sarfaesi act.docx

7/29/2019 sarfaesi act.docx

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EXECUTIVE SUMMARY

Introduction:

This project gives an idea about the Debt Recovery Process and Collection Process. Debt

Recovery is inseparable from Recovery Agents and Agencies so keeping in mind their vital role

this projects highlights their duties, functions etc as well. For understanding the exact recovery

methods in banking industry, the modes of recovery and Debt restructuring in Punjab National

Bank is also been included.

Importance Of Study:

As we all know growing percentage of Non Performing Assets is a big concern for

modern as well as traditional financial institutions. If recovery is been made effective then

certainly it will reflect positively on reducing percentage of NPAs. So recovery management, be

of fresh loans or old loans, is central to NPA management. Thus qualified recovery personals is a

prime need of the banking industry.

Objectives:

To study the Impact ofSARFAESI Act on Non performing Asset

Debt Recovery and Collection Process of Banks.

To study the importance of Debt Recovery Agents and Agencies in respect of

recovery.

To study Non Performing Assets in a brief.

Limitations of the study:

As Punjab National Bank is second largest public sector bank in India, its operations are

very vast so due to time and cost constrains it was not possible to visit each and every branch

office of the bank for collecting primary information.

Also due to space restrictions it was not possible to cover entire available secondary data.
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METHOD OF COLLECTING DATA:

Primary data was been collected by visiting the bank and having an Interview with Mr. TP Rajmohan, Senior Manager (Loans), PNB House, Fort, Mumbai 01. Even other professionals

in bank guided for the collection of primary data.

The information collected from Internet, Reference Books and Magazines has constituted

secondary data of the project.

EXPECTED CONTRIBUTION:

This project will be helpful to the professionals from the banking industry, the policy

makers, the students of banking studies and people conducting research. Also banks can make

use of the available study for analyzing debt recovery policies.

CHAPTER SCHEME:

1) Introduction

2) Debt Recovery process and Process for Tribunals

3) Debt Recovery Agents and Agencies

4) Punjab National Bank

5) Conclusion and Suggestions

Signature of student Signature of Guide

Name of Student Name of Guide


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Table of Contents

Sr. No. Title Pg. No.

1 Introduction To Debt Recovery 011.1 Introduction 021.2 Debt 03

1.3 Classification of Debt 04

1.4 Recovery 07

1.5 Defaults Of Loan 08

2 Debt Recovery Process And Process For Tribunals 12

2.1 Debt Recovery process 13

2.2 Important Points To Be Remembered 16

2.3 Elements Of Debt Recovery 17

2.4 Strategies For Debt Recovery 18

2.5 Debt Recovery Tribunals 20

2.6 Procedure Of Tribunals 22

3 Debt Recovery Agents And Agencies 28

3.1 Debt Recover Agents 29

3.2 Engagement Of Recovery Agents 31

3.3 Debt Recovery Agencies 333.4 Soft Skills For Debt Recovery 34

3.5 Rights Of Recovery Agents Of Banks 383.6 Duties Of Recovery Agents 40

3.7 Training of Recovery Agents 42

3.8 Functions Of Debt Recovery Agents 43

4 Punjab National Bank 46

4.1 Introduction 47

4.2 History 49

4.3 Loan Recovery Policy 50

4.4 General Guidelines 51

4.5 Guidelines On Asset Classification 53

4.6 Modes of Recovery 54

4.7 Debt Restructuring 585 Conclusion And Suggestions 61

5.1 Conclusion 62

5.2 Suggestions 63

Annexure 1 Bibliography 64


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CHAPTER 1:

INTRODUCTION TO DEBT REOVERY


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1.1 Introduction:

Banks in past were never so serious in their efforts to ensure timely recovery and

consequent reduction of Non Performing Assets (NPAs) as they are today. This because of the

modern, complex, competitive market conditions that are making banks to undertake this step. 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 ofurgency 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. Because it generally generates a

loss when it is written off, a bad debt recovery usually produces income.

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.


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1.2 Debt:

The word Debt comes from the LatinDeberewhich means to owe.

Debt is that which is owed, usually referencing assets owed, but the term can also cover

moral obligations and other interactions not requiring money. In the case of assets, debt is a

means of using future purchasing power in the present before a summation has been earned.

A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern

society, debt is usually granted with expected repayment; in many cases, plus interest.

Debt can be represented by a loan note, bond, mortgage or other form stating repayment

terms and, if applicable, interest requirements. These different forms all imply intent to pay back

an amount owed by a specific date, which is set forth in the repayment terms.

Definitions:

1) Business Dictionary defines a Debt as, Aduty or obligation to pay money, deliver goods, or

render service under an express or implied agreement. One who owes, is a debtor or debitor; one

to whom it is owed, is a debtee, creditor, or lender. Use of debt in a firm's financial structure

creates financial leverage that can multiply yield on investment provided returns generated by

debt exceed its cost. Because the interest paid on debt can be written off as an expense, debt is

normally the cheapest type oflong-term financing.

