectly, fixing unrealistically high installments
and conservative schedule of repayments. These inner pulls and pressures may find reflection in
fixing excessive amounts of installments in order to show an early period of repayment. The
borrower at this stage finds himself in an unenviable position of a 'Yes Master' and nods his head
at whatever conditions are attached or whatever repayment schedule is fixed by the financial
institutions, in all probability, covering up his design to evade payment of the future dues. And,
the real problem surfaces when repayment of
11

RECOVERY MANAGEMENT IN BANKS


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.
Lack of Follow up Measures:-
"A stitch in time saves nine"
Follow-up measures taken regularly and systematically keep the borrowing unit under constant
vigil of the banks. Many ills can be checked through such follow-up measures by keeping the
borrowing units on their alertness and guiding them to rectify their mistakes in the first
opportunities or extending them a helping hand in tiding over their tight times. Normally, such
close follow-up programs are conspicuous by their absence. In the result, the borrowing units not
only ignore payment of their dues to banks but also often tread on wrong tracks, much to the
detriment of their own financial health and that of the banks.
Performance of the borrowing units, if carefully and systematically monitored through regular
inspections by scrutiny of returns, annual balance sheet and inspection of site, can be
significantly improved. Naturally, such inspections prevent the borrowers from deviating from
the terms and conditions of the loan or from diverting any fund for purpose other than those
earmarked in the sanction letter and keep the financial health of the units in good order.
Labour problems:-
12

RECOVERY MANAGEMENT IN BANKS


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.
Default due to natural calamities:-
A certain proportion of default can be attributed to natural calamities such as floods, earthquakes,
storms, etc. Prima-facie this would seen to be a factor beyond human control. A more detailed
insight, would however, suggest that certain precautionary preventive measures such as proper
meteorological and topographical analysis of the industrial sight can go a long way in reducing
this element of risk. Natural calamities not only affect the unit directly but also exert additional
burden on the Government in terms of relief measures, waivers etc. A further fraction, albeit
nominal, is of such borrowers who tend to take undue advantage of such natural calamities in
order to avoid repayment, thereby increasing the magnitude of default.
13

RECOVERY MANAGEMENT IN BANKS


CHAPTER 2
What is NPA?
For a bank, an NPA or bad debt is usually a loan that is not producing income. Earlier it was
largely applicable to businesses. But things have changed with banks widely extending consumer
loans (home, car, personal and education, among others) and strict asset classification norms.
If a borrower misses paying his equated monthly installment (EMI) for 90 days, the loan is
considered bad, or an NPA. High NPAs are a sign of bad financial health. This has wide-ranging
ramifications for a bank, especially in the stock market and money market. So, as soon as a debt
goes bad, the banks want it either made better or taken out of their books.
The genesis (origin) of an NPA
There are many reasons as to why a loan goes bad.
For a business, it could be because it fails to take off.
Such a situation may arise because of sudden health expenditure or job loss or death. Often, as in
the US today, it can be because of over-leveraging, when consumers borrow
14
RECOVERY MANAGEMENT IN BANKS
against most of their assets and, maybe, have unsecured
loans too.
In such a case, any hit on income can jeopardize all repayments. They, however, can file for
bankruptcy under Chapters 7, 11 and 13 of the United States Bankruptcy Code. Indians don't
have such an option.
In India, the situation has worsened due to banks aggressively pushing loans, even unsecured
ones, to individuals to prevent idle assets on their books. President and founder of International
Consumer Rights Protection Council, an NGO, says most customers in India are not financially
educated and banks are luring them to take more and more loans, often without checking their
financial position
15
RECOVERY MANAGEMENT IN BANKS
2.1 Meaning of NPA
An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest
are not paid by the borrower for a period of 180 days. However with effect from March 2004,
default status would be given to a borrower if dues are not paid for 90 days. If any advance or
credit facilities granted by bank to a borrower become non- performing, then the bank will have
to treat all the advances/credit facilities granted to that borrower as non- performing without
having any regard to the fact that there may still exist certain advances / credit facilities having
performing status.
1) Why such huge levels of NPAs exist in the Indian
banking system (IBS)?
The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the
banks concerned. What is needed is having adequate preventive measures in place namely, fixing
pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision.
Banks concerned should continuously monitor loans to identify accounts that have potential to
become non- performing.
2) Why NPAs have become an issue for banks in India?
To start with, performance in terms of profitability is a benchmark for any business enterprise
including the banking industry. However, increasing NPAs have a direct impact on
16
RECOVERY MANAGEMENT IN BANKS
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.
17

