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DEBT RECOVERY MANAGEMENT
'Debt'
• Debt is an amount of money borrowed by one party from
another.
• Debt is used by many corporations and individual...
Types of Loan Defaults
Loan Default
• Means a borrower has not fulfilled the conditions in repayment of a
debt
1)Debt Serv...
DEBT RECOVERY MANAGEMENT IN
BANKS
• A debt from a loan, credit line or accounts receivable
that is recovered either in who...
Debt Recovery Management
• A company or agency that is in the business of recovering money that is
owed on delinquent acco...
Defaults Classification
• Defaults are classified into two baskets – Soft and Hard.
• The borrowers are segregated into ba...
Engagement Of Recovery Agency
• The Bank may utilize the services of recovery agencies for collection of
dues and reposses...
• In case the Bank engages service of such
recovery/enforcement/ seizure agencies for any recovery case,
the identity of t...
Debt recovery procedure
1. Contact with a friendly payment reminder
2. Contact with an overdue payment reminder
3. Contact...
Defaults of loan
• Improper selection of an entrepreneur
• Deficient analysis of project Viability
• Inadequacy of Collate...
Effective Strategies which bank follows
RECOVERY CAMPS
PREFERENCE OF CLAIMS
COMPROMISE PROPOSALS
TECHNICAL WRITE OFF
ONE T...
Gross Non Performing Assets
• The total (Gnpas) of banks stood at
Rs 5,94,929 crores as at end march 2016, over
90 per cen...
Recovery Acts
• Debt Recovery Tribunal Act 1993
• The Securitisation And Reconstruction Of Financial
Assets And Enforcemen...
Who can file a case?
Through?
Fee to file a case with DRT?
Debt Recovery Tribunal Act 1993
• The Debts Recovery Tribunal have been constituted
under Section 3 of the Recovery of Deb...
But soon DRT saw some downside
reason being
• When it came to large and powerful borrowers
• Primarily on the ground that ...
• As if these were not sufficient, there was clash
of jurisdiction between the Official Liquidators
appointed by the High ...
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...
SARFAESI ACT
• The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security
Interest Act, 2002 (a...
• The SARFAESI Act provides for the manner for
enforcement of security interests by a secured
creditor without the interve...
Steps
• Take possession of Mr.A’s assets without requiring court order.
(Commercial or residential, fixed or moving assets...
• SARFAESI applies only to loans above Rs.10 lakhs.
• By the way SARFAESI applies only to those assets “mortgaged/secured”...
The borrower (loan taker) has following options:
• Get a stay order from Debt Recoverty tribunal (DRT) against the
auction...
Bank: Power to Auction
• First Bank contacts the experts, gets valuation of Mr.A’s assets.
• Expert says “those assets are...
New Problem
• Suppose Bank attached a warehouse of Mr.A.
• If the land was in good urban area, Bank could open a new branc...
Asset reconstruction company (ARC).
• They buy NPA (Bad loans) from Banks and try to extract
maximum money out of it profi...
Example
• Bank has NPA worth Rs.40 crores.
• ARC will buy the NPA file from Bank at a lower rate say 35 crores.
• Besides,...
Security Receipts (SR)
• In above example, ARC needs Rs.35 crores to buy a Non
performing asset from Bank.
• So ARC will i...
• Although, ARC usually promise 9% profit on “security reciepts (SR)”
Three possible situations:
• Qualified institutional...
Qualified Institutional Buyer (QIB)
• Scheduled Commercial Banks
• Foreign Institutional Investor
• Mutual Funds
• Venture...
Problem
• Indian QIBs do not invest much in ARCs.
• Therefore ARC’s capacity to buy NPA is very low.
• And bank themselves...
ARC’s aim
• Extract maximum money out of this investment.
• Auction the assets fully or partially.
• Sell the property in ...
ARC New Power: convert Debt into
equity
• If company starts making more profit in future, ARC
will receive more share from...
• Bank’s loss ?
• ARC’s profit?
Central Registry
• Previously, borrowers used to forged property documents and get loans from
multiple banks by giving the...
RBI unveils new scheme to tackle bad
loans of big firms
• Corporate debt restructuring (CDR), (2001)
• Joint lenders forum...
• Schemes For Sustainable Structuring Of Stressed
Assets
Liabilities
Sustainable Unsustainable
Effect Of Demonetization on NPA’s
• RBI Allows both individuals and companies with loans up to Rs 1
crore an additional gr...
Advantages & Disadvantages of recovery
Advantages:
• The process of assigning debt collection to outsides enables official...
Disadvantages:
• Debt collection does cost money;
• The debt collection agency will be establishing
a relationship with th...
Recent Updates
• RBI: Banks should share info to counter bad
loans
• Parliamentary panel approves debt recovery
law with c...
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
Debt Recovery Management or Debt Recovery Mechanism by Banks
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Debt Recovery Management or Debt Recovery Mechanism by Banks

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Debt recovery procedure conducted by Banks, steps involved in recovery of debt by banks and Acts involved in recovery of Debts.

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Debt Recovery Management or Debt Recovery Mechanism by Banks

  1. 1. DEBT RECOVERY MANAGEMENT
  2. 2. '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.
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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.
  8. 8. • 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
  9. 9. 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
  10. 10. 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
  11. 11. Effective Strategies which bank follows RECOVERY CAMPS PREFERENCE OF CLAIMS COMPROMISE PROPOSALS TECHNICAL WRITE OFF ONE TIME SETTLEMENT SCHEME LOK ADALATS
  12. 12. 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)
  13. 13. Recovery Acts • Debt Recovery Tribunal Act 1993 • The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 • ARC
  14. 14. Who can file a case? Through? Fee to file a case with DRT?
  15. 15. 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
  16. 16. 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.
  17. 17. • 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.
  18. 18. 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.
  19. 19. 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
  20. 20. • 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.
  21. 21. 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
  22. 22. • 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
  23. 23. 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.
  24. 24. 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
  25. 25. 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).
  26. 26. 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
  27. 27. 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?
  28. 28. 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
  29. 29. • 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.
  30. 30. Qualified Institutional Buyer (QIB) • Scheduled Commercial Banks • Foreign Institutional Investor • Mutual Funds • Venture Capital Investors • Insurance Companies • Pension/ Provident Funds
  31. 31. 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.
  32. 32. 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
  33. 33. 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
  34. 34. • Bank’s loss ? • ARC’s profit?
  35. 35. 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)
  36. 36. 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)
  37. 37. • Schemes For Sustainable Structuring Of Stressed Assets Liabilities Sustainable Unsustainable
  38. 38. 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
  39. 39. 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.
  40. 40. 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.
  41. 41. 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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