2) According to Recovery Of Debts Due To Banks And Financial Institutions Act, 1993 a

debt means, Any liability (inclusive of interest) which is alleged as due from any person by a

bank or a financial institution or by a consortium of banks or financial institutions during thecourse of any business activity undertaken by the bank or the financial institution or the

consortium under any law for the time being in force, in cash or otherwise, whether secured or

unsecured, or whether payable under a decree or order of any civil court or otherwise and

subsisting on, and legally recoverable on, the date of the application.
http://en.wiktionary.org/wiki/owedhttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Moralityhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Sumhttp://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Debtorhttp://en.wikipedia.org/wiki/Interesthttp://www.investorwords.com/2862/loan_note.htmlhttp://www.investorwords.com/521/bond.htmlhttp://www.investorwords.com/3124/mortgage.htmlhttp://www.businessdictionary.com/definition/form.htmlhttp://www.investorwords.com/6639/repayment_terms.htmlhttp://www.investorwords.com/6639/repayment_terms.htmlhttp://www.investorwords.com/2531/interest.htmlhttp://www.businessdictionary.com/definition/requirements.htmlhttp://www.businessdictionary.com/definition/intent.htmlhttp://www.investorwords.com/3626/pay.htmlhttp://www.businessdictionary.com/definition/set.htmlhttp://www.investorwords.com/4950/terms.htmlhttp://www.businessdictionary.com/definition/duty.htmlhttp://www.businessdictionary.com/definition/duty.htmlhttp://www.businessdictionary.com/definition/obligation.htmlhttp://www.businessdictionary.com/definition/pay.htmlhttp://www.businessdictionary.com/definition/money.htmlhttp://www.businessdictionary.com/definition/goods.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/agreement.htmlhttp://www.investorwords.com/3562/owe.htmlhttp://www.businessdictionary.com/definition/debtor.htmlhttp://www.businessdictionary.com/definition/debitor.htmlhttp://www.businessdictionary.com/definition/creditor.htmlhttp://www.businessdictionary.com/definition/lender.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.businessdictionary.com/definition/financial-structure.htmlhttp://www.businessdictionary.com/definition/create.htmlhttp://www.businessdictionary.com/definition/financial-leverage.htmlhttp://www.businessdictionary.com/definition/yield.htmlhttp://www.businessdictionary.com/definition/investment.htmlhttp://www.businessdictionary.com/definition/returns.htmlhttp://www.businessdictionary.com/definition/cost.htmlhttp://www.businessdictionary.com/definition/interest.htmlhttp://www.investorwords.com/3569/paid.htmlhttp://www.businessdictionary.com/definition/expense.htmlhttp://www.investorwords.com/8060/long_term_financing.htmlhttp://www.investorwords.com/8060/long_term_financing.htmlhttp://www.investorwords.com/8060/long_term_financing.htmlhttp://www.businessdictionary.com/definition/expense.htmlhttp://www.investorwords.com/3569/paid.htmlhttp://www.businessdictionary.com/definition/interest.htmlhttp://www.businessdictionary.com/definition/cost.htmlhttp://www.businessdictionary.com/definition/returns.htmlhttp://www.businessdictionary.com/definition/investment.htmlhttp://www.businessdictionary.com/definition/yield.htmlhttp://www.businessdictionary.com/definition/financial-leverage.htmlhttp://www.businessdictionary.com/definition/create.htmlhttp://www.businessdictionary.com/definition/financial-structure.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.businessdictionary.com/definition/lender.htmlhttp://www.businessdictionary.com/definition/creditor.htmlhttp://www.businessdictionary.com/definition/debitor.htmlhttp://www.businessdictionary.com/definition/debtor.htmlhttp://www.investorwords.com/3562/owe.htmlhttp://www.businessdictionary.com/definition/agreement.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/goods.htmlhttp://www.businessdictionary.com/definition/money.htmlhttp://www.businessdictionary.com/definition/pay.htmlhttp://www.businessdictionary.com/definition/obligation.htmlhttp://www.businessdictionary.com/definition/duty.htmlhttp://www.investorwords.com/4950/terms.htmlhttp://www.businessdictionary.com/definition/set.htmlhttp://www.investorwords.com/3626/pay.htmlhttp://www.businessdictionary.com/definition/intent.htmlhttp://www.businessdictionary.com/definition/requirements.htmlhttp://www.investorwords.com/2531/interest.htmlhttp://www.investorwords.com/6639/repayment_terms.htmlhttp://www.investorwords.com/6639/repayment_terms.htmlhttp://www.businessdictionary.com/definition/form.htmlhttp://www.investorwords.com/3124/mortgage.htmlhttp://www.investorwords.com/521/bond.htmlhttp://www.investorwords.com/2862/loan_note.htmlhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Debtorhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Sumhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Moralityhttp://en.wikipedia.org/wiki/Assetshttp://en.wiktionary.org/wiki/owed


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1.3 Classification of Debts:

A)On the basis of Security:On the basis of security debts can be classified as secured debts and unsecured debts:

1) Secured Debts:A loan is in which the borrower pledges some asset (e.g. a car or property) as collateral

for the loan is called as secured debt owed to the creditor who gives the loan. The debt is

thus secured against the collateral. In the event that the borrower defaults, the creditor

takes possession of the asset used as collateral and may sell it to satisfy the debt by

regaining the amount originally lent to the borrower, for example, foreclosure of a home.

