Debt Recovery Management or Debt Recovery Mechanism by Banks

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DEBT RECOVERY MANAGEMENT

Transcript of Debt Recovery Management or Debt Recovery Mechanism by Banks

Page 1: Debt Recovery Management or Debt Recovery Mechanism by Banks

DEBT RECOVERY MANAGEMENT

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'Debt'

• Debt is an amount of money borrowed by one party from

another.

• Debt is used by many corporations and individuals as a

method of making large purchases that they could not afford

under normal circumstances.

• A debt arrangement gives the borrowing party permission to

borrow money under the condition that it is to be paid back

at a later date, usually with interest.

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Types of Loan Defaults

Loan Default

• Means a borrower has not fulfilled the conditions in repayment of a

debt

1)Debt Service Default 3) Sovereign Default

2)Technical Default 4) Strategic Default

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DEBT RECOVERY MANAGEMENT IN BANKS

• 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

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Debt Recovery Management

• A company or agency that is in the business of recovering money that is

owed on delinquent accounts.

• Many debt collectors are hired by companies/Banks to which money is

owed by debtors, operating for a fee or for a percentage of the total

amount collected.

• Some debt collectors are debt buyers; these companies purchase debt at

a fraction of its face value and then attempt to recover the full amount

of the debt

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Defaults Classification

• Defaults are classified into two baskets – Soft and Hard.

• The borrowers are segregated into baskets on the basis of the time

period of default.

• The baskets are usually on the basis number on the basis of number

of days i.e. 0-30, 0-60, 0-120 and so on.

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

days.

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

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Engagement Of Recovery Agency

• The Bank may utilize the services of recovery agencies for collection of

dues and repossession of securities. Recovery agencies will be appointed as

per regulatory guidelines issued in this regard.

The name and address of all Recovery Agencies on the Bank’s approved panel

will be placed on the Bank’s website for information.

Only recovery agencies from the approved panels will be engaged by the Bank.

Employees of the recovery agencies, after completing the mandatory Debt

Recovery Agent (DRA) training, will be issued valid ID cards authorising them

to collect dues from the Bank's customers.

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• In case the Bank engages service of such

recovery/enforcement/ seizure agencies for any recovery case,

the identity of the agency will be disclosed to the borrower.

• The recovery agents engaged by the Bank will be required to

follow a code of conduct governing their dealings with

customers

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Debt recovery procedure

1. Contact with a friendly payment reminder

2. Contact with an overdue payment reminder

3. Contact your customer with a final notice

4. Try to make direct contact with your customer

5. Send a formal letter of demand

6. Repossession of Security

7. Valuation & Sale of Property

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Defaults of loan

• Improper selection of an entrepreneur

• Deficient analysis of project Viability

• Inadequacy of Collateral Security/Equitable Mortgage against

loan

• Unrealistic Terms and Schedule of Repayment

• Lack of Follow up Measures

• Default due to natural calamities

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Effective Strategies which bank follows

RECOVERY CAMPS

PREFERENCE OF CLAIMS

COMPROMISE PROPOSALS

TECHNICAL WRITE OFF

ONE TIME SETTLEMENT SCHEME

LOK ADALATS

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Gross Non Performing Assets

• The total (Gnpas) of banks stood at

Rs 5,94,929 crores as at end march 2016, over

90 per cent of this is on the books of public-

sector banks (psbs)

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Recovery Acts

• Debt Recovery Tribunal Act 1993

• The Securitisation And Reconstruction Of Financial

Assets And Enforcement Of Security Interest Act,

2002

• ARC

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Who can file a case?

Through?

Fee to file a case with DRT?

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Debt Recovery Tribunal Act 1993

• The Debts Recovery Tribunal have been constituted

under Section 3 of the Recovery of Debts Due to Banks

and Financial Institutions Act, 1993

Aim

• To receive claim applications from Banks and Financial

Institutions against their defaulting borrowers

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But soon DRT saw some downside reason being

• When it came to large and powerful borrowers

• Primarily on the ground that their claims against the

lenders were pending in the civil courts (even now,

more than 70,000 cases pending with drts)

• If the debts recovery tribunal were adjudicate the matter

and auction off their properties irreparable damage

would occur to them.