RECOVERY MANAGEMENT IN BANKS


2.2 Strategy for recovery
Devising a strategy helps in achieving a set goal or objective. Recovery agents should therefore
devise a strategy for debt recovery. The following guidelines would help in preparing proper
strategy for debt recovery.
i) The collection process should be compliant to the bank-specific recovery norms and also
regulatory guidelines.
ii)
The collection timing should be synchronized to the
cash inflow pattern of the debtors:
For example, recovery from salaried employees should be timed when salary is received by or
credited to the debtor’s account, normally at the moth-end. In case of SME borrowers the effort
should coincide with cash flow on account of sales.
In case a collection from agriculturist should be made, then it should be soon after the crops are
sold. This will call for knowledge of bank products on the part of agents. It should be the
endeavour of the agent that collection should be made well before the cash inflows are spent
away by the debtor for meeting other expenses.
18
RECOVERY MANAGEMENT IN BANKS
iii) Adopt different collection strategy for different debtor types: This is based on the dictum that
‘one size does not fit all’. In the foregoing paragraphs, three types of debtors have been described
and they need different strategies for recovery success:
•Normal debtors, i.e. who ‘can pay’ and ‘will pay’ if
reminded or/and persuaded to pay.
•Difficult debtors, i.e. those who ‘can pay’, but ‘will not
pay’.
•Doubtful debtors, i.e. whose who can pay the reduced
amount as negotiated with them.
iv)
While different strategies are required for different types of debtors, the following are the
common points to be followed in all kinds of recovery strategies:
•Recovery effort should start with the establishing a
good rapport with the debtor. Communication, listening and persuasive skills would be applied in
building good interpersonal relations.
•Go through the ‘know Your Customer’ papers furnished
by the bank and know the customer’s identify and
personal profile.
•Go through the copy of the loan agreement of the
debtor furnished by the bank and note down the financial position, cash flow pattern, and assets
charged to the bank.
v)
Record in notebook recovery efforts in chronological
order for each.
19
RECOVERY MANAGEMENT IN BANKS
CHAPTER 3
Policy, Processes and procedure of debt
recovery management
Collection of post due debt or receivables of the bank that has engaged a recovery agent is the
core function of the agent. All other functions, as discussed in the preceding unit, revolve around
this core function. We will discuss in detail the policy, processes and procedure for debt recovery
function in this unit.
Banks lay down their policy and procedure for collection of past due debts in conformity with
the legal and regulatory framework. The banks will in particular, abide by:
1) The RBI directives on recovery of debt, including
recovery agents engaged by the bank and,
2) The Model Policy on collection of Dues and Repossession of security framed by the Indian
Banks’ Association.
A bank will normally incorporate its policy and procedure for debt recovery in the arrangement
entered into its recovery agents. In terms of the recovery management agreed with the bank, the
recovery agents should adhere to the policy, procedure, etc. prescribed by the bank.
3.1 Loan recovery policy
20
RECOVERY MANAGEMENT IN BANKS
The debt collection policy (recovery policy) of the bank is built around dignity and respect to
customers. The Bank will not follow policies that are unduly coercive in recovery of dues from
borrowers. The policy is built on courtesy, fair treatment and persuasion. The bank believes in
following fair practices with regard to recovery of dues from borrowers and taking possession of
security (properties / assets charged to the bank as primary or collateral security) (known as
security repossession) and thereby fostering customer confidence and long-term relationship.
The repayment schedule for any loan sanctioned by the Bank will be fixed taking into account
the repaying capacity and cash flow pattern of the borrower. The bank will explain to the
customer upfront the method of calculation of interest and how the Equated Monthly
Installments (EMI) or payments through any other mode of repayment will be appropriated
against interest and principal due from the customers. The bank would expect the customers to
adhere to the repayment schedule agreed to and approach the Bank for assistance and guidance
in case of genuine difficulty in meeting repayment obligations.
The Bank’s Security Repossession Policy (taking possession of the mortgaged properties under
SRESI Act or acquiring the property as non banking asset through enforcement of decree) aims
at recovery of dues in the event of default and is not aimed at whimsical deprivation of the
property. The policy recognizes fairness and transparency in repossession, valuation and
realization of security. All the
21

RECOVERY MANAGEMENT IN BANKS


practices adopted by the bank for follow up and recovery of dues and repossession of security
will be in consonance with the law.
General Guidelines:
All the members of the staff or any person authorized to represent our Bank in collection and / or
security repossession would follow the guidelines set out below:
1. The customer would be contacted ordinarily at the place of his / her choice and in the absence
of any specified place, at the place of his / her residence and if unavailable at his / her residence,
at the place of business / occupation.
2. Identity and authority of persons authorized to represent the Bank for follow up and recovery
of dues would be made known to the borrowers at the first instance. The bank staff or any person
authorized to represent the bank in collection of dues or / and security repossession will identify
himself / herself and display the authority letter issued by the bank upon request.
3. The bank would respect privacy of its borrowers.
4. The bank is committed to ensure that all written and verbal communication with its borrowers
will be in simple business language and the bank will adopt civil manners for interaction with
borrowers.
5. Normally the bank’s representatives will contact the borrower between 0700 hrs and 1900 hrs,
unless circumstances warrant visiting the borrower at odd hours and occasions. Such
circumstances would include continuous irregularity in the accounts.
22
RECOVERY MANAGEMENT IN BANKS
6. Borrower’s requests to avoid calls at a particular time or at a particular place would be
honored as far as possible.
7. The bank will document the efforts made for the recovery of dues and the copies of
communication, if any, sent to the customers will be kept on record.
8. All assistance will be given to resolve disputes or differences regarding dues in a mutually
acceptable and in an orderly manner.
9. Inappropriate occasions such as bereavement in the family or such other calamitous occasions
will be avoided for making calls / visits to collect dues.
Giving notice to borrowers
While written communication, telephonic reminders or visits by the bank’s representatives to the
borrowers’ place or residence will be used as loan follow up measures, the bank will not initiate
any legal or other recovery measures including repossession of the security without giving due
notice in writing. The Bank will follow all such procedures as required under law for recovery /
repossession of security.
Repossession of Security
Repossession of security is aimed at recovery of dues and not to deprive the borrower of the
property. The recovery process through repossession of security will involve repossession,
valuation of security and realization of security through appropriate means. All these would be
carried out in
23

RECOVERY MANAGEMENT IN BANKS


a fair and transparent manner. Repossession will be done only after issuing the notice as detailed
above. Due process of law will be followed while taking repossession of the property. The bank
will take all reasonable care for ensuring the safety and security of the property after taking
custody, in the ordinary course of the business.
Valuation and Sale of Property
Valuation and sale of property repossessed by the bank will be carried out as per law and in a fair
and transparent manner. The bank will have right to recover from the borrower the balance due,
if any, after sale of property. Excess amount, if any, obtained on sale of property will be returned
to the borrower after meeting all the related expenses provided the bank is not having any other
claims against the borrower.
Opportunity for the borrower to take back the security
As indicated earlier in the policy document, the bank will resort to repossession of security only
for the purpose of realization of its dues as the last resort and not with intention of depriving the
borrower of the property. Accordingly, the bank will be willing to consider handing over
possession of property to the borrower any time after repossession but before concluding sale
transaction of the property, provided the bank dues are paid in full. If satisfied with the
genuineness of borrower’s inability to pay the loan installments as per the schedule which
resulted in the repossession of security, the bank may consider handing
24

RECOVERY MANAGEMENT IN BANKS


over the property after receiving the installments in arrears. However, this would be subject to
the bank being convinced of the arrangements made by the borrower to ensure timely repayment
of remaining installments in future.
25