From the creditor's perspective this is a category of debt in which a lender has been

granted a portion of the bundle of rights to specified property.

types of debts

on the bais of

security

Secured unsecured

on the bais of

amount held

public debts private debts

on the bais of

value

Good debts bad debts

business debtsnon business

debts
http://en.wikipedia.org/wiki/Collateral_%28finance%29http://en.wikipedia.org/wiki/Default_%28finance%29http://en.wikipedia.org/wiki/Foreclosurehttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Bundle_of_rightshttp://en.wikipedia.org/wiki/Bundle_of_rightshttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Foreclosurehttp://en.wikipedia.org/wiki/Default_%28finance%29http://en.wikipedia.org/wiki/Collateral_%28finance%29


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2) Unsecured Debts:An Unsecured Debt is a debt that is not backed by collateral. It is also known as a

signature loan or personal loan. Unsecured debt is typically a loan or credit card debt that

individuals carry and when they default, there is no course of action other than seeking a

judgment against the individual or reporting it to the credit bureaus. There is nothing the

lender can take from the individual in order to regain his or her money. Most types of

unsecured debt is offered in smaller amounts than secured debt, because there is no

guarantee the lender will receive the money back.

B) On the basis of amount held:

On the basis of amount held by whom debts are classified as

1) Public Debts:Public debt is money (or credit) owed by any level of government; either central

government, state government, or municipal government . As the government draws its

income from much of the population, government debt is an indirect debt of the taxpayers.

Governments usually borrow by issuing securities, government bonds and bills. It is also

known as government debt or national debt.

2) Private Debts:Private debt is Money owed by individuals and businesses within a given country.

C) On the basis of value:

On the basis of value debts are classified as

1) Good Debts:If the debt is financing something thats going up in value, its usually Good debt.

Examples of good debt would be the mortgage on home and a loan for a college

education. A mortgage finances a house, an asset that, over the long term, goes up in

value, and a student loan finances an education, which is likely to result in a higher

paying job and better employability down the road.
http://en.wikipedia.org/wiki/Collateral_%28finance%29http://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Credit_%28finance%29http://en.wikipedia.org/wiki/Central_governmenthttp://en.wikipedia.org/wiki/Central_governmenthttp://en.wikipedia.org/wiki/Federal_governmenthttp://en.wikipedia.org/wiki/Municipal_governmenthttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Government_bondhttp://en.wikipedia.org/wiki/Government_bondhttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Municipal_governmenthttp://en.wikipedia.org/wiki/Federal_governmenthttp://en.wikipedia.org/wiki/Central_governmenthttp://en.wikipedia.org/wiki/Central_governmenthttp://en.wikipedia.org/wiki/Credit_%28finance%29http://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Collateral_%28finance%29


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2) Bad Debt:If the debt is financing something thats losing value, its usually Bad debt.

According to Wikipedia, In financial accounting and finance, bad debt is the portion

ofreceivables that can no longer be collected, typically from accounts receivable or

loans. Bad debt in accounting is considered an expense. A bad debt is money owed to

you that you can't collect.

An example of bad debt would be a car loan. Most new cars lose more than half of

their value within the first five years after being bought. A second examp le of bad

debt would be moneyborrow to buy something thats losing value that you could

actually afford to buy without a loan, like a dinner out, for example.

Bad debts are further categorized as Business Bad Debts and Non business Bad Debts.

i. Business Bad debts:a) A business bad debt, like its name, is a bad debt that arises from the taxpayers

trade or business e.g. A computer seller sells computer on credit, and the buyer

defaults on the loan

b) Business bad debts are deductible by the taxpayer at any time when they

become:

- Completely worthless (i.e. cannot be recovered)

- Partially worthless.

c) Generally, a business bad debt deduction is a business expense deduction and

may be used to offset other ordinary business income without any limitations.

ii. Non business Bad Debts:a) A non business bad debt is a debt that is personal in nature, not related to a

trade or business e.g. You loan your friend some money and he cannot pay you

back.

b) Non business bad debts are deductible only when they become completely

worthless. They are treated as short term capital loss to the taxpayer.
http://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Receivablehttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Loanhttp://www.legalmatch.com/law-library/article/federal-income-tax-business-deductions.htmlhttp://www.legalmatch.com/law-library/article/capital-assets-defined.htmlhttp://www.legalmatch.com/law-library/article/capital-assets-defined.htmlhttp://www.legalmatch.com/law-library/article/federal-income-tax-business-deductions.htmlhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Receivablehttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Accounting


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1.4 RECOVERY:

Recovery is 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 and financial institutions 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 and financial institutions has

blocked a significant portion of their funds in unproductive assets, the value of which

deteriorates with the passage of time.


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1.5 DEFAULTS OF LOANS:

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.

Causes of Default of Loans:

1) Improper selection of an entrepreneur:Selection of the right Entrepreneur is one of the major factors in the profitability

of Banks. Two major criteria 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 taken before the sanctioning of the loan.

2) Deficient analysis of project Viability:a. 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.


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b. 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.

3) 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.

4) 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


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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.

5) Fluctuations in statutory regulations and norms:-Certain unforeseen, unpredictable and unexpected fluctuations in the statutory

regulations such as change in the Excise rates, Commercial Tax, Electricity Tariff

and other revenue tools of the government, tend to throw the entire planning of

the industrialist out of gear. It has been observed that these fluctuations are of

such a magnitude and are so unpredictable as to be beyond the comprehension of

the most skeptic and apprehensive of entrepreneur. In order to cope with these

unforeseen variations, which force the entrepreneur to put additional burden on

his financial resources, the natural and convenient remedy that comes to his mind

is to delay the repayment of the loan.

6) Lack of Follow up Measures:-"A stitch in time saves nine"

a. 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.

b. 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.


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7) 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.

8) 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.


