OBJECTIVES

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OBJECTIVES:

1) To study the Debt Recovery and Collection Process of

Mihindra and Mahindra Finance.

2) To study the importance of Debt Recovery Agents and

Agencies in respect of recovery.

3) To study Non Performing Assets in a brief.

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INTRODUCTION

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INTRODUCTION

Financial institution deserves to be paid for their products and

services. The collection professionals in Recovery Management

Systems will work to see that.

Reasonable fees with no up-front costs. They get paid only

when it is collect.

Recovery Management Systems will design a collection strategy to

meet financial institution’s objectives. Financial institution can

recover their debts without losing customers.

Monthly settlements with meaningful reporting. Status updates

on demand.

Extensive experience obtaining and collecting money judgments

in Ohio. Garnishments, liens, and levies Recovery Management

Systems will collect when legal action is the only option.

Cutting edge skip-tracing tools and techniques recovery

Management Systems can work 1st, 2nd, and 3rd placements and even

turn financial institution old judgments into money.

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Defaults of loan

One major problem which the Financial Institution 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 Financial Institution are

interviewed for finding out the causes of defaults. These reasons may be useful

for the and Financial Institution for the better recovery of loans in future. After

surveying different Financial Institution, the following can be said to be some

of the main causes of default of loans from industrial sector:-

Improper selection of an entrepreneur :-Selection of the right Entrepreneur is one of the major factors in the

profitability of Financial Institution. Two major criterion 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 financial institution, 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.

Deficient analysis of project Viability:- 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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There are many examples where the Financial Institution 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.

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 Financial Institution, he often takes the liberty, and tends to weigh the

pros and cons vis-à-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 Financial Institution.

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

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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 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.

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

Follow-up measures taken regularly and systematically keep the

borrowing unit under constant vigil of the Financial Institution. 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

Financial Institution but also often tread on wrong tracks, much to the

detriment of their own financial health and that of the Financial Institution.

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.

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

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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.

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.

What is NPA?

For a financial institution, an NPA or bad debt is usually a loan that is

not producing income. Earlier it was largely applicable to businesses. But

things have changed with Financial Institution widely extending consumer

loans (home, car, personal and education, among others) and strict asset

classification norms.

If a borrower misses paying his equated monthly installment (EMI) for

90 days, the loan is considered bad, or an NPA. High NPAs are a sign of bad

financial health. This has wide-ranging ramifications for a financial institution,

especially in the stock market and money market. So, as soon as a debt goes

bad, the Financial Institution want it either made better or taken out of their

books.

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The genesis (origin) of an NPA

There are many reasons as to why a loan goes bad. For a business, it

could be because it fails to take off.

Such a situation may arise because of sudden health expenditure or job

loss or death. Often, as in the US today, it can be because of over-leveraging,

when consumers borrow against most of their assets and, maybe, have

unsecured loans too.

In such a case, any hit on income can jeopardize all repayments. They,

however, can file for financial institutionruptcy under Chapters 7, 11 and 13 of

the United States Financial institutionruptcy Code. Indians don't have such an

option.

In India, the situation has worsened due to Financial Institution

aggressively pushing loans, even unsecured ones, to individuals to prevent idle

assets on their books. President and founder of International Consumer Rights

Protection Council, an NGO, says most customers in India are not financially

educated and Financial Institution are luring them to take more and more

loans, often without checking their financial position

2.1 Meaning of NPA

An asset is classified as non-performing asset (NPAs) if dues in the

form of principal and interest are not paid by the borrower for a period of 180

days. However with effect from March 2004, default status would be given to

a borrower if dues are not paid for 90 days. If any advance or credit facilities

granted by financial institution to a borrower become non-performing, then the

financial institution will have to treat all the advances/credit facilities granted

to that borrower as non-performing without having any regard to the fact that

there may still exist certain advances / credit facilities having performing

status.

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1) Why such huge levels of NPAs exist in the Indian financial

institutioning system (IBS)?

The origin of the problem of burgeoning NPAs lies in the quality of

managing credit risk by the Financial Institution concerned. What is needed is

having adequate preventive measures in place namely, fixing pre-sanctioning

appraisal responsibility and having an effective post-disbursement supervision.

Financial Institution concerned should continuously monitor loans to identify

accounts that have potential to become non-performing.

2) Why NPAs have become an issue for Financial Institution in India?

To start with, performance in terms of profitability is a benchmark for

any business enterprise including the financial institutioning industry.

However, increasing NPAs have a direct impact on Financial Institution

profitability as legally Financial Institution are not allowed to book income on

such accounts and at the same time Financial Institution are forced to make

provision on such assets as per the Reserve Financial institution of India (RBI)

guidelines.