RECOVERY MANAGEMENT IN BANKS


3.2 Debt recovery processes
Debt recovery processes can be typically of following
kinds, each involving different procedure:
1) Difficult recovery process where the debtors are not willing to pay and who intentionally resist
or avoid recovery efforts: The recovery agent has to follow special process of recovery against
the recalcitrant defaulters, in consultation with the bank.
2) Assets possession process: If the recalcitrant debtors do not eventually pay the dues, the
movable assets charged to the bank by way of hypothecation or pledge, can be possessed by the
bank or the recovery agent and thereafter auctioned or otherwise sold to recover the dues. The
detailed procedure for such recovery is discussed later, after explaining the meaning of pledge,
hypothecation etc. in another Unit.
3) Legal recovery process: The intervention of the court is required to possess mortgaged
immovable property by the or its recovery agent. Also if the charged assets do not exist, or the
debt is unsecured, the debtor will have to be sued for recovery of the dues by the bank/recovery
agent.
26
RECOVERY MANAGEMENT IN BANKS
3.3 Procedure of tribunal
1) Application to the Tribunal:
(1) Where a bank has to recover any debt from any person, it may make an application to the
Tribunal within the local limits of whose jurisdiction By Act 1 of 2000, sec. 8 (w.r.e.f. 17-1-
2000).Subs. by Act 1 of 2000, sec. 9, for section 19 (w.r.e.f.17-1-2000).
(a) the defendant, or each of the defendants where there are more than one, at the time of making
the application, actually and voluntarily resides or carries on business or personally works for
gain; or
(b) any of the defendants, where there are more than one, at the time of making the application,
actually and voluntarily resides or carries on business or personally works for gain; (c) the cause
of action, wholly or in party, arises.
(2) Where a bank, which has to recover its debt from any person, has filed an application to the
Tribunal under subsection (1) and against the same person another bank also has claim to recover
its debt, then, the later bank or financial institution may join the applicant bank at any stage of
the proceedings, before the final order is passed, by making an application to that Tribunal.
(3) Every application under sub-section (1) or sub-section (2) shall be in such form and
accompanied by such documents or other evidence and by such fee as may be prescribed
Provided that the fee may be prescribed having regard to the
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RECOVERY MANAGEMENT IN BANKS
amount of debt to be recovered Provided further that nothing contained in this sub-section
relating to fee shall apply to cases transferred to the Tribunal under sub-section of section 31. On
receipt of the application under sub-section (1) or sub-section, the Tribunal shall issue summons
requiring the defendant to show cause within thirty days of the service of summons as to why the
relief prayed for should not be granted.
(5) The defendant shall, at or before the first hearing or within such time as the Tribunal may
permit, present a written statement of his defence.
(6) Where the defendant claims to set-off against the applicant’s demand any ascertained sum of
money legally recoverable by him from such applicant, the defendant may, at the first hearing of
the application, but not 17 afterwards unless permitted by the Tribunal, present a written
statement containing the particulars of the debt sought to be set-off.
(7) The written statement shall have the same effect as a plaint in a cross-suit so as to enable the
Tribunal to pass a final order in respect both of the original claim and of the set- off.
(8) A defendant in an application may, in addition to his right of pleading a set-off under sub-
section, set up, by way of counter-claim against the claim of the applicant, any right or claim in
respect of a cause of action accruing to the defendant against the applicant either before or after
the filing of the application but before the defendant has delivered his defence or before the time
limited for delivering
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RECOVERY MANAGEMENT IN BANKS
his defence has expired, whether such counter-claim is in the
nature of a claim for damages or not.
(9) A counter-claim under sub-section shall have the same effect as a cross-suit so as to enable
the Tribunal to pass a final order on the same application, both on the original claim and on the
counter-claim.
(10) The applicant shall be at liberty to file a written statement in answer to the counter-claim of
the defendant within such period as may be fixed by the Tribunal.
(11) Where a defendant sets up a counter-claim and the applicant contends that the claim thereby
raised ought not be disposed of by way of counter-claim but in an independent action, the
applicant may, at any time before issues are settled in relation to the counter-claim, apply to the
Tribunal for an order that such counter-claim may be excluded, and the Tribunal may, on the
hearing of such application, make such order as it thinks fit.
(12) The Tribunal may make an interim order (whether by way of injunction or stay or
attachment) against the defendant to debar him from transferring, alienating or otherwise dealing
with, or disposing of, any property and assets belonging to him without the prior permission of
the Tribunal.
(13) (A) Where, at any stage of the proceedings, the Tribunal is satisfied, by affidavit or
otherwise, that the defendant, with intent to obstruct 18 or delay or frustrate the execution of any
order for the recovery of debt that may be passed against him,
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(i) is about to dispose of the whole or any part of his property;
or
(ii) is about to remove the whole or any part of his property
from the local limits of the jurisdiction of the Tribunal; or
(iii) is likely to cause any damage or mischief to the property or affect its value by misuse or
creating third party interest, the Tribunal may direct the defendant, within a time to be fixed by it,
either to furnish security, in such sum as may be specified in the order, to produce and place at
the disposal of the Tribunal, when required, the said property or the value of
the same, or such portion thereof as may be sufficient to satisfy the certificate for the recovery of
the debt, or to appear and show cause why he should not furnish security. (B) Where the
defendant fails to show cause why he should not furnish security, or fails to furnish the security
required, within the time fixed by the Tribunal, the Tribunal may order the attachment of the
whole or such portion of the properties claimed by the applicant as the properties secured in his
favour or otherwise owned by the defendant as appears sufficient to satisfy any certificate for the
recovery of debt.
(14) The applicant shall, unless the Tribunal otherwise directs, specify the property required to be
attached and the estimated value thereof.
(15) The Tribunal may also in the order direct the conditional attachment of the whole or any
portion of the property specified under subsection.
(16) If an order of attachment is made without complying with
the provisions of sub-section, such attachment shall be void.
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(17)In the case of disobedience of an order made by the Tribunal under sub-sections (12), (13)
and (18) or breach of any of the terms on which the order was made, the Tribunal may order the
properties of the person guilty of such disobedience or breach to be attached an may also order