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CHAPTER 2:

DEBT RECOVERY PROCESS

AND

PROCESS FOR TRIBUNALS


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2.1 DEBT RECOVERY PROCESSES:

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

1) NORMAL RECOVERY PROCEDURE:As mentioned above, this procedure will generally apply to the debtors who are willing to

pay the dues with normal recovery process. Based on the above-mentioned regulatory

guidelines, following procedure may be outlined for such recovery. However the recovery

agents should follow the bank-specific debt recovery procedure as advised by their principal.

Below are given the main rules for making telephone calls and visit to the debtor for recovery of

dues:

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

particular customer.

ii. The customer has been notified by the bank of the details of the recovery agent for

collection of the past-due debt.

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

should be followed generally:

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

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

C. 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.

D. All calls where the customer becomes abusive or threatening should be

appropriately documented.

E. Customers question be answered in full. They should be provided withinformation requested and given assistance in making recovery. Minor issues

should be resolved.

F. How often to call customer/ The purpose of a collection call as to bring to the

Customers notice the obligation and to seek a commitment to pay on a specified


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2.2 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.


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2.3 Elements Of Debt Recovery:

The agency agreement 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 arrangement

and 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: This 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.


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2.4 Strategies 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 receivedby or credited to the debtors account, normally at the moth-end. In case

of SME borrowers the effort should coincide with cash flow on account of sales. In

case a collection from agriculturist should be made, then it should be soon after the

crops are sold. This will call for knowledge of bank products on the part of agents. It

should be the endeavour of the agent that collection should be made well before the

cash inflows are spent away by the debtor for meeting other expenses.

iii) Adopt different collection strategy for different debtor types. This is based on the

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:

a) Normal debtors, i.e., who can pay and will pay if reminded or/and persuaded

to pay.

b) Difficult debtors, i.e., those who can pay, but will not pay.

c) 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:

a)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.

b)Go through the know Your Customer papers furnished by the bank and know

the customers identify and personal profile.


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2.5 Debts Recovery Tribunal:

Keeping in line with the international trends on helping financial institutions recover their

bad Debt quickly and efficiently, the Government of India has constituted 33 Debt Recovery

Tribunal and 5 Debt Recovery Appellate Tribunal across the country.

The Debt Recovery Tribunals are located across the country. Some cities have more than

one Debt Recovery Tribunal located therein. New Delhi and Mumbai have three Debt Recovery

Tribunals. Chennai and Kolkata have two Debt Recovery Tribunals each. One Debt Recovery

Tribunal each has been constituted at Ahmdabad, Allahabad, Arungabad, Bangalore,

Chandigrah, Coimbatore, Cuttack, Ernakulam, Guwahati, Hydrabad, Jabalpur, Jaipur, Lucknow,

Nagpur, Patna, Pune, Ranchi and Vishakapatnam. Depending upon the number of cases a Debt

Recovery Tribunal is constituted.

There are a number of States that do not have a Debt Recovery Tribunal. The Banks &

Financial Institutions and other parties in these States have to go to Debt Recovery Tribunal

located in other states having jurisdiction over there area. Thus the territorial jurisdiction of some

Debt Recovery Tribunal is very vast. For example, the Debt Recovery Tribunal located in

Guwahati has jurisdiction over all the seven North Eastern States. Similarly, the territorial

jurisdiction of the Debt Recovery Tribunal located at Chandhigarh too has a very widejurisdiction over the States of Punjab, Harayana, Chandhigarh.

The setting up of a Debt Recovery Tribunal is dependant upon the volume of cases.

Higher the number of cases within a territorial area, more Debt Recovery Tribunal would be set

up.

Each Debt Recovery Tribunal is presided over by a Presiding Officer. The Presiding

Officer is generally a judge of the rank of Dist. & Sessions Judge. A Presiding Officer of a Debt

Recovery Tribunal is assisted by a number of officers of other ranks, but none of them need

necessarily have a judicial back ground. Therefore, the Presiding Officer of a Debt Recovery

Tribunal is the sole judicial authority to hear and pass any judicial order.


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2.6 PROCEDURE OF TRIBUNALS:

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 jurisdiction

(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.

(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 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 defense.

(6) Where the defendant claims to set-off against the applicants demand any ascertained sum of

money legally recoverable by him from such applicant, the defendant may, at the first hearing of


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(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,--

(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.

(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


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3.1 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, but not before that date.

If the debt is not paid on the due date it becomes over due or past due.


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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. The bank may prefer to utilize its resources in terms of staff, time etc for its core banking

functions like deposit taking, lending, remittance, foreign exchange business and out-source the

debt recovery function by engaging Debt Recovery Agents on certain terms and conditions,

including fee or commission for their services.


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3.2 Engagement of Recovery Agents:

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

engaging recovery agents:

Agent in these guidelines would include agencies engaged by the bank and the agents/

employees of the concerned agencies. Banks should have a due diligence process in place for

engagement of recovery agents, which should be so structured to cover, among others,

individuals involved in the recovery process. The due diligence process should generally

conform to the guidelines issued by RBI 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 reverification of antecedents should

be resorted to.

To ensure due notice and appropriate authorization, banks should inform the borrower the

details of recovery agency firms / companies while forwarding default cases to the recovery

agency.