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• As if these were not sufficient, there was clash

of jurisdiction between the Official Liquidators

appointed by the High Courts and the

Recovery Officers of the Debts Recovery

Tribunals.

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Current Issues of DRT

• Bankers say that Rs 2 lakh crore of loans are stuck in

DRTs. Of the Rs 2 lakh crore of suits filed,

• Rs 1.29 lakh-crore loan recovery certificates are yet

to be issued.

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SARFAESI ACT

• The Securitisation and Reconstruction of

Financial Assets and Enforcement of Security

Interest Act, 2002 (also known as the Sarfaesi

Act) is an Indian law .

• It allows banks and other financial institution to

auction residential or commercial properties to

recover loans

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• The SARFAESI Act provides for the manner for

enforcement of security interests by a secured

creditor without the intervention of a court or

tribunal

• Once a loan is declared as non-performing asset,

Bank can take actions under SARFAESI act, to

recover the loan money.

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Steps

• Take possession of Mr.A’s assets without requiring court order.

(Commercial or residential, fixed or moving assets.)

• Auction / Sale them.

• Change the administration/ Management of those assets.

• If Mr. A had sold away the mortgaged asset to third party Mr.X,

bank can order Mr.X to surrender that Asset.

• If Mr.X owes money to Mr.A, he can be ordered to pay money

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• SARFAESI applies only to loans above Rs.10 lakhs.

• By the way SARFAESI applies only to those assets “mortgaged/secured” to

get the loan.

• E.g. if Mr.X had taken business-loan, Bank would have asked him to sign

away his factory/machinary/vehicles/land etc. specific items as mortgage.

• Hence Bank can attach only those assets.

• But Bank cannot take away personal home-furniture, expensive items in

the name of SARFAESI.

• Similarly, Agricultural land is exempted from SARFAESI attachment

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The borrower (loan taker) has following options:

• Get a stay order from Debt Recoverty tribunal (DRT) against the

auction/sale of his properties. (He cannot file case in Civil courts.)

• Fight the case in DRT.

• If unhappy with DRT verdict, he can appeal to Debt Recovery

Appellate Tribunal (DRAT).

• But before filing appeal with DRAT, he’ll have to deposit 50% of his

pending loan money.

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Bank: Power to Auction

• First Bank contacts the experts, gets valuation of Mr.A’s assets.

• Expert says “those assets are worth Rs.50 crores according to present

market value of land/ building/ machinary

• Then Bank will give advertisement in newspapers “we are auctioning xyz

land/machinary/building. Minimum bidding amount is Rs.50 crores.

• Problem: sometimes, bidders do not take interest in buying such properties,

factories etc.

• To fix this problem, Amendment bill of 2011, makes a new provision: if no

one else comes to bid in the auction, Bank itself can buy that property

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New Problem

• Suppose Bank attached a warehouse of Mr.A.

• If the land was in good urban area, Bank could open a new branch

office there (or housing for its employees).

• But if plot/factory/house is in some remote area useless for Bank’s

personal business.

• Under the Banking regulation Act, a bank cannot keep such

immovable property beyond 7 years, (max 12 years with RBI’s

permission).

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Asset reconstruction company (ARC).

• They buy NPA (Bad loans) from Banks and try to extract

maximum money out of it profit.

• They’ve to register with RBI.

Examples:

• ARCIL (India’s first and largest asset reconstruction

company (ARC))

• Reliance Asset Reconstruction Company Limited

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Example• Bank has NPA worth Rs.40 crores.

• ARC will buy the NPA file from Bank at a lower rate say 35 crores.

• Besides, banks have hundreds of bad loan cases, they donot have time or

manpower to pursue individual case, sometimes no bidders are interested in

auction. All the file work and donkey labour, In such cases, it’s better for

bank to transfer NPA to ARC.

• But that doesn’t mean ARC will give 35 crores to the Bank from its own

pocket!

• Then how will the Asset reconstruction company (ARC) arrange for the

money?

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Security Receipts (SR)

• In above example, ARC needs Rs.35 crores to buy a Non

performing asset from Bank.