such person to be detained in the civil prison for a term not exceeding three months, unless in the
meantime the Tribunal directs his release.
(18) Where a certificate of recovery is issued against a company registered under the Companies
Act, 1956 (1 of 1956) the Tribunal may order the sale proceeds of such company to be
distributed among its secured creditors in accordance with the provisions of section 529A of the
Companies Act, 1956 and to pay the surplus, if any, to the company.
(19) The Tribunal may, after giving the applicant and the defendant an opportunity of being
heard, pass such interim or final order, including the order for payment of interest from the date
on or before which payment of the amount is found due up to the date of realization or actual
payment, on the application as it thinks fit to meet the ends of justice.
(20) The Tribunal shall send a copy of every order passed by
it to the applicant and the defendant.
(21) The Presiding Officer shall issue a certificate under his signature on the basis of the order of
the Tribunal to the Recovery Officer for recovery of the amount of debt specified in the
certificate.
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(22) Where the Tribunal, which has issued a certificate of recovery, is satisfied that the property
is situated within the local limits of the jurisdiction of two or more Tribunals, it may send the
copies of the certificate of recovery for execution to such other Tribunals where the property is
situated:
Provided that in a case where the Tribunal to which the certificate of recovery is sent for
execution finds that it has no jurisdiction to comply with the certificate of recovery, it shall return
the same to the Tribunal which has issued it.
(23)The Tribunal may made such orders and give such directions as may be necessary or
expedient to give effect to its orders or to prevent abuse of its process or to secure the ends of
justice.
2) Appeal to the Appellate Tribunal.
(1) Save as provided in subsection
(2) any person aggrieved by an order made, or deemed to have been made, by a Tribunal under
this Act, may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter. No
appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of
the parties.
(3) Every appeal under sub-section shall be filed within a period of forty-five days from the date
on which a copy of the order made, or deemed to have been made, by the Tribunal is received by
him and it shall be in such form and be accompanied by such fee as may be prescribed: Provided
that the Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-
five days if it is satisfied that there was sufficient cause for not filing it within that period.
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(4) On receipt of an appeal under sub-section, the Appellate Tribunal may, after giving the parties
to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming,
modifying or setting aside the order appealed against.
(5) The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal
and to the concerned Tribunal.
(6) The appeal filed before the Appellate Tribunal under sub- section shall be dealt with by it as
expeditiously as possible and endeavor shall be made by it to dispose of the appeal finally within
six months from the date of receipt of the appeal.
3) Deposit of amount of debt due, on filing appeal.
Where an appeal is preferred by any person from whom the amount of debt is due to a bank or a
consortium of banks, such appeal shall not be entertained by the Appellate Tribunal unless such
person has deposited with the Appellate Tribunal seventy-five per cent of the amount of debt so
due from him as determined by the Tribunal under section 19: Provided that the Appellate
Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited
under this section.
4) Procedure and Powers of the Tribunal and the
Appellate Tribunal.
(1) The Tribunal and the Appellate Tribunal shall not be
bound the procedure laid down by the Code of Civil
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Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and, subject
to the other provisions of this Act and of any rules, the Tribunal and the Appellate Tribunal shall
have powers to regulate their own procedure including the places at which they shall have their
sittings.
(2) The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their
functions under this Act, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:--
(a) Summoning and enforcing the attendance of any person
and examining him on oath;
(b) Requiring the discovery and production of documents;
(c) Receiving evidence on affidavits;
(d) Issuing commissions for the examination of witnesses or
documents;
(e) Reviewing its decisions;
(f) Dismissing an application for default or deciding itex
parte;
(g) Setting aside any order of dismissal of any application for
default or any order passed by it ex parte;
(h) Any other matter which may be prescribed.
(3) Any proceeding before the Tribunal or the Appellate Tribunal shall be deemed to be a judicial
proceeding within the meaning of sections 193 and 228, and for the purposes of section 196, of
the Indian Penal Code (45 of 1860) and the
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Tribunal or the Appellate Tribunal shall be deemed to be a
civil court.
NORMAL RECOVERY PROCEDURE:
As mentioned above, this procedure will generally apply to the debtors who are willing to pay
the dues with normal recovery process. Based on the above-mentioned regulatory guidelines,
following procedure may be outlined for such recovery. However the recovery agents should
follow the bank-specific debt recovery procedure as advised by their principal. Below are given
the main rules for making telephone calls and visit to the debtor for recovery of dues:
1) The recovery agent has been authorized by the bank to
collect the past due debt from the particular customer.
2) The customer has been notified by the bank of the details
of the recovery agent for collection of the past-due debt.
3) Making customer calls: This is the first step in recovery procedure and following rules should
be followed generally:
(i)
Calls are made from the same number as advised
by the bank to the customer.
(ii) The agents disclose his identity and authority at the
first instance.
(iii) The agent contacts the debtor between 0700 hours and 1900 hours, unless the special
circumstance of his/her business or occupation requires the bank to contact of a different time.
Under no circumstances, can the customer be called beyond 2100 hours.
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RECOVERY MANAGEMENT IN BANKS
(iv) All calls where the customer becomes abusive or
threatening should be appropriately documented.
(v)
Customer’s question be answered in full. They should be provided with information requested
and given assistance in making recovery. Minor issues should be resolved.
(vi)
How often to call customer/ The purpose of a collection call as to bring to the Customer’s notice
the obligation and to seek a commitment to pay on a specified date. Once a promise is elicited a
call may be made to serve as a reminder and for confirmation of payment.
(vii) If the customer is not available during a few calls made by the agent, a message may be left
to an adult family member as follows” Please leave a message that ABC had called and request
the customer to call ABC back at the given phone number”. The message should not indicate that
the 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.
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The debtor has been notified of the amount due and
also of the name of the collection agent.