Further, since in some of the cases, the borrower might not have received the details

about the recovery agency due to refusal / non-availability / avoidance and to ensure

identification, it would be appropriate if the agent also carries a copy of the notice and the

authorization letter from the bank along with the identity card issued to him by the bank or the

agency firm / company. Further, where the recovery agency is changed by the bank during the

recovery process, in addition to the bank notifying the borrower of the change, the new agent

should carry the notice and the authorization letter along with his identity card.

The notice and the authorization letter should, among other details, also include the

telephone numbers of the relevant recovery agency. Banks should ensure that there is a tape

recording of the content / text of the calls made by recovery agents to the customers, and vice-

versa. Banks may take reasonable precaution such as intimating the customer that the

conversation is being recorded, etc.


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The up to date details of the recovery agency firms / companies engaged by banks may

also be posted on the banks website. Where a grievance/ complaint has been lodged, banks

should not forward cases to recovery agencies till they have finally disposed of any grievance /

complaint lodged by the concerned borrower. However, where the bank is convinced, with

appropriate proof, that the borrower is continuously making frivolous / vexatious complaints, it

may continue with the recovery proceedings through the Recovery Agents even if a grievance /

complaint is pending with them. Each bank should have a mechanism whereby the borrowers'

grievances with regard to the recovery process can be addressed. The details of the mechanism

should also be furnished to the borrower while advising the details of the recovery.

Incentives to Recovery Agents:

It is understood that some banks set very stiff recovery targets or offer high incentives to

recovery agents. These have, in turn, induced the recovery agents to use questionable methods

for recovery of dues. Banks are, therefore, advised to ensure that the contracts with the recovery

agents do not induce adoption of uncivilized, unlawful and questionable behavior or recovery

process.


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3.3 Debt Recovery Agencies (DRAs):

Debt recovery agents are employed Debt Recovery Agencies who work for banks subject

to certain terms and condition. Debt recovery agencies are third-party businesses that collect

dues past-dues and other receivable of banks in exchange for a fee. DRAs charge the

Banks/NBFCs for their services in one of two ways:

(1)A flat fee and

(2) A percentage of amounts collected.

Most collection agencies use one of following three methods to collect debts/dues viz.

(1) Contact and follow up through telephone

(2) Letters,

(3) Direct contact by visiting the debtors.

Before the debt recovery agent is given the job, banks begin their work banks issue

normal reminders to the borrowers. However it is seen that in the case of retail loans the initial

reminders could also begin from the DRAs. 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. Direct contact is most useful in bringing pressure or turning up the heat on

debtors who have been identified as those having no intention to pay their dues/bill.

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.


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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 (explained above), 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 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 thinkotherwise 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 :

i. Communicate and listen properly and effectively, as described in the preceding

paragraph.

ii. Show empathy and respect to other party, not with standing the fact that he/she debtor to

the principal.iii. 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.

iv. 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

prospect.


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3.5 RIGHTS OF RECOVERY AGENTS OF BANKS:

1) Right to remuneration:Contract of Agency under the contract Act does not provide a mandatory duty on the principal toremunerate the agent for the work done on behalf of the principal. Thus there is no automatic

right of an agent to get remuneration from the principal, unless the agency agreement expressly

or impliedly provides for remuneration payable by the principal to the agent.

Although the contract Act does not specifically provide for an agents right to remuneration, a

bank and a recovery agent can agree to a scale of fees for various kinds of debt recoveries.

Where an agency contract does not provide for any fee or other remuneration, the principal may

be liable to pay to the agent only the fee as per the customary practices of the industry.

2) Right to retain:The right to retain means that an agent can retain the money belonging to the principal, for

meeting the following kinds of expense, and thereafter remit the balance amount to the principal.

I. The expenses incurred during the course of agency,

II. Any sum due to the agent as remuneration.

This right is given under section 217 of the contract Act. An agent can retain money only for the

expenses incurred during the transaction in question, and not for the previous dues for services

rendered.

However, this right is practically of little consequence where debt recovery agency agreements

provide for the agents remuneration and also the manner and timing of the payment obligation

of the principal. As the money collected represents payment by a customer to the bank towards

dues it would be ideal if the money is remitted in full and not adjusted towards the dues of the

bank to the agent.


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3) Right to compensation:The principal is liable to compensate the agent in respect of any injury caused to him either

because of the principals neglect or want of skill (section 225 0f the contract Act) This question

generally arises in construction contracts where the contractors laborer suffers injury due the

negligence lack of skill of the principal. However, in debt recovery contingencies of this nature

where the principal is negligent or lacks skill, will generally not arise and so also will be the

question of compensation to the agent.

4) Right to indemnity:Section 222 of the contract Act provides that the employer of an agent is bound to indemnify him

against the consequences of all lawful acts done by such agent in exercise of the authorityconferred upon him. Thus there are two essential conditions to be satisfied by an agent to claim

indemnity from the principal:

I. The agent must have acted lawfully when the injury was sustained.

II. The act should have been done in the course of the agency business.

However, an agent is not entitled to any indemnity from his principal for any criminal or

wrongful act. This is provided in section 224 of the act where one person employs another to

don an act which is criminal, the employer is not liable to the agent, either upon express or an

implied promise, to indemnify him against the consequences of that act.


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3.6 Duties of recovery agents:

1) Duty to follow instruction:The foremost duty of a recovery agent is to follow the instructions of the principal who has

engaged him for stipulated tasks and pay remuneration for doing so. In this regard, following

points should be noted:

I. The instructions of the principal have to be clear, unambiguous and lawful.

II. It is the duty of the agent to follow only the lawful instructions. Where the acts which

the agent has undertaken to perform are unlawful or void in law, the principal cannot

compel the agent to perform and the principal also cannot claim damages against the

agent for failure to perform such acts.

