The concept of Debt Recovery Management

Banks were never so serious in their efforts to ensure timely recovery and consequent reduction of NonPerforming Assets (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 Non-Performing Assets comprise two pronged strategy. First relates to arresting of the defaults and creation of NPA thereof and the second is to handling of loan delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of urgency in the minds of staff of bank and gave them a message that either they perform or perish. The prudential norm has forced the bank to look into the asset quality. A debt from a loan, credit line or accounts receivable that is recovered either in whole or in part after it has been written off or classified as a bad debt. In accounting, the bad debt recovery would credit the allowance for bad debts or bad debt reserve categories, and reduce the accounts receivable category in the books. Not all bad debt recoveries are like-kind recoveries. For example, a collateralized loan that has been written off may be partially recovered through sale of the collateral. Or, a bank may receive equity in exchange for writing off a loan, which could later result in recovery of the loan and, perhaps, some additional profit. 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 banks interest margins we must recognize that cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. No doubt, improving recovery management in India is an area requiring expeditions and effective actions in legal institutional and judicial processes. Banks at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to banks has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time. 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 banks objectives. Bank can recover their debts without losing customers. Monthly settlements with meaningful reporting. Status updates on demand. Extensive experience obtaining and collecting money judgments in Ohio. Garnishments, liens, and levies Recovery Management Systems will collect when legal action is the only option. Cutting edge skip-tracing tools and techniques recovery Management Systems can work 1st, 2nd, and 3rd placements and even turn bank old judgments into money.

Advantages & Disadvantages of recovery Advantages:

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

Disadvantages:

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

Important points for debt recovery On the basis of the foregoing procedure for normal recovery process, we may list below certain Donts for the dent recovery, which are as follows: 1) Dont violate or breach the recovery policy, procedure etc. prescribed by the principal. 2) Dont exceed the authority given in the recovery arrangement. 3) Dont make a call to the debtor before 0700 hours or after 2100 hours.

4) Dont make anonymous calls or bunched calls to the debtor, which may be perceived as harassment. 5) Dont conceal or misrepresent your identity during calls and visit or other interaction with the debtor. 6) Dont show uncivil/indecent/dirty behavior or use such language during calls and visits to the debtor. 7) Dont harass/humiliate/intimidate/threaten the debtor-verbally or physically. 8) Dont intrude into the privacy of the debtors family members, friends/colleagues. 9) Dont disclose the customers debts/dues/account information to unauthorized person. 10) Dont 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. 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 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.

Main causes of default of loans from industrial sector

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 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 entrepreneur as well as the project should undergo very careful scrutiny before the sanctioning of the loan. Strict measures and security should take before the sanctioning of the loan. 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 losing his encumbered asset in the event of his defaulting in the payment of dues to banks, he often takes the liberty, and tends to weigh the pros and cons vis--vis default. Security against loan, though at times may fall harsh on the borrower, serves a worthwhile purpose in

that it creates promoters stake in the borrowers and thus, disciplines the borrower to be more committed in paying the dues to Banks.

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

Non Performing Assets (NPA)

What is NPA? For a bank, an Non Performing Asset (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 against most of their assets and, maybe, have unsecured loans too. 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 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? 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 presanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become nonperforming. 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 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 nonperforming assets.