The collection agent has taken an appointment from
the debtor for the visit.
(ii) During visit, the agent should be in proper dress and appearance, or wear the dress prescribed
by the principal and follow the timing and place of the visit as per the principal’s or RBI/IBA
code, unless otherwise agreed by the debtor expressly.
(iii)
At the first stance, the agent should utter salutation words (like good morning/evening…
sir/madam, as per custom of the bank). The agent should thereafter show his ID card and
authority given by the principal for debt collection from the debtor./ Only after these initial
formalities, the conversation regarding debt collection should start.
(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,
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RECOVERY MANAGEMENT IN BANKS

When due to nature of the customer’s employment i.e. working in shifts e.g. call center, hotel.
He/she is usually available outside these hours.
(v) The agent should respect privacy of the debtor. Privacy policy as discussed above for calls
would apply during visits also.
(vi) During the visit, due respect and courtesy should be shown to the customer and the
interactions should be civil and polite as per the principal’s policy.
(vii) During interactions with the debtor, the agent must not use threats or intimidation verbally
or by body language. Under no circumstances, any physical violence be used in debt collection
process.
3.4 Other modes of recovery
(1)Where a certificate has been issued to the Recovery
Officer under Sub-section of section 19, the Recovery Officer may, without prejudice to the
modes of recovery specified in section 25, recover the amount of debt by any one or more of the
modes provided under this section.
(2) If any amount is due from any person to the defendant,
the Recovery Officer may require such person to deduct
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RECOVERY MANAGEMENT IN BANKS
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
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RECOVERY MANAGEMENT IN BANKS
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 defendant’s liability for any sum due under this Act,
whichever is less.
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RECOVERY MANAGEMENT IN BANKS
(vii) The Recovery Officer may, at any time or from time to time, amend or revoke any notice
under this sub-section or extend the time for making any payment in pursuance of such notice.
(viii) The Recovery Officer shall grant a receipt for any amount paid in compliance with a notice
issued under this sub-section, and the person so paying shall be fully discharged from his liability
to the defendant to the extent of the amount so paid.
(ix)Any person discharging any liability to the defendant after the receipt of a notice under this
sub-section shall be personally liable to the Recovery Officer to the extent of his own liability to
the defendant so discharged or to the extent of the defendant’s liability for any debt due under his
Act, whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make payment in
pursuance thereof to the Recovery Officer, he shall be deemed to be a defendant in default in
respect of the amount specified in the notice and further proceedings may be taken against him
for the 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.
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RECOVERY MANAGEMENT IN BANKS
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
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viewed seriously. Reserve Bank may consider imposing a ban on a bank from engaging recovery
agents in a particular area, either jurisdictional or functional, for a limited period. In case of
persistent breach of above guidelines. Similar supervisory action could be attracted when the
High Courts or the Supreme Court pass strictures or impose penalties against any bank or its
Directors/ Officers/ agents with regard to policy, practice and procedure related to the recovery
process.
3.5 Programs of bank

Credit counseling
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
43
RECOVERY MANAGEMENT IN BANKS
debt counseling than a function of credit education. Credit counseling often involves negotiating
with bank to establish a debt management plan (DMP) for a customer. A DMP may help the
debtor repay his/her debt by working out a repayment plan with the bank. DMPs, usually offer
reduced payments, fees and interest rates to the borrower. Recovery agents refer to the terms
dictated by the bank to determine payments or interest reduction offered to customer in a debt
management plan.

Debt Management Programs
Once a customer has come under a DMP, the bank will close the customer’s various accounts and
restrict any future charges in the accounts. The most common benefit of a DMP is the
consolidation of multiple monthly payments into one monthly payment, which is usually less
than the sum of the individual payments previously paid by the customer. Some DMPs advertise
that payment can be cut by 50%, although a reduction of 10-20% is more common.
CHAPTER 4
ICICI bank & its avenue
To understand about this big bank, we need to
understand how it became so big a force to reckon with.
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RECOVERY MANAGEMENT IN BANKS
ICICI (Industrial Credit Investment Corporation ofIndia) promoted the ICICI bank in 1994 with
its stake reducing to 46% after the IPO in 1998. ICICI is a well-known name in India along
withIDBI and was formed in 1955 at the initiative of the World Bank, Indian Government and
Indian Industries. Both of these institutions have an exceptional brand-image and one of the
highest possible ratings from CRISIL and other rating organizations. ICICI can be considered an
oligopolistic corporation along with IDBI. ICIC listed in NYSE in 2000. In 2001 it underwent a
tight marriage with Bank of Madura in a stock-only amalgamation.
ICICI Bank (BSE: ICICI) (formerly Industrial
Credit and Investment Corporation of India) is India's
largest private sector bank in market capitalization and second largest overall in terms of assets.
ICICI Bank has total assets of about USD 100 Billion (end-Mar 2008), a network of over 1308
branches and offices, about 3950 ATMs, and 24 million customers (as of end July 2007). ICICI
Bank offers a wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialized subsidiaries and
affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset
management. But these data are dynamic. ICICI Bank is also the largest issuer of credit cards in
India. . ICICI Bank has listed its equity shares on stock exchanges at Kolkata and Vadodara,
Mumbai and the National Stock
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Exchange of India Limited, and it’s ADRs on the New York
Stock Exchange (NYSE).
The Bank is expanding in overseas markets and has the largest international balance sheet among
Indian banks. The Bank now has wholly-owned subsidiaries, branches and representatives
offices in 18 countries, including an offshore unit in Mumbai. This includes wholly owned
subsidiaries in the UK, Canada and Russia, offshore banking units in Singapore and Bahrain, an
advisory branch in Dubai, branches in Sri Lanka, Hong Kong and Belgium, and rep offices in the
US, China, United Arab Emirates, Bangladesh, South Africa, Indonesia, Thailand and Malaysia.
In particular, the bank is targeting the NRI (Non Resident Indian) population
ICICI Bank reported marked-to-market loss of $264 million as of January 31, 2008 following the
USA subprime mortgage crisis.
4.1 Recovery management of ICICI bank
Here how it works

Defaults are classified into two baskets – Soft and
Hard.

The borrowers are segregated into baskets on the
basis of the time period of default. The baskets are
46
RECOVERY MANAGEMENT IN BANKS
usually on the basis number on the basis of number of
days i.e. 0-30, 0-60, 0-120 and so on.