• So ARC will issue “security receipts (SR)” worth Rs.35 crores.

• Only Qualified Institutional buyers (QIB) can buy these security

receipts (SR).

• SR are not “bonds”, they do not carry fixed interest rate.

• ARC will promise to pay money on SR, when it gets money the bad

loan

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• Although, ARC usually promise 9% profit on “security reciepts (SR)”

Three possible situations:

• Qualified institutional buyers (QIB) buy those security reciepts (SR). So

Rs.35 cr cash goes from QIB -> ARC -> Bank.

• Bank itself recieves SR worth Rs.35 crores for free. (that means ARC will

gradually pay the money to Bank).

• Combination of both: QIBs buy SR worth 30 crores + Bank recieves free

SR worth 5 crores.

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Qualified Institutional Buyer (QIB)

• Scheduled Commercial Banks

• Foreign Institutional Investor

• Mutual Funds

• Venture Capital Investors

• Insurance Companies

• Pension/ Provident Funds

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Problem

• Indian QIBs do not invest much in ARCs.

• Therefore ARC’s capacity to buy NPA is very low.

• And bank themselves don’t have enough expertise or

manpower to dispose those NPAs quickly.

• Previously Foreign investors could invest only up to 49% in

ARC minority shareholder cannot influence company

decisions.

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ARC’s aim

• Extract maximum money out of this investment.

• Auction the assets fully or partially.

• Sell the property in combination with other NPA properties of other

defaulters.

• Restructure the EMIs of Mr.A.

• Change the Management of that asset, appoint its own

directors/officers.

• Order Mr.A to outsource or lease his business to a another company

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ARC New Power: convert Debt into equity

• If company starts making more profit in future, ARC

will receive more share from that profit. (because

more profit more dividend to shareholders.)

• If price of company’s shares go up in the share

market, ARC can sell those shares to third party and

make decent profit

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• Bank’s loss ?

• ARC’s profit?

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Central Registry• Previously, borrowers used to forged property documents and get loans from

multiple banks by giving them duplicate property documents as security.

• So when borrower refuses to pay up loan, many banks would make claim for

the same property

• To fix this problem, Reserve Bank of India (RBI) setup Central Registry in

2011, under SARFAESI.

• This central registry has details of all properties against which loans have been

taken.

• Official name: Central Registry of Securitisation Asset Reconstruction and

Security Interest of India (CERSAI)

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RBI unveils new scheme to tackle bad loans of big firms

• Corporate debt restructuring (CDR), (2001)

• Joint lenders forum (JLR), (April 2014)

• Strategic debt restructuring (SDR),(June 2015)

• 5/25 Scheme (June 2016)

• S4A Scheme (June 2016)

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• Schemes For Sustainable Structuring Of Stressed

Assets

Liabilities

Sustainable Unsustainable

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Effect Of Demonetization on NPA’s

• RBI Allows both individuals and companies with loans up to Rs 1

crore an additional grace period of 60 days to repay their loans

(Tue, 22 Nov 2016)

• Demonetization may help banks turn profitable in third quarter

• ICICI Bank has lowered the interest rate by 0.15% for deposits

between 390 days to two years while HDFC has cut its interest rate

by 0.25% on deposits ranging between one to five crore.

• Car loan and home loan EMI’s could fall

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Advantages & Disadvantages of recovery

Advantages:

• The process of assigning debt collection to outsides enables officials from

Banks to develop more remunerative new business.

• Third party involvement in debt collection has proven time and again to

improve the chances of recovering bank dues as these people are

specialists in negotiating with debtors and the result usually speak for

themselves;

• A skillfully negotiated debt collection could mean saving on litigation cost.

• The process of assigning debt collection to outsides enables officials of

non-Banks. Cost to develop more beneficial new business.

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Disadvantages:

• Debt collection does cost money;

• The debt collection agency will be establishing

a relationship with the banks customers,

which could be potentially harmful if they

sour that relationship by not dealing with

customers in a courteous manner.

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Recent Updates

• RBI: Banks should share info to counter bad loans

• Parliamentary panel approves debt recovery law with changes

• Govt moves amendment to Sarfaesi, debt recovery tribunal Acts

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