III. If an agent acts contrary to the instructions/directions of the principal, he may be held

liable to the principal for the loss suffered by the principal due to such default.

In this regard the banks policy towards customers and the code of conduct of the agents as

prescribed by the bank/IBA should be kept in mind and adhered to by the DRA.

2) Duty to follow trade customs:

A recovery agent has to discharge his duties according to the terms of the agency agreement withthe principal. Where the instructions are not given in detail, the agent has to follow the

commercial customs and industry practice. For instance, for debt collection for banks, RBI and

IBA have laid down some guidelines which have to be followed in recovery process. As

explained in Unit 1, if an agency agreement does not provide any behavior code in collection

process, the RBI/IBA code or guidelines would require to be followed by the recovery agent

while collecting dues from the debtors.


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3.7 Training for Recovery Agents:

In terms of Circular issued by Reserve Bank of India (RBI) dated November 3, 2006 on

guidelines on managing risks and code of conduct in outsourcing of financial services by banks,

banks were advised that they should ensure that, among others, the recovery agents are properly

trained to handle with care and sensitivity, their responsibilities, in particular aspects like hours

of calling, privacy of customer information etc.

Reserve Bank has requested the Indian Banks Association to formulate, in consultation with

Indian Institute of Banking and Finance (IIBF), a certificate course for Direct Recovery Agents

with minimum 100 hours of training. Once the above course is introduced by IIBF, banks should

ensure that over a period of one year all their Recovery Agents undergo the above training and

obtain the certificate from the above institute. Further, the service providers engaged by banks

should also employ only such personnel who have undergone the above training and obtained the

certificate from the IIBF. Keeping in view the fact that a large number of agents throughout the

country may have to be trained, other institutes/ banks own training colleges may provide the

training to the recovery agents by having a 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


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3.8 Functions Of Debt Recovery Agents:

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

debtors of the bank as per agency agreement entered with the principal. Remitting the collected

funds to principal, keeping account of the receivables collected and yet to be collected and

reporting the position and developments to the principal are essential but ancillary to the core

function. All these functions will be specified in most agency agreement and would require to be

accordingly discharged by the debt recovery agent.

Apart from the easily collectible receivables, most banks have on their books 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.

1) Collecting Dues Receivables:As mentioned above, collecting dues is the core function of a debt recovery agent.

Receivables refer to the sums of money which have become due in the loan/advances accounts

and are payable on or after due dates by the debtors to the creditors as per the loan/advances

agreements entered between the lenders and creditors. Thus the receivables in a loan/advances

account connote the following essential features:

A. Existence of loan or advance agreement between the creditor and debtor.

B. Repayment obligation of the debtor to repay the loan/advance in part or whole, to the

creditor, as per the loan/advance agreement.

C. 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.


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Thus the debt recovery agent is legally authorized to collect the specified receivables

from the debtors on behalf of the principal:

I. The loan agreement

II. 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.

2) Remitting Collected Funds:The funds collected from the debtors should be sent deposited by the agent to the creditor

periodically as per the agency arrangement. Statement of collections remitted should also be

sent along with the remittance, preferably in duplicate and the copy acknowledged by the bank

be kept on record by the agent, in chronological order, for future reference. These statements of

remittance will from the basis of claiming the agreed fee or commission by the agent from the

principal in due course.

3) 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 separate for each principal. It would constitute the following minimum

requirements of book-keeping for a recovery agent.

I. 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 debtors lists from the basis of

agents activities and also the book-keeping required. These should therefore be carefully

kept on record in chronological order.


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II. Ledger account of each debtor:Showing the amounts of receivable collected and balance to be collected should be kept

in chronological or this can be maintained in the computer also. It may be note that all

the collections/recoveries should be remitted to the bank. Normally agent cannot adjust

its dues on account of fee against the recoveries made on behalf of the bank.

III. Copies of loan/advances:Agreements between the debtors and the bank is obliged to keep confidentiality of its

customers accounts and recovery and these should not be divulged to third parties

without the customers sent. As such, a debt recovery agent must take all due care to the

required privacy and confidentiality as regards the records of each due furnished by the

bank and also as regards the collections made remitted by him to the principal.


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CHAPTER 4:

PUNJAB NATIONAL BANK


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4.1 Introduction of bank:

Punjab National Bank (PNB) of India, the first Indian bank started only with Indian capital, was

nationalized in July 1969 and currently the bank has become a front-line banking institution in

India with 4525 Offices including 432 Extension Counters. The corporate office of the bank is at

New Delhi. Punjab National Bank of India has set up representative offices at Almaty

(Kazakhistan), Shanghai (China) and in London and a full fledged Branch in Kabul

(Afghanistan).

Punjab National Bank Provide a wide variety of banking services which include corporate and

personal banking, industrial finance, agricultural finance, financing of trade and international

banking.

Punjab National Bank is serving over 3.5 crore customers through 4540 Offices including 421

extension counters - largest amongst Nationalized Banks.

Punjab National Bank with 112 year tradition of sound and prudent banking is one among 300

global companies and seven Indian companies which are expected to emerge as challengers to

Worlds leading blue chip companies. While among top 1000 world banks,The Banker, the

leading magazine in London, has placed PNB at the 248th position, the bank features at 1308th

position among Forbes Global 2000 list of global giants and fast growing companies.