The soft basket is when the default is at early, usually
below 90 days.

The default shifts into hard basket if it is beyond 90
days.

The bank sends reminder mails and makes telephone
calls to the borrower

After several reminders if the borrower still shows no
sign of paying up then the bank sends an employee to
borrower to personally remind him of the re-payment.

Even after the notice if the borrower ignores the bank
sends a legal notice to the borrower.

If the borrower ignores the legal notice then the bank either decided to write off the amount or
recover the amount.

The recovery process is most of the times outsourced
to an external recovery agency.

The recovery agency sends its recovery agents to collect the money from the borrower, under the
supervision of the bank.

The recovery agencies usually give the borrower a stipulated time period within which the
amount has to be repaid back.

In some cases, if the bank decides to use SARFAESI, 2002, then the recovery agency has to seize
the assets of the borrower.
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The recovery agents either manage to make the borrower pay back the money or if the
SARFAESI Act comes into play then they auction off the seized assets of the borrower and pay
the bank.
NOTE: If borrower didn’t reply for bank notice, hence the securitization and reconstruction of
financial assets and enforcement of security interest act, 2002 (securitization act) comes into
play.
Securitisation act of 2002
Discouraged by the results of debtors in filling the coffers of banks, legislature enacted
securitization and reconstruction of financial assets and enforcement of security interest act
(securitization act) w.e.f. 21st day of June 2002.The banks were empowered under section 13(4)
of securitization act to take possession of secured assets of the borrower including the right to
transfer by way of lease, assignment or sale for realizing the secured asset. The role of the court
was limited to challenge the measures under section 13(4), by way of appeal, that too on deposit
of 75% of amount claimed on the notice under section 13(2) of securitization act.
4.2 Article
ICICI Bank fined Rs500, 000 for rough recovery methods
A consumer commission has ordered ICICI Bank, the country’s largest private sector lender, to
pay a fine of Rs500, 000 for use of force by the bank’s recovery agent on
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RECOVERY MANAGEMENT IN BANKS
a defaulting customer. The client who defaulted on loan had approached the consumer affairs
commission in Delhi complaining of use of force by the bank’s recovery agents.
He alleged the recovery agents impounded his vehicle and beat a friend’s son with iron rods,
mistaking him as the defaulter.
The Delhi Consumer Commission has ordered the bank to pay the complainant, Tapan Bose,
Rs500,000 compensation. (With register to required aren’t and outfits independent are agents the
methods. Recovery regarding India of Bank Reserve the guidelines strict despite hires country
across)
Other big lenders like Citibank and HDFC Bank have also dealt with consumer complaints about
the strong-arm tactics of recovery agents. The banks often dismiss the recovery agents when
confronted with such complaints.
Earlier, an ICICI Bank customer in Mumbai committed suicide after alleged harassment by
recovery agents. The bank later paid his family compensation of Rs15 lakh.
Banks suffer the highest default rates on its "small- ticket personal loans" that are usually below
Rs50,000. The rates of default on these loans are 10 per cent, compared to 2 per cent for credit
card defaulters and 1.5 per cent for car loans. The bank is reducing its exposure in the segment--
it now has around 3 million such loans. Banks often run into
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trouble when recovery agents target defaulters for these
recoveries.
CHAPTER 5
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Debt recovery agent
The phrase “Debt Recovery Agent” comprises three terms- Debt, Recovery and Agent. Let us
understand the meaning of these terms separately, before we explain the meaning of “Debt
Recovery Agent”.
Debt:
It refers to a sum of money owed by one person or entity (debtor) to another person or entity
(creditor). Thus there are two parties to a debt- debtor who receives money by way of a debt; and
creditor who lends money to the debtor. To illustrate, if Ram takes a loan of Rs. 3 lacs from a
bank for purchasing a car, Ram becomes the debtor (or borrower), the bank is the creditor (or
lender) and the loan of Rs. 3 laces is the debt (principal). Ram would be required to repay the
loan in equated ,monthly installment (EMI),comprising the principal and interest, spread over the
repayment period of, say, 3 years ( debt tenor).
Recovery:
It means collection or recovery of money from the debtor by, or on behalf of the creditor, after it
has become due for payment in accordance with the debt terms agreed between the creditor and
the debtor. In the above example, if Ram (debtor) fails to pay the agreed installment (EMI) on
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,
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RECOVERY MANAGEMENT IN BANKS
but not before that date. If the debt is not paid on the due
date it becomes over due or past due.
Agent:
It is a legal term defined in section 182 of Indian Contract Act as “a person employed to do any
act for another or to represent another in dealings with third person”. The person for whom such
acts are done, or who is represented, is called the “Principal”. An agent has thus an authority to
do acts on behalf of the principal within the limits of the authority and thereby bind the principal
for such acts in relation to third parties. There are several kinds of agents e.g. brokers (financial
or commodity brokers), auctioneers, insurance agents, estate or property agents, commission
agent, selling agents, marketing agents, debt recovery agents.
Debt Recovery Agent may now be defined as a person or entity engaged by a bank for the
purpose of collecting specified loans, or advances or other kind of dents from the debtors (or
borrowers) in accordance with the specified terms and conditions. In the above examples of the
car loan to Ram, if the bank (creditor) engages XY will be called as Debt Recovery Agent of the
bank.
5.1 Engagement of Recovery Agents
Banks are advised to take into account the following
specific considerations while engaging recovery agents:
52
RECOVERY MANAGEMENT IN BANKS
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,
53
RECOVERY MANAGEMENT IN BANKS
the new agent should carry the notice and the authorization
letter along with his identity card.
The notice and the authorization letter should, among other details, also include the telephone
numbers of the relevant recovery agency. Banks should ensure that there is a tape recording of
the content / text of the calls made by recovery agents to the customers, and vice-versa. Banks
may take reasonable precaution such as intimating the customer that the conversation is being
recorded, etc.
The up to date details of the recovery agency firms / companies engaged by banks may also be
posted on the bank’s website. Where a grievance/ complaint has been lodged, banks should not
forward cases to recovery agencies till they have finally disposed of any grievance / complaint
lodged by the concerned borrower. However, where the bank is convinced, with appropriate
proof, that the borrower is continuously making frivolous / vexatious complaints, it may continue
with the recovery proceedings through the Recovery Agents even if a grievance / complaint is
pending with them. In cases where the subject matter of the borrower’s dues might be sub judice,
banks should exercise utmost caution, as appropriate, in referring the matter to the recovery
agencies, depending on the circumstances.
5.2 Recovery agencies
Debt recovery agents are employed Debt Recovery
Agencies who work for banks subject to certain terms and
54
RECOVERY MANAGEMENT IN BANKS
condition. Debt recovery agencies are third-party businesses that collect dues past-dues and other
receivable of banks in exchange for a fee. DRAs charge the banks/NBFCs for their services in
one of two ways:
(1)A flat fee and
(2) A percentage of amounts collected.
Most collection agencies use one of following three methods
to collect debts/dues viz.
(1) Contact and follow up through telephone
(2) Letters,
(3) Direct contact by visiting the debtors.
Before the debt recovery agent is given the job, banks begin their work banks issue normal
reminders to the borrowers. However it is seen that in the case of retail loans the initial reminders
could also begin from the DRA. Typically, collection agencies begin the collection process by
sending a demand letter followed by phone calls If these efforts do not result in the payment, it
will be followed up and supplemented by visit to customers’ houses to more intensive methods.
Besides sending out letters and making phone calls, some recovery agencies also specialize in
locating debtors who can no longer be reached at the address or phone number listed on their
accounts. Certain act on behalf of banks to collect severely overdue accounts.
5.3 Training for Recovery Agents
In terms of our Circular DBOD.NO.BP.40/ 21.04.158/
2006-07 dated November 3,2006 on guidelines on managing
55
RECOVERY MANAGEMENT IN BANKS
risks and code of conduct in outsourcing of financial services by banks, banks were advised that
they should ensure that, among others, the recovery agents are properly trained to handle with
care and sensitivity, their responsibilities, in particular aspects like hours of calling, privacy of
customer information etc.
Reserve Bank has requested the Indian Banks’ Association to formulate, in consultation with
Indian Institute of Banking and Finance (IIBF), a certificate course for Direct Recovery Agents
with minimum 100 hours of training. Once the above course is introduced by IIBF, banks should
ensure that over a period of one year all their Recovery Agents undergo the above training and
obtain the certificate from the above institute. Further, the service providers engaged by banks
should also employ only such personnel who have undergone the above training and obtained the
certificate from the IIBF. Keeping in view the fact that a large number of agents throughout the
country may have to be trained, other institutes/ bank’s own training colleges may provide the
training to the recovery agents by having a tie-up arrangement with Indian Institute of Banking
and Finance so that there is uniformity in the standards of training. However, every agent will
have to pass the examination conducted by IIBF all over India.
5.4 Soft skills for debt recovery
The previous unit focused on the regulatory
requirements in debt collection process, including the bank-
56

