Chapter 1 – Recovery In Retail Loans

RECOVERY OF RETAIL LOANS

Banks aggressively build up their retail asset portfolios to expand business as retail assets are one of the best revenue drivers in banking. Risk in retail banking is well diversified because the customer base is large and heterogeneous in nature. Retail asset portfolio of foreign banks, and new generation private sector banks as percentage of total portfolio is much higher compared to public sector banks. The retail portfolio of public sector banks used to be in the range of 30%. While profits generated from retail portfolio are attractive, there is also risk of default. The unsecured nature of retail assets like Personal Loans and Credit Card Receivables make the portfolio more vulnerable for default. The aggressive approach of banks towards retail loans has toned down due to the global financial crisis and its impact across the globe though the same was relatively lesser in India.

Defaults and Rescheduling in Retail Loans

Default is the occurrence of an event which happens due to non payment of agreed installments. One of the major reasons for default has been change in interest rates. Both in fixed pricing loans and variable pricing or floating rate loans, repricing takes place as per the reset clause. The monthly installments also called as EMIs are fixed based on the rate prevailing at the time of availing the loan and the agreed repayment period based on the servicing capacity of the borrower. An increase in interest rate will increase the EMI which the customer may not be able to service resulting in default and subsequently NPA.

Rescheduling

If a customer wants to continue with his existing EMI instead of increased EMI, the repayment period is extended beyond the earlier committed repayment period. This phenomenon is called as rescheduling of retail loans. In retail loans, rescheduling mainly happens in Housing Loans as they are of long tenor and mortgage backed.

Reasons for default in Credit Cards and Personal Loans

Genuine defaults which are due to reasons beyond the borrower’s control like personal set backs, job losses, unforeseen medical expenses etc. In this case, intention to pay is intact but the ability to pay is affected and results in defaults. In this case, bank adopts a customer oriented approach because the chances of recovery are bright.
Willful defaults where the borrowers deliberately default with malafide intention. In willful defaults the approach of the banks will be on a recovery basis.

RECOVERY PROCESS

Recovery process is a scientific tool for maintaining the quality of retail assets. It is designed in such a way that it addresses both genuine defaulters as well as willful defaulters. For genuine defaulters, the recovery process has to be gentle and professional. In case of willful defaulters, the recovery process should be strict and very professional. ‘Public Sector Banks’ approach to recovery of loans is different from the strategies adopted by private sector banks and foreign banks. While PSBs administer recovery management through their own staff in case of retail loans, private and foreign banks outsource their recovery process and entrust the same to Recovery Agents for end to end recovery management when the accounts become default.

RECOVERY AGENTS

RBI has framed guidelines prescribing the procedures for code of conduct for Recovery Agents because the agents used coercive methods including threats, intimidation and forced recovery of assets financed.

Engagement of Recovery Agents

‘Agent’ 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.
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. Banks may decide the periodicity at which re-verification of antecedents should be done. Banks should inform the borrower the details of recovery agency firms / companies while forwarding default cases to the recovery agency. Further, agent should also carry 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. Where the recovery agency is changed by the bank during the recovery process, the bank should notify the borrower of the change and 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 I text of the calls made by recovery agents to the customers, and vice-versa. Banks may take reasonable precaution such as intimating the customer that the conversation is being recorded, etc.
The up to date details of the recovery agency firms / companies engaged by banks may also be posted on the bank’s website.
Where a grievance/ complaint has been lodged, banks should not forward cases to recovery agencies till they have finally disposed of any grievance / complaint lodged by the concerned borrower. However, where the bank is convinced, with appropriate proof, that the borrower is continuously making frivolous / vexatious complaints, it may continue with the recovery proceedings through the Recovery Agents even if a grievance / complaint is pending with them. In cases where the subject matter of the borrower’s dues is sub judice, banks should exercise caution, in referring the matter to the recovery agencies.
Bank should have a mechanism to address borrowers’ grievances with regard to the recovery process. The details of the mechanism should be furnished to the borrower while advising the details of the recovery agency.

Incentives to Recovery Agents

Banks should ensure that the contracts with the recovery agents do not induce adoption of uncivilized, unlawful and questionable behaviour or recovery process.

