recoverymanagement,PROCESS AND AGENCIES-200524112357.pptx

RECOVERY MANAGEMENT PROCESS,COMPANIES

1. RECOVERY MANAGEMENT IN BANKING DEBT RECOVERY TRIBUNAL SARFAESI ACT

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. INTRODUCTION TO RECOVERY MANAGEMENT Banks need to recover the money lent to the borrowers. In case the funds lend becomes npa; it hampers whole banking business and decrease profitability. “Recovery ” is defined as the process of regaining and saving something lost and “Management” is the process of planning, organizing and controlling activities to achieve the objectives of business efficiently. Recovery Management is thus concerned with designing and implementing a collection of strategy to recover the debts without losing customers.

4. Recovery measures could be legal and non-legal :- Banks could adopt legal measures to recover loans by filing a suit in civil court or filing an application before the DRTs. Before taking legal actions banks generally give frequent reminders by calls, messages, mails and visit to borrower’s place which is considered as non-legal measures without intervention of court. Major reasons behind defaults :- Lack of credit evaluation, Inadequacy of collateral security/ equitable mortgage against loan, Lack of follow up measures, Default due to natural calamities etc.

5. 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

6. IMPORTANT POINTS FOR DEBT RECOVERY Don’t violate or breach the recovery policy, procedure etc. prescribed by the principle. Don’t exceed the authority given in the recovery arrangement. Don’t make a call to the debtor before 07:00 hours or after 21:00 hours. Don’t make anonymous calls or bunched calls to the debtor, which may be perceived as harassment. Don’t conceal or misrepresent your identity during calls and visit or other interaction with the debtor. Don’t show uncivil/indecent/dirty behaviour or use such language during calls and visits to the debtor. Don’t harass/humiliate/intimidate/threaten the debtor- verbally or physically.

7. Debt recovery procedure Contact with a friendly payment reminder Contact with an overdue payment reminder Contact your customer with a final notice Try to make direct contact with your customer Send a formal letter of demand Repossession of Security Valuation & Sale of Property

8. NOTICE TO BORROWERS, REPOSSESION & SALE OF PROPERTY NOTICE TO BORROWER - Before initiation of any legal measures, giving notice to borrowers in form of written communication, telephonic reminders or visits by the bank’s representatives to the borrowers’ place is done as a part of loan follow up. REPOSSESSION OF SECURITY - Repossession of security is aimed at recovery of dues from the borrower by taking custody of the property until full outstanding loan amount is repaid. The recovery process through repossession of security will involve valuation of security and realization of security through appropriate means. Repossession can be done only after issuing the legal notice to borrower. VALUATION AND SALE OF PROPERTY - Valuation and sale of property repossessed by the bank is carried out as per law and in a fair and transparent manner. The bank have right to recover from the borrower the balance due if any after sale of property. Excess amount 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 claims against the borrower.

9. Recovery Acts Debt Recovery Tribunal Act 1993 The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act , 2002 ARC

10. DEBT RECOVERY TRIBUNALS The Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI); popularly known as DRT Act was enacted in the year 1993 to speed up the recovery process by banks and FIs through legal proceedings from their borrowers. The Act provided for establishment of Debt Recovery Tribunals (DRTs) for expeditious settlement in case of debts above Rs. 10 lakhs. Procedure for filing application before DRTs involve :- Filling of application Scrutiny of application by the Registrar of DRT Issue of summons to borrowers Recovery proceedings

11. P opular DRA: 1. ARR M S (India) Private Limit e d 2. Direct Recovery Associ at es Inc. 3. Cedar Financial Popular DRA: ARR M S (India) Private Limit e d Direct Recovery Associ at es Inc. Cedar Financial Popular DRA: ARR M S (India) Private Limit e d Direct Recovery Associ at es Inc. Cedar Financial

12. 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

13. 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.

14. 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

15. 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 .

16. 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

17. 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).

18. 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

19. 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?

20. 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

21. 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.

22. Qualified Institutional Buyer (QIB) Scheduled Commercial Banks Foreign Institutional Investor Mutual Funds Venture Capital Investors Insurance Companies Pension/ Provident Funds

23. 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.

24. 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

25. 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

26. Bank’s loss ? ARC’s profit?

27. 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)

28. 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)

29. Schemes For Sustainable Structuring Of Stressed Assets Liabilities Sustainable Unsustainable

30. 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

31. 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.

32. 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.

33. 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

34. ASSET RECONSTRUCTION COMPANIES The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, enacted in December 2002 provides the legal basis for the setting up ARCs in India. Securitization means the conversion of an asset especially a loan into marketable securities typically for the purpose of raising cash by selling them to other investors. An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the banks/FIs can clean up their balance sheets and ARCs can sell the debt value in form of financial securities to investors. Banks rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.

35. DEBT RECOVE R Y AGENTS Debt Recovery Agent may be defined as a person or entity engaged by a bank for the purpose of collecting specified bad loans or advances or other kind of debts from the borrowers in accordance with the specified terms and conditions of loan agreement. Banks are advised that they should ensure that the recovery agents are properly trained to handle loan cases with care and sensitivity in particular aspects like hours of calling, privacy of customer information, no abuses or violence, informed of legal norms and compliances etc.

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