At the same time, the bank has been conscious of its social responsibilities by financing

agriculture and allied activities and Small Scale Industries (SSI). Considering the importance of

small scale industries bank has established 31 specialized branches to finance exclusively such

industries.

Punjab National Bank also offers Internet Banking services in the country for Corporate as well

as individuals. Internet Banking services are available through all Branches of the Bank

networked under CBS. Providing 24 hours, 365 days banking right from the PC of the user,

Internet Banking offers world class banking facilities like anytime, anywhere access to account,

complete details of transactions, and statement of account, online information of deposits, loans

overdraft account etc. PNB has recently introduced Online Payment Facility for railway


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reservation through IRCTC Payment Gateway Project and Online Utility Bill Payment Services

which allows Internet Banking account holders to pay their telephone, mobile, electricity,

insurance and other bills anytime from anywhere from their desktop.

Keeping in tune with changing times and to provide its customers more efficient and speedy

service, the Bank has taken major initiative in the field of computerization. All the Branches of

the Bank have been computerized. The Bank has also launched aggressively the concept of "Any

Time, Any Where Banking" through the introduction ofCentralized Banking Solution (CBS)

and over 5000 branches (as on 29th

October 2009) have already been brought under its ambit.


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4.2 History of Punjab National Bank:

a) 1895: PNB commenced its operations in Lahore. PNB has the distinction of being the

first Indian bank to have been started solely with Indian capital that has survived to the

present. (The first entirely Indian bank, the Oudh Commercial Bank, was established in

1881 in Faizabad, but failed in 1958.)

b) 1904: PNB established branches in Karachi and Peshawar.

c) 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.

d) 1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore,

but continued to operate in Pakistan.

e) 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942).

f) 1961: PNB acquired Universal Bank of India.

g) 1963: The Government ofBurma nationalized PNB's branch in Rangoon (Yangon).

h) September 1965: After the Indo-Pak war the government of Pakistan seized all the offices

in Pakistan of Indian banks, including PNB's headoffice, which may have moved to

Karachi. PNB also had one or more branches in East Pakistan (Bangladesh).

i) 1969: The Government of India (GOI) nationalized PNB and 13 other major commercial

banks, on July 19, 1969.

j) 1986: PNB acquired Hindustan Commercial Bank (est. 1943).

k) 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.

l) 1998: PNB set up a representative office in Almaty, Kazakhstan.

m)2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala.PNB

also opened a representative office in London.

n) 2004: PNB established a branch in Kabul, Afghanistan. PNB also opened a representative

office in Shanghai.

o) 2005: PNB opened a representative office in Dubai.

p) 2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with

two offices, one in London, and one in South Hall.

q) 2008: PNB opened a branch in Hong Kong.

r) 2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong

Kong, this in Kowloon.
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4.3 Loan Recovery Policy:

The debt collection policy (recovery policy) of the bank is built around dignity and

respect to customers. The Bank will not follow policies that are unduly coercive in recovery of

dues from borrowers. The policy is built on courtesy, fair treatment and persuasion. The bank

believes in following fair practices with regard to recovery of dues from borrowers and taking

possession of security (properties / assets charged to the bank as primary or collateral security)

(known as security repossession) and thereby fostering customer confidence and long-term

relationship.

The repayment schedule for any loan sanctioned by the Bank will be fixed taking into

account the repaying capacity and cash flow pattern of the borrower. The bank will explain to the

customer upfront the method of calculation of interest and how the Equated Monthly

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 Banks Security Repossession Policy (taking possession of the mortgaged properties

under SARESI 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 practices adopted by the bank for follow up and recovery of dues

and repossession of security will be in consonance with the law.


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4.4 Policy On Collection of Dues and Repossession of security:

1)General Guidelines:All the members of the staff or any person authorized to represent 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 banks representatives will contact the borrower between 0700 hrs and

1900 hrs, unless circumstances warrant visiting the borrower at odd hours and occasions. Suchcircumstances would include continuous irregularity in the accounts.

6. Borrowers 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.


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2) Giving notice to borrowers:While written communication, telephonic reminders or visits by the banks 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.

3) 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 becarried out in a fair and transparent manner. Repossession will be done only after issuing the

notice as detailed above. Due process of law will be followed while taking repossession of the

property.

4) 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

claim against the borrower.

5) Opportunity for the borrower to take back the security:The bank resorts 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 borrowers inability to pay the loan

installments as per the schedule which resulted in the repossession of security, the bank may

consider handing over the property after receiving the installments in arrears.


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4.5 Guidelines on Asset classification:

All accounts need to be classified into four categories taking into account the degree of

well defined credit weaknesses and extent of dependence on collateral security for

realization of the dues as given under :-

1) Standard Assets :Standard asset is one which does not disclose any problem and which does not carry

more than normal risk attached to the business. Such an asset is not an NPA . However,

Central Govt. Guaranteed advances, although categorized as NPA for the purpose of

Income Recognition, are to be treated as Standard Assets.

2) Sub-standard Assets :With effect from 31

stMarch, 2005 a sub-standard asset is one, which has remained NPA

for a period less than or equal to 12 months.

3) Doubtful Assets :With effect from 31

stMarch, 2005 an asset is classified as doubtful if it remained in the

sub-standard category for 12 months. In certain cases of serious credit/security

impairment, the account may straightway be classified as Doubtful Asset.