RECOVERY MANAGEMENT IN BANKS


specific policy and procedure. These requirements are mandatory, but may not automatically lead
to full recovery. Success in recovery depends on compliance with the regulatory norms added
with collection skills and strategy. Both are complementary to each other. Mere regulatory
compliance without collection skills and strategy may not result in recovery. Similarly, collection
skills and strategy without regulatory compliance may vitiate recovery atmosphere in the long
term.
In the present unit, we would briefly discuss some of the essential skills and strategy that
facilitate and improve debt recovery. The objective is limited to acquainting the readers with the
meaning and key elements of skills and strategy required in debt recovery. The learning can, and
should, be enhanced through detailed discussions in the classroom of a training institute,
including role plays by the participants.
1) Communication skill:
Communication is the process of exchanging information, ideas and thought etc. between at least
two persons in order to create a common understanding. In recovery process, communication
takes place between the debtor and agent by words, in writing, eye contact or body language
(during personal meeting) Communication is of two types:
•Verbal communication by spoken words,
•Non-verbal communication e.g. face language (facial
expression, eye contact), voice language (voice tone,
57
RECOVERY MANAGEMENT IN BANKS
voice pitch), and body language (body position, body
movement) All or any of these elements of non-verbal
language communicate some message (whether
intended or unintended by the communicator) to the
receiver.
Following are the main principles of effective communication, which could be followed by a
recovery agent (communicator) in communication with the debtor (receiver).
•The agent’s language (verbal as well as body
language) should be civil and courteous, as per the
bank-specific requirement.
•The objective of the communication should be clear.
•The language used should be clear simple and
courteous.
•The language used should be easily understood by the
receiver.
•The agent should be watchful and sensitive to the
receiver’s responses (including his/her body language
as mentioned above).
•Make sure that the non-verbal communication (or body
language) is not adverse to debtor, though
unintentional
2) Listening skill:
Listening is another skill which is recovery in process. A good recovery agent should be a good
communicator and a good listener. Listening refers to all the ways in which communication is
being received from the other party and includes not only hearing but also facial body
expressions,
58

RECOVERY MANAGEMENT IN BANKS


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 debtor’s poit of
view.
•Normally, commence speaking only after the other
party has finished speaking or making a point. Normally do not interrupt. In other words,
interrupt only when absolutely necessary, e.g. when the points being spoken are irrelevant or
becoming unduly lengthy or controversial and time is limited or is being exceeded. Also interrupt
softly by saying words like “excuse me.”
3) Inter-personal skill:
Inter-personal skill refers to ‘communication plus’ skill that enhances the relationship and
understanding between two or more persons. It thus include communication and listening skills,
plus ‘something more’. This ‘something more’ would be explained here. Generally, person relate
to each other favorably when they find support to their dignity, self- respect, self-esteem, ideas
and values. Establishing good
59

RECOVERY MANAGEMENT IN BANKS


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 in the preceding paragraph.