Training for Recovery Agents

Banks should ensure that, 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. Indian Banks Association in consultation with Indian Institute of Banking and Finance (IIBF), has formulated a certificate course for Direct Recovery Agents with minimum 100 hours of training. 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. 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.

Taking possession of property mortgaged / hypothecated to banks

As per Supreme Court, the recovery of loans or seizure of vehicles could be done only through legal means. Banks should rely only on legal remedies available under the relevant statutes while enforcing security interest without intervention of the Courts.
Where banks have incorporated a re-possession clause in the contract with the borrower and rely on such repossession clause for enforcing their rights, they should ensure that the re-possession clause is legally valid, complies with the provisions of the Indian Contract Act in letter and spirit, and ensure that such repossession clause is clearly brought to the notice of the borrower at the time of execution of the contract.
The terms and conditions of the contract should be strictly in terms of the Recovery Policy and should contain provisions regarding (a) notice period before taking possession (b) circumstances under which the notice period can be waived (c) the procedure for taking possession of the security (d) a provision regarding final chance to be given to the borrower for repayment of loan before the sale / auction of the property (e) the procedure for giving repossession to the borrower and (f) the procedure for sale / auction of the property.

Lok Adalats

Lok Adalats organized by civil courts
Recovery of personal loan, credit card loan or housing loan less than Rs.20 lakhs

Debt Recovery Tribunals(DRTs)

DRTs governed by Recovery of Debt Due to Banks and Financial Institutions Act,1993 (RDB Act)
Each Debt Recovery Tribunal is presided over by a Presiding Officer
The Presiding Officer is generally a judge of the rank of Distict & Sessions Judge
Each Recovery Tribunal has two Recovery Officer
DRTs are fully empowered to pass comprehensive orders like in Civil Courts
All evidences are taken by way of an affidavit

Utilisation of credit counselors

Banks should utilise the services of the credit counsellors for providing counselling to the borrowers when the case of a particular borrower deserves sympathetic consideration.

Complaints against the bank / its recovery agents

Banks, as principals, are responsible for the actions of their agents. Banks should ensure that their agents engaged for recovery of their dues strictly adhere to RBI guidelines and including the BCSBI Code.
If complaints are received by RBI regarding violation of the guidelines, RBI may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of above guidelines, Reserve Bank may consider extending the period of ban or the area of ban.
Banks should, ensure that their employees also adhere to the above guidelines.

Periodical Review

Banks engaging recovery agents are advised to undertake a periodical review of the mechanism to effect improvements.

SARFAESI ACT

To provide a structured platform to the Banking sector for managing its mounting NPA and keep pace with international financial institutions

To enable banks and Fls to realise long-term assets, manage problems of _liquidity, asset -liability mismatches and improve recovery by taking possession of securities, sell them and reduce non performing assets (NPAs) by adopting measures for recovery or reconstruction.”

Provisions of the Act

The remedy was suggested by Committees like the Narasirnham Committee II and Andhyarujina Committee, which considered the need for changes in the legal system to address the issue of NPAs. The SARFAESI Act was passed in 2002 to legalise securitisation and reconstruction of financial assets and enforcement of security interest. The act envisaged the formation of asset reconstruction companies (ARCs) /Securitisation Companies (SCs). The Act has made provisions for registration and regulation of securitisation companies or_reconstruction companies by the RBI, facilitate securitisation of financial assets of banks, empower SCs/ARCs to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fis to take possession of securities given for financial assistance and sell or lease the same or to take over management in the event of default.

The Act provides alternative methods for recovery of NPAs, namely securitization and asset reconstruction.

Securitisation

Securitisation means issue of security by raising of receipts or funds by SCs/ARCs.
A securitisation company or reconstruction company may raise funds from the QIBs by forming schemes for acquiring financial assets.
The SCl/ ARC shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired, out of investments made by a QIB and ensure that realisations of such financial asset are held and applied towards redemption of investments and payment of returns assured on such investments under the relevant scheme.

Asset Reconstruction

The SCs/ ARCs for the purpose of asset reconstruction should provide for anyone or more of the following measures:
the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower.
the sale or lease of a part or whole of the business of the borrower.
rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisions of this Act.
settlement of dues payable by the borrower
taking possession of secured assets in accordance with the provisions of this Act.