4) Loss Assets :A loss asset is one where loss has been identified by the bank or internal or external

auditors or the RBI Inspectors but the amount has not been written off, wholly or

partly. If the realizable value of the security as assessed by the bank / approved valuer /

RBI is less than 10% of the outstanding in the borrowal accounts, the existence of

security should be ignored and the asset should be straightaway classified as loss asset.

However, the unsecured advance identified as sub-standard, though not having any

tangible security, will not be considered Loss Asset.


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4.6 Modes of Recovery:

1) Assignment/Sale Of Decrees:Assignment/Sale of Decree can be adopted as a measure of recovery in those cases where

borrowers do not pay decreed amount in terms of decree in maximum one Years time.

Transfer/Sale of Financial Assets to Securitisation Companies/Reconstruction Companies

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002 (SARFAESI Act) provides alsofor sale of financial assets (NPAs) by banks / FIs to Asset

Reconstruction Companies (ARCs). Financial assets would be offered for transfer / sale to only

those Securitization Company/ Reconstruction Company who has / have obtained the Certificate

of Registration from RBI under Section 3 of the SARFAESI Act. Only those NPAs, to which

provisions of the SARFAESI Act are applicable, shall be considered for sale.

2) Engagement Of Recovery Agencies:Various Banks including Private/ Foreign and Nationalized Banks have been outsourcing the job

of recovery in small NPA accounts through Recovery Agents by payment of nominal fee to

resolve small NPAs, where multiple complexities are involved i.e. borrowers in scattered areas,

recalcitrant borrowers, advances having no collateral security/guarantee, hindrances in

repayment due to local leaders etc. Banks policy in this regard provides that NPA accounts

(whether non-suit filed, suit filed or decreed) with ledger outstanding up to Rs. 10 lakh are

eligible under the scheme, except accounts where compromises have been approved (including

those reached at in Lok Adalats) and have not been treated as failed. Moreover, written off

accounts can also be entrusted to Recovery Agencies to effect recovery.

I. Recovery Agencies of repute, having good track of effecting recoveries of the Banks, are

required to get themselves empanelled by Zos and are required to provide Bank

Guarantee/ Security deposit of Rs.1 lac in each Zone subject to maximum of Rs.3 lac.


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II. Provisions of model code of conduct on collection of dues and possession of securities

are strictly complied with in the light of recent Supreme Court judgment in the matter of

ICICI Bank Ltd. Vs Prakash Kaur & Others cautioning the Banks against use of

coercive methods for recovery of loans and also in the light of other case on the same

issue, wherein State Consumer Forum of New Delhi has given stern warning to Banks

that if any complaint is received against any Bank alleging use of force by recovery

agents, the punishment of minimum one month imprisonment shall be imposed under

section 27 of the Consumer Protection Act 1986.

III. In terms of latest guidelines of Bank, the recovery agents preferably be given only

doubtful and loss assets cases.

IV. The Zonal Offices allocate Region(s) to the Recovery Agency. And the Regional Offices

allocate the branches in the Region to the Recovery Agencies.

V. The Agency or any of its personnel must not have any access to the record (ledger /

register etc.) of the branch.

VI. One account should not be allotted to two Recovery Agencies simultaneously.

VII. The field staff of Recovery Agency shall not himself accept cash. Cash recoveries, if

any, shall be directly deposited by the borrower or his representative in the branch. The

field staff of Recovery Agency shall not receive any cheque/draft in his name or in the

name of the Agency. The cheques / drafts should be drawn in favor of THE BANK A/c

___________ (title of the account for which collection is made) and crossed A/c Payee

only.


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3) One Time Settlement:Resolution of Non Performing Assets through one-time settlement (OTS) has been recognized as

an effective non-legal remedy by the Bank due to twin advantages of faster recovery of dues andincome generation by recycling of funds otherwise likely to be blocked for a long time. One time

settlement of dues refers to a negotiated settlement under which the bank endeavours to recover

maximum amount within least possible time, with least possible expenses.

4) Recovery camps :In case of accounts under small segment the platform of Recovery Camps be used by the field

functionaries with proper spade work. For on the spot decision on One Time Settlement

proposals received in such recovery camps, participation of officials from controlling offices is

advisable.

5) Write Off:When all recovery measures have failed to yield any result, there is no primary/collateral security

and means of borrower/ repaying capacity are negligible/remote Bank may be left with no option

but to write off such advances. Recovery efforts should be continued even in the written off

accounts.Non-borrowal fraud cases may be considered for write off, on fulfillment of following

conditions:-

I. Account is listed under loss assets and 100% provision is made.

II. Insurance claim, wherever applicable, has been finalized / settled.

III. Police / CBI investigations have been completed or final report / charge sheet has been

filed by the investigating agencies.

IV. All avenues of recovery have been exhausted and there is no prospect of recovery / no

enforceable security is available/ legal action is not feasible.

V. In cases where criminal cases are in progress, technical write off leaving a notional

balance of Rs.100/- till finalization of action may be considered.


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Theft / dacoit / robbery etc. cases may be considered for write off, on fulfillment of following

conditions:-

i) Final report has been filed by the police authorities.

ii) Insurance claim has been finalized / settled.

iii) Staff side action has been decided against all erring officials.

iv) Account is classified under Loss Assets and 100% provision is held.

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