Show empathy and respect to other party, not with standing the fact that he/she debtor to the
principal.
•Do not make the debtor feel anxious/ insecure/
threatened by your communication verbal or non- verbal. On the contrary, try to remove such
apprehension, if any, of the debtor.
•Give all the information the debtor asks for in
connection with the debt and its repayment. This would help improve inter-personal relation and
also the recovery prospects.
2)Persuasive skill:
60
RECOVERY MANAGEMENT IN BANKS
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
debtor’s credit history, which may make his/her future
borrowing with any bank costlier and difficult.
This should induce the debtor to pay.

Also explained that non-repayment of the loan dues would amount to breach of the loan
agreement and would result in the bank charging higher interest rate.
61

RECOVERY MANAGEMENT IN BANKS


5.5 Function of 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 over due
receivables from debtors who are not traceable, or who show unwillingness pay or who resist
surrendering the security charged. In such cases, the recovery process is difficult and requires
handling by specialized collection agencies to process the required expertise. The functions of re-
processing the security, initial legal action and tracing the vanished debtors may be called as
specialized function of debt collecting agencies.

Collecting dues receivable:
As mentioned above, collecting dues is the core function of a debt recovery agent. Receivables
refer to the sums of money which have become due in the loan/advances accounts and are
payable on or after due dates by the debtors to the creditors as per the
62
RECOVERY MANAGEMENT IN BANKS
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 are discussed in
subsequent units.
Remitted collected funds:
The funds collected from the debtors should be sent deposited by the agent to the creditor
periodically as per the agency arrangement. Statement of collections remitted
63

RECOVERY MANAGEMENT IN BANKS


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 from the basis of claiming the agreed fee or commission by the
agent from the principal in due course.
Book keeping of recovery management:
While each debt recovery agent may devise his/her own accounting and book keeping methods,
he/she has to take care of the reporting requirements of it principal. Further, book-keeping has to
be sperate for each principal. IT following would constitute the minimum requirement of book-
keeping for a recovery agent.
1)
Lists of debtors received from the principal:
Collection of receivables is an going activity of a recovery agent who may receive the ‘debtor’
lists from the principal from time to time. The debtor lists from the basis of agent’s activities and
also the book-keeping required. These should therefore be carefully kept on record in
chronological order.
2) Ledger account of each debtor: Showing the amounts
of receivable collected and balance to be collected should be kept in chronological or this can be
maintained in the computer also.
It may be note that all the collections/recoveries should be remitted to the a bank. Normally
agent cannot adjust its dues on account of fee against the recoveries made on behalf of the bank.
3) Copies of loan/advances: Agreements between the
debtors and the bank is obliged to keep confidentiality of its
64
RECOVERY MANAGEMENT IN BANKS
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.
65

RECOVERY MANAGEMENT IN BANKS


Case study

HDFC Bank Recovery:-
Mr.Kaushik Agarwal, about 18 months back had purchased 1 Tata Indigo, financed by HDFC
bank. His EMI for this month (May'08) was bounced due to some reasons.
The recovery person called him on the 22nd May for the payment of the same. He was out of
town at that moment so Mr.Kaushik had asked him to send someone to his office on the 24th to
collect cash.
Now on 24th it slipped out of Kaushik’s mind that he had to pay cash to HDFC Bank and hence
he did not withdraw any cash from the bank. As it was a Saturday so when the person came for
collection, he requested him to come on Monday, as the bank was already closed for the day.
On this the person, who had called Kaushik earlier on the 22nd, called him again and started
shouting at him and speaking in a very bad language. The person told Mr. Kaushik that they
know his Residence addresses, so if he don’t pay them today they will come to his house and will
insult him in neighborhood. The person also passed threat on him that if Kaushik don’t pay
within 5 minutes it would be very bad for him. The person kept using foul words and shouting at
him, until he disconnected the phone.
66
RECOVERY MANAGEMENT IN BANKS
After this Kaushik had no option to go to his local police station and lodge a complaint against
that person, and Mr. Kaushik have also decided to put a case against that person and HDFC bank
in consumer court as well as civil court.
Kaushik has also posted a complaint with HDFC
Grievance cell, docket no. TF22534017.
Kaushik requests the concerned authority to take some
action on this.
ABC bank:
ABC Bank had granted a personal loan of Rs. 60,000 to XY, a lower middle class individual, for
consumption needs. The loan was to be repaid in installments by XY. The loan was without any
tangible security and also without any third party guarantee. The borrower XY could not repay in
time some installments and therefore the loan became overdue.
The ABC Bank gave XY’s Case to Z recovery agent, along with other overdue loans for
recovery. The Z recovery agent called XY a couple of times and also visited him at his residence.
As XY was not able to repay the amount in default, Z, used abusive and harsh languages in front
on XY’s wife and daughters to make recovery. During one of the visits to XY’s house, Z and his
colleagues took away forcibly some of the things that were available in XY’s house in front of
his wife and daughters and also used threatening language for payment of the dues. XY felt very
much humiliated and also depressed. Being unable to repay the
67
RECOVERY MANAGEMENT IN BANKS
dues. XY committed suicide. He left a suicide note, blaming Z for harassing him endlessly. He
mentioned the abuses he had suffered at the hands of Z before his wife and daughters. He also
mentioned the threat Z gave that he would suffer dire consequences if he failed to repay the
overdue amount.
Following the suicide death of XY, the local police arrested Z and his colleagues (who used to
accompany Z during his visits to XY’s house) on charges of abetment of suicide. A case was also
filed against the ABC Bank, which had to pay an ex-gratia payment of Rs.20 lakhs to the
deceased’s family. The incident has also been published in the press and has damaged the Bank’s
reputation in public eye, at least for the time being.
68
RECOVERY MANAGEMENT IN BANKS
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.
69

RECOVERY MANAGEMENT IN BANKS


BIBLIOGRAPHY
PRIMARY DATA:
IDBI Bank (Cuffe Parade, Mumbai)
SECONDARY DATA:
Book reference

Handbook on debt (Indian Institution of banking and
finance)
Business economics (T.Y.B.COM)
Hindustan times (newspaper)
Web reference
www.rbi.co.in
www.icicibank.com
www.iibf.org.in
70
RECOVERY MANAGEMENT IN BANKS
- Mandar
71

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