Further, Reserve Financial institution of India (RBI) successfully

creates excess liquidity in the system through various rate cuts and Financial

Institution fail to utilize this benefit to its advantage due to the fear of

burgeoning non-performing assets.

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2.2 Strategy 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 financial

institution-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 received by or credited to

the debtor’s 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 financial institution 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:

Normal debtors, i.e. who ‘can pay’ and ‘will pay’ if reminded or/and

persuaded to pay.

Difficult debtors, i.e. those who ‘can pay’, but ‘will not pay’.

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:

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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.

Go through the ‘know Your Customer’ papers furnished by the

financial institution and know the customer’s identify and personal

profile.

Go through the copy of the loan agreement of the debtor furnished by

the financial institution and note down the financial position, cash flow

pattern, and assets charged to the financial institution.

v) Record in notebook recovery efforts in chronological order for each.

Policy, Processes and procedure of debt recovery management

Collection of post due debt or receivables of the financial institution

that has engaged a recovery agent is the core function of the agent. All other

functions, as discussed in the preceding unit, revolve around this core function.

We will discuss in detail the policy, processes and procedure for debt recovery

function in this unit.

Financial Institution lay down their policy and procedure for collection

of past due debts in conformity with the legal and regulatory framework. The

Financial Institution will in particular, abide by:

1) The RBI directives on recovery of debt, including recovery agents

engaged by the financial institution and,

2) The Model Policy on collection of Dues and Repossession of security

framed by the Indian Financial Institution’ Association.

A financial institution will normally incorporate its policy and

procedure for debt recovery in the arrangement entered into its recovery

agents. In terms of the recovery management agreed with the financial

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institution, the recovery agents should adhere to the policy, procedure, etc.

prescribed by the financial institution.

3.1 Loan recovery policy

The debt collection policy (recovery policy) of the financial

institution is built around dignity and respect to customers. The

Financial institution 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 financial institution

believes in following fair practices with regard to recovery of dues

from borrowers and taking possession of security (properties /

assets charged to the financial institution 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 Financial

institution will be fixed taking into account the repaying capacity and cash

flow pattern of the borrower. The financial institution 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 financial institution would expect the customers to adhere to

the repayment schedule agreed to and approach the Financial institution for

assistance and guidance in case of genuine difficulty in meeting repayment

obligations.

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The Financial institution’s Security Repossession Policy (taking

possession of the mortgaged properties under SRESI Act or acquiring the

property as non financial institutioning 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 financial institution for follow up and recovery of dues and

repossession of security will be in consonance with the law.

General Guidelines:

All the members of the staff or any person authorized to represent our

Financial institution 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

Financial institution for follow up and recovery of dues would be made known

to the borrowers at the first instance. The financial institution staff or any

person authorized to represent the financial institution in collection of dues

or / and security repossession will identify himself / herself and display the

authority letter issued by the financial institution upon request.

3. The financial institution would respect privacy of its borrowers.

4. The financial institution is committed to ensure that all written and

verbal communication with its borrowers will be in simple business language

and the financial institution will adopt civil manners for interaction with

borrowers.

5. Normally the financial institution’s representatives will contact the

borrower between 0700 hrs and 1900 hrs, unless circumstances warrant

visiting the borrower at odd hours and occasions. Such circumstances would

include continuous irregularity in the accounts.

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6. Borrower’s requests to avoid calls at a particular time or at a

particular place would be honored as far as possible.

7. The financial institution 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.

Giving notice to borrowers

While written communication, telephonic reminders or visits by the financial

institution’s representatives to the borrowers’ place or residence will be used

as loan follow up measures, the financial institution will not initiate any legal

or other recovery measures including repossession of the security without

giving due notice in writing. The Financial institution will follow all such

procedures as required under law for recovery / repossession of security.

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 be carried 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. The financial institution will take all reasonable

care for ensuring the safety and security of the property after taking custody, in

the ordinary course of the business.

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Valuation and Sale of Property

Valuation and sale of property repossessed by the financial institution will be

carried out as per law and in a fair and transparent manner. The financial

institution 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

financial institution is not having any other claims against the borrower.

Opportunity for the borrower to take back the security

As indicated earlier in the policy document, the financial institution will resort

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 financial institution 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 financial institution

dues are paid in full. If satisfied with the genuineness of borrower’s inability

to pay the loan installments as per the schedule which resulted in the

repossession of security, the financial institution may consider handing over

the property after receiving the installments in arrears. However, this would

be subject to the financial institution being convinced of the arrangements

made by the borrower to ensure timely repayment of remaining installments in

future.

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3.3 Procedure of tribunal

1) Application to the Tribunal:

(1) Where a financial institution has to recover any debt from any person, it

may make an application to the Tribunal within the local limits of whose

jurisdiction By Act 1 of 2000, sec. 8 (w.r.e.f. 17-1-2000).Subs. by Act 1 of

2000, sec. 9, for section 19 (w.r.e.f.17-1-2000).

(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; or

(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 financial institution, 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 financial institution also has claim to recover

its debt, then, the later financial institution or financial institution may join the

applicant financial institution 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.

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(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 defence.

(6) Where the defendant claims to set-off against the applicant’s demand any

ascertained sum of money legally recoverable by him from such applicant, the

defendant may, at the first hearing of the application, but not 17 afterwards

unless permitted by the Tribunal, present a written statement containing the

particulars of the debt sought to be set-off.

(7) The written statement shall have the same effect as a plaint in a cross-suit

so as to enable the Tribunal to pass a final order in respect both of the original

claim and of the set-off.

(8) A defendant in an application may, in addition to his right of pleading a

set-off under sub-section, set up, by way of counter-claim against the claim of

the applicant, any right or claim in respect of a cause of action accruing to the

defendant against the applicant either before or after the filing of the

application but before the defendant has delivered his defence or before the

time limited for delivering his defence has expired, whether such counter-

claim is in the nature of a claim for damages or not.

(9) A counter-claim under sub-section shall have the same effect as a cross-

suit so as to enable the Tribunal to pass a final order on the same application,

both on the original claim and on the counter-claim.

(10) The applicant shall be at liberty to file a written statement in answer to the

counter-claim of the defendant within such period as may be fixed by the

Tribunal.

(11) Where a defendant sets up a counter-claim and the applicant contends that

the claim thereby raised ought not be disposed of by way of counter-claim but

in an independent action, the applicant may, at any time before issues are

settled in relation to the counter-claim, apply to the Tribunal for an order that

such counter-claim may be excluded, and the Tribunal may, on the hearing of

such application, make such order as it thinks fit.

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(12) The Tribunal may make an interim order (whether by way of injunction

or stay or attachment) against the defendant to debar him from transferring,

alienating or otherwise dealing with, or disposing of, any property and assets

belonging to him without the prior permission of the Tribunal.

(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.

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(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 such person to be

detained in the civil prison for a term not exceeding three months, unless in the

meantime the Tribunal directs his release.

(18) Where a certificate of recovery is issued against a company registered

under the Companies Act, 1956 (1 of 1956) the Tribunal may order the sale

proceeds of such company to be distributed among its secured creditors in

accordance with the provisions of section 529A of the Companies Act, 1956

and to pay the surplus, if any, to the company.

(19) The Tribunal may, after giving the applicant and the defendant an

opportunity of being heard, pass such interim or final order, including the

order for payment of interest from the date on or before which payment of the

amount is found due up to the date of realization or actual payment, on the

application as it thinks fit to meet the ends of justice.

(20) The Tribunal shall send a copy of every order passed by it to the applicant

and the defendant.

(21) The Presiding Officer shall issue a certificate under his signature on the

basis of the order of the Tribunal to the Recovery Officer for recovery of the

amount of debt specified in the certificate.

(22) Where the Tribunal, which has issued a certificate of recovery, is satisfied

that the property is situated within the local limits of the jurisdiction of two or

more Tribunals, it may send the copies of the certificate of recovery for

execution to such other Tribunals where the property is situated:

Provided that in a case where the Tribunal to which the certificate of recovery

is sent for execution finds that it has no jurisdiction to comply with the

certificate of recovery, it shall return the same to the Tribunal which has issued

it.

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(23)The Tribunal may made such orders and give such directions as may be

necessary or expedient to give effect to its orders or to prevent abuse of its

process or to secure the ends of justice.

2) Appeal to the Appellate Tribunal.

(1) Save as provided in subsection

(2) any person aggrieved by an order made, or deemed to have been made, by

a Tribunal under this Act, may prefer an appeal to an Appellate Tribunal

having jurisdiction in the matter. No appeal shall lie to the Appellate Tribunal

from an order made by a Tribunal with the consent of the parties.

(3) Every appeal under sub-section shall be filed within a period of forty-five

days from the date on which a copy of the order made, or deemed to have been

made, by the Tribunal is received by him and it shall be in such form and be

accompanied by such fee as may be prescribed: Provided that the Appellate

Tribunal may entertain an appeal after the expiry of the said period of forty-

five days if it is satisfied that there was sufficient cause for not filing it within

that period.

(4) On receipt of an appeal under sub-section, the Appellate Tribunal may,

after giving the parties to the appeal, an opportunity of being heard, pass such

orders thereon as it thinks fit, confirming, modifying or setting aside the order

appealed against.

(5) The Appellate Tribunal shall send a copy of every order made by it to the

parties to the appeal and to the concerned Tribunal.

(6) The appeal filed before the Appellate Tribunal under sub-section shall be

dealt with by it as expeditiously as possible and endeavor shall be made by it

to dispose of the appeal finally within six months from the date of receipt of

the appeal.

3) Deposit of amount of debt due, on filing appeal.

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Where an appeal is preferred by any person from whom the amount of

debt is due to a financial institution or a consortium of Financial Institution,

such appeal shall not be entertained by the Appellate Tribunal unless such

person has deposited with the Appellate Tribunal seventy-five per cent of the

amount of debt so due from him as determined by the Tribunal under section

19: Provided that the Appellate Tribunal may, for reasons to be recorded in

writing, waive or reduce the amount to be deposited under this section.

4) Procedure and Powers of the Tribunal and the Appellate Tribunal.

(1) The Tribunal and the Appellate Tribunal shall not be bound the procedure

laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be

guided by the principles of natural justice and, subject to the other provisions

of this Act and of any rules, the Tribunal and the Appellate Tribunal shall have

powers to regulate their own procedure including the places at which they

shall have their sittings.

(2) The Tribunal and the Appellate Tribunal shall have, for the purposes of

discharging their functions under this Act, the same powers as are vested in a

civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a

suit, in respect of the following matters, namely:--

(a) Summoning and enforcing the attendance of any person and examining

him on oath;

(b) Requiring the discovery and production of documents;

(c) Receiving evidence on affidavits;

(d) Issuing commissions for the examination of witnesses or documents;

(e) Reviewing its decisions;

(f) Dismissing an application for default or deciding it ex parte;

(g) Setting aside any order of dismissal of any application for default or any

order passed by it ex parte;

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(h) Any other matter which may be prescribed.

(3) Any proceeding before the Tribunal or the Appellate Tribunal shall be

deemed to be a judicial proceeding within the meaning of sections 193 and

228, and for the purposes of section 196, of the Indian Penal Code (45 of

1860) and the Tribunal or the Appellate Tribunal shall be deemed to be a civil

court.

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 financial

institution-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:

1) The recovery agent has been authorized by the financial institution to

collect the past due debt from the particular customer.

2) The customer has been notified by the financial institution of the details of

the recovery agent for collection of the past-due debt.

3) Making customer calls: This is the first step in recovery procedure and

following rules should be followed generally:

(i) Calls are made from the same number as advised by the financial

institution to the customer.

(ii) The agents disclose his identity and authority at the first instance.

(iii) The agent contacts the debtor between 0700 hours and 1900 hours,

unless the special circumstance of his/her business or occupation

requires the financial institution to contact of a different time.

Under no circumstances, can the customer be called beyond 2100

hours.

(iv) All calls where the customer becomes abusive or threatening

should be appropriately documented.

23

(v) Customer’s question be answered in full. They should be provided

with information requested and given assistance in making

recovery. Minor issues should be resolved.

(vi) How often to call customer/ The purpose of a collection call as to

bring to the Customer’s notice the obligation and to seek a

commitment to pay on a specified date. Once a promise is elicited

a call may be made to serve as a reminder and for confirmation of

payment.

(vii) If the customer is not available during a few calls made by the

agent, a message may be left to an adult family member as

follows” Please leave a message that ABC had called and request

the customer to call ABC back at the given phone number”. The

message should not indicate that the customer ABC has overdue

amount , or the call originated from a Recovery agency.

4) Visit to customer (debtor) This would be the second step in collection

process. Following procedure should generally be followed.

(i) A customer should be visited for debt collection only after these conditions

are satisfied;

The debtor has not paid the due amount within the days of grace and

the dues are still outstanding against him/her.

The debtor has been notified of the amount due and also of the name of

the collection agent.

The collection agent has taken an appointment from the debtor for the

visit.

(ii) During visit, the agent should be in proper dress and appearance, or wear

the dress prescribed by the principal and follow the timing and place of the

visit as per the principal’s or RBI/IBA code, unless otherwise agreed by the

debtor expressly.

(iii) At the first stance, the agent should utter salutation words (like good

morning/evening…sir/madam, as per custom of the financial institution).

The agent should thereafter show his ID card and authority given by the

24

principal for debt collection from the debtor./ Only after these initial

formalities, the conversation regarding debt collection should start.

(iv) The time of visiting the customer will be generally between 0700 hours

to 2100 hours. Visits earlier or later than the prescribed time may be

made only under the following conditions:

When the customer has expressly consented to that timing.

When attempts to contact the customer have resulted in information

that the customer is normally only available outside these hours and no

alternate telephone number is available to contact him/her,

When due to nature of the customer’s employment i.e. working in

shifts e.g. call center, hotel. He/she is usually available outside these

hours.

(v) The agent should respect privacy of the debtor. Privacy policy as

discussed above for calls would apply during visits also.

(vi) During the visit, due respect and courtesy should be shown to the

customer and the interactions should be civil and polite as per the principal’s

policy.

(vii) During interactions with the debtor, the agent must not use threats or

intimidation verbally or by body language. Under no circumstances, any

physical violence be used in debt collection process.

3.4 Other modes of recovery

(1) Where a certificate has been issued to the Recovery Officer under Sub-

section of section 19, the Recovery Officer may, without prejudice to the

modes of recovery specified in section 25, recover the amount of debt by

any one or more of the modes provided under this section.

25

(2) If any amount is due from any person to the defendant, the Recovery

Officer may require such person to deduct from the said amount, the amount

of debt due from the defendant under this Act and such person shall comply

with any such requisition and shall pay the sum so deducted to the credit of

the Recovery Officer: Provided that nothing in this sub-section shall apply to

any part of the amount exempt from attachment in execution of a decree of a

civil court under section 60 of the Code of Civil Procedure, 1908 (5 of 1908).

(3) (I) The Recovery Officer may, at any time or from time to time, by notice

in writing, require any person from whom money is due or may become due

to the defendant or to any person who holds or may subsequently hold money

for or on account of the defendant, to pay to the Recovery Officer either

forthwith upon the money becoming due or being held or within the time

specified in the notice (not being before the money becomes due or is held) so

much of the money as is sufficient to pay the amount of debt due from the

defendant or the whole of the money when it is equal to or less than that

amount.

(ii) A notice under this sub-section may be issued to any person who holds or

may subsequently hold any money for or on account of the Defendant jointly

with any other person and for the purposes of this subsection, the shares of the

joint holders in such amount shall be presumed, until the contrary is proved, to

be equal.

(iii) A copy of the notice shall be forwarded to the defendant at his last

address known to the Recovery Officer and in the case of a joint account to all

the joint holders at their last addresses known to the Recovery Officer.

(iv) Save as otherwise provided in this sub-section, every person to whom a

notice is issued under the sub-section shall be bound to comply with such

notice, and, in particular, where any such notice is issued to a post office,

financial institution, financial institution, or an insurer, it shall not be

necessary for any pass book, deposit receipt, policy or any other document to

be produced for the purpose of any entry, endorsement or the like to be made

before the payment is made notwithstanding any rule, practice or requirement

to the contrary.

26

(v) Any claim respecting any property in relation to which a notice under this

sub-section has been issued arising after the date of the notice shall be void as

against any demand contained in the notice.

(vi) Where a person to whom a notice under this sub-section is sent objects to

it by a statement on oath that the sum demanded or the part thereof is not due

to the defendant or that he does not hold any money for or on account of the

defendant, then, nothing contained in this sub-section shall be deemed to

require such person to pay any such sum or part thereof, as the case may be,

but if it is discovered that such statement was false in any material particular,

such person shall be personally liable to the Recovery Officer to the extent of

his own liability to the defendant on the date of the notice, or to the extent of

the defendant’s liability for any sum due under this Act, whichever is less.

(vii) The Recovery Officer may, at any time or from time to time, amend or

revoke any notice under this sub-section or extend the time for making any

payment in pursuance of such notice.

(viii) The Recovery Officer shall grant a receipt for any amount paid in

compliance with a notice issued under this sub-section, and the person so

paying shall be fully discharged from his liability to the defendant to the

extent of the amount so paid.

(ix)Any person discharging any liability to the defendant after the receipt of a

notice under this sub-section shall be personally liable to the Recovery Officer

to the extent of his own liability to the defendant so discharged or to the extent

of the defendant’s liability for any debt due under his Act, whichever is less.

(x) If the person to whom a notice under this sub-section is sent fails to make

payment in pursuance thereof to the Recovery Officer, he shall be deemed to

be a defendant in default in respect of the amount specified in the notice and

further proceedings may be taken against him for the realization of the amount

as if it were a debt due from him, in the manner provided in sections 25, 26

and 27

(4) The Recovery Officer may apply to the court in whose custody there is

money belonging to the defendant for payment to him of the entire amount of

27

such money, or if it is more than the amount of debt due an amount sufficient

to discharge the amount of debt so due.

The Recovery Officer may, by order, at any stage of the execution of the

certificate of recovery, require any person, and in case of a company, any of

its officers against whom or which the certificate of recovery is issued, to

declare on affidavit the particulars of his or its assets.]

(5) The Recovery Officer may recover any amount of debt due from the

defendant by distrait and sale of his movable property in the manner laid

down in the Third Schedule to the Income-Tax Act, 1961 (43 of 1961).

Use of lok adalat

The Honorable Supreme Court also observed that loans, personal

loans, credit card loans and housing loans with less than Rs.10 lakh can be

referred to Lok Adalats. In this connection, Financial Institution' attention is

invited to Circular DBOD.No.Leg.BC.21/09.06.002/2004-05 dated August 3,

2004 wherein they were advised to use the forum of Lok Adalats organized by

Civil Courts for recovery of loans. Financial Institution are advised that they

should preferably use the forum of Lok Adalats for recovery of personal loans,

credit card loans or housing loans with less than Rs.10 lakh as suggested by

the Honorable Supreme Court.

Financial Institution, as principals, are responsible for the actions of

their agents. Hence, they should ensure that their agents engaged for recovery

of their dues should strictly adhere to the above guidelines and instructions.

Complaints received by Reserve Financial institution regarding

violation of the above guidelines and adoption of abusive practices followed

by Financial Institution’ recovery agents would be viewed seriously. Reserve

Financial institution may consider imposing a ban on a financial institution

from engaging recovery agents in a particular area, either jurisdictional or

functional, for a limited period. In case of persistent breach of above

guidelines. Similar supervisory action could be attracted when the High Courts

28

or the Supreme Court pass strictures or impose penalties against any financial

institution or its Directors/ Officers/ agents with regard to policy, practice and

procedure related to the recovery process.

3.5 Programs of financial institution

Credit counseling

It is the process of education to borrower about how to avoid incurring

debts that cannot be repaid as also how to manage the debts burden and

repayment commitments in respect of a number of debts. This process is

actually more debt counseling than a function of credit education. Credit

counseling often involves negotiating with financial institution to establish a

debt management plan (DMP) for a customer. A DMP may help the debtor

repay his/her debt by working out a repayment plan with the financial

institution. DMPs, usually offer reduced payments, fees and interest rates to

the borrower. Recovery agents refer to the terms dictated by the financial

institution to determine payments or interest reduction offered to customer in a

debt management plan.

Debt Management Programs

Once a customer has come under a DMP, the financial institution will

close the customer’s various accounts and restrict any future charges in the

accounts. The most common benefit of a DMP is the consolidation of multiple

monthly payments into one monthly payment, which is usually less than the

sum of the individual payments previously paid by the customer. Some DMPs

advertise that payment can be cut by 50%, although a reduction of 10-20% is

more common.

29

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 financial

institution for purchasing a car, Ram becomes the debtor (or borrower), the

financial institution 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 financial institution 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.

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

30

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 financial institution 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 financial institution (creditor) engages XY will be

called as Debt Recovery Agent of the financial institution.

5.1 Engagement of Recovery Agents

Financial Institution are advised to take into account the following

specific considerations while engaging recovery agents:

Agent’ in these guidelines would include agencies engaged by the

financial institution and the agents/ employees of the concerned agencies.

Financial Institution 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, Financial Institution 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. Financial Institution may decide

the periodicity at which re-verification of antecedents should be resorted to.

31

To ensure due notice and appropriate authorization, Financial

Institution 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

financial institution along with the identity card issued to him by the financial

institution or the agency firm / company. Further, where the recovery agency

is changed by the financial institution during the recovery process, in addition

to the financial institution 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. Financial

Institution 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. Financial

Institution 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 Financial Institution may also be posted on the financial

institution’s website. Where a grievance/ complaint has been lodged, Financial

Institution should not forward cases to recovery agencies till they have finally

disposed of any grievance / complaint lodged by the concerned borrower.

However, where the financial institution 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 might be sub judice, Financial Institution

should exercise utmost caution, as appropriate, in referring the matter to the

recovery agencies, depending on the circumstances.

32

5.2 Recovery agencies

Debt recovery agents are employed Debt Recovery Agencies who

work for Financial Institution subject to certain terms and condition. Debt

recovery agencies are third-party businesses that collect dues past-dues and

other receivable of Financial Institution in exchange for a fee. DRAs charge

the Financial Institution/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, Financial Institution

begin their work Financial Institution 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 DRA. 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. 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 Financial Institution to collect severely

overdue accounts.

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5.3 Training for Recovery Agents

In terms of our Circular DBOD.NO.BP.40/ 21.04.158/ 2006-07 dated

November 3,2006 on guidelines on managing risks and code of conduct in

outsourcing of financial services by Financial Institution, Financial Institution

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 Financial institution has requested the Indian Financial

Institution’ Association to formulate, in consultation with Indian Institute of

Financial institutioning and Finance (IIBF), a certificate course for Direct

Recovery Agents with minimum 100 hours of training. Once the above course

is introduced by IIBF, Financial Institution 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

Financial Institution 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/ financial institution’s own training

colleges may provide the training to the recovery agents by having a tie-up

arrangement with Indian Institute of Financial institutioning 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.

5.4 Soft skills for debt recovery

The previous unit focused on the regulatory requirements in debt

collection process, including the financial institution-specific policy and

procedure. These requirements are mandatory, but may not automatically lead

to full recovery. Success in recovery depends on compliance with the

regulatory norms added with collection skills and strategy. Both are

complementary to each other. Mere regulatory compliance without collection

34

skills and strategy may not result in recovery. Similarly, collection skills and

strategy without regulatory compliance may vitiate recovery atmosphere in the

long term.

In the present unit, we would briefly discuss some of the essential

skills and strategy that facilitate and improve debt recovery. The objective is

limited to acquainting the readers with the meaning and key elements of skills

and strategy required in debt recovery. The learning can, and should, be

enhanced through detailed discussions in the classroom of a training institute,

including role plays by the participants.

1) Communication skill:

Communication is the process of exchanging information, ideas and

thought etc. between at least two persons in order to create a common

understanding. In recovery process, communication takes place between the

debtor and agent by words, in writing, eye contact or body language (during

personal meeting) Communication is of two types:

Verbal communication by spoken words,

Non-verbal communication e.g. face language (facial expression, eye

contact), voice language (voice tone, voice pitch), and body language (body

position, body movement) All or any of these elements of non-verbal language

communicate some message (whether intended or unintended by the

communicator) to the receiver.

Following are the main principles of effective communication, which

could be followed by a recovery agent (communicator) in communication with

the debtor (receiver).

The agent’s language (verbal as well as body language) should be civil and

courteous, as per the financial institution-specific requirement.

The objective of the communication should be clear.

The language used should be clear simple and courteous.

The language used should be easily understood by the receiver.

The agent should be watchful and sensitive to the receiver’s responses

(including his/her body language as mentioned above).

35

Make sure that the non-verbal communication (or body language) is not

adverse to debtor, though unintentional

2) Listening skill:

Listening is another skill which is recovery in process. A good

recovery agent should be a good communicator and a good listener. Listening

refers to all the ways in which communication is being received from the other

party and includes not only hearing but also facial body expressions,

attentiveness or lack of it. Following are the requisites of good listening, which

help improve communication and make if effective:

Hear attentively to what the debtor is saying. One may hear, but not

listen, if he/she is distracted or inattentive.

Lack of listening conveys lack of regard/ respect for the communicator;

hence it should be avoided.

Do not show impatience or haste while listening to the debtor. You may

lose some important information the debtor washes to say.

Do not show anger or disapproval, or other such facial/ body expression,

while listening to the debtor’s poit of view.

Normally, commence speaking only after the other party has finished

speaking or making a point. Normally do not interrupt. In other words,

interrupt only when absolutely necessary, e.g. when the points being spoken

are irrelevant or becoming unduly lengthy or controversial and time is limited

or is being exceeded. Also interrupt softly by saying words like “excuse me.”

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, 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

36

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 think otherwise 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 :

Communicate and listen properly and effectively, as described in

the preceding paragraph.

Show empathy and respect to other party, not with standing the

fact that he/she debtor to the principal.

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.

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 prospects.

4) Persuasive skill:

After having established good rapport with the debtor, the next skill

required in a good recovery agent is to be able to persuade the debtor to repay

the dues. This may be termed as persuasive skill. The persuasive skill is built

on establishing a good rapport and winning the trust of the debtor. Some of the

elements of the persuasion in debt recovery may be suggested as follows:

Explain that the financial institution (principal) lends money out of the

deposits collected from the public and repayment of the loans by the debtor

and others as per the terms would enable the financial institution to pay the

deposits when demanded by the depositors.

Explain your task/ duty of collection of dues on behalf of the principal

and that you have no authority to waive/ reduce or unduly postpone the

recovery, which only the principal can do.

37

Show interest/ concern for the debtor by understanding his/her

problem and say that you would try to give assistance to the possible, within

the authority, as agent, given to you by the principal.

Explain that non-payment may adversely impact the debtor’s credit

history, which may make his/her future borrowing with any financial

institution costlier and difficult.

This should induce the debtor to pay.

Also explained that non-repayment of the loan dues would amount to

breach of the loan agreement and would result in the financial institution

charging higher interest rate.

5.5 Function of recovery agents

The core function of a debt recovery agent is to collect

dues/receivables from specified debtors of the financial institution 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 Financial Institution

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.

Collecting dues receivable:

As mentioned above, collecting dues is the core function of a debt

recovery agent. Receivables refer to the sums of money which have become

38

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:

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

2) 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 financial institution

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 financial institution to the agent, along with

copies of the relative loan agreements.

Thus the debt recovery agent is legally authorized to collect the

specified receivables from the debtors on behalf of the principal:

1) The loan agreement, and

2) 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.

Remitted 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 financial institution 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.

39

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 sperate for each

principal. IT following would constitute the minimum requirement of book-

keeping for a recovery agent.

1) 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 debtor lists from the basis of agent’s

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

carefully kept on record in chronological order.

2) 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 a financial institution.

Normally agent cannot adjust its dues on account of fee against the recoveries

made on behalf of the financial institution.

3) Copies of loan/advances: Agreements between the debtors and the

financial institution is obliged to keep confidentiality of its customer’s

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

without the customer’s 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 financial institution and also as regards the collections

made remitted by him to the principal.

40

Company Profile

Empowering potential. Transforming lives.

Two decades ago, Mahindra and Mahindra Financial Services

Limited (MMFSL) commenced its journey in the rural non-banking

finance industry. And with that was born a vision to transform rural

and semi-urban India into a self-reliant, flourishing landscape.

Since then, we have come a long way, empowering millions of

ambitious individuals with personalised finance for a wide range of

vehicles, home development requirements and many other diverse

endeavours – all to help them live their dreams and Rise in life.

At Mahindra Finance, we are guided by a firm belief in people,

their dreams, and their potential to achieve those dreams. Hence,

our socially inclusive business model facilitates loans to customers

based not on their current financial status, but their future earning

capacity. This philosophy has instilled a sense of confidence in the

minds of rural and semi-urban India – a confidence that allows

them to believe that no dream is too big. Today, as one of the

leading non-banking finance companies, we are proud to have

touched over 3 million lives.

During the course of our journey, apart from emerging as the top

tractor financer in India, we have constantly strived towards

developing skill sets of the local population. Which is why, we

provide employment to over 16,000 people in over 700 branches

across India. This not only ensures equal growth opportunity for

all, but also enables us to serve our customers better through local

understanding and expertise.

41

So be it a humble farmer or a budding entrepreneur – we are

committed to empower every individual with resources to help

their dreams see the light of day.

HISTORY

The history of Mahindra Finance has been one of continuous ascent where our

effort to empower our customers has been a constant element. A strong set of

values, an evolved lineage and a group of highly motivated individuals is what

we started with.

What followed was a series of events that helped us grow from strength to

strength. And two decades that witnessed many dreams across the nation see

the light of day. Come, walk with us through the journey of time and take a

glimpse of how Mahindra Finance grew with all those who believed in it.

Mahindra Finance is led by an ensemble of highly motivated

visionaries who bring years of experience and expertise to the

table. They guide, inspire and propel us to push the boundaries and

move towards our collective vision of empowering every life with

resources to put their ambitions on the map.

 

Board of Directors

Steering Committee

The board consists of eight noted directors vested with the charge

of general supervision, direction and management of the operations

of our company. The primary responsibilities of the Board of

Directors include:

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Overseeing high standards of corporate governance and compliance with

various laws

Overseeing our financial management and approving various lines of business

Shaping our policies and procedures

Monitoring our performance and evolving the growth strategy

Setting up counter-party and other prudential risk management limits

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The Board of Directors:

Mr. Bharat N. Doshi

Chairman

Mr. Uday Y. Phadke

Director

Mr. Ramesh Iyer

Managing Director

Mr. Dhananjay Mungale

Independent Director

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Mr. M. G. Bhide

Independent Director

Mr. Piyush Mankad

Independent Director

Mrs. Rama Bijapurkar

Independent Director

Mr. V. S. Parthasarathy

Director

45

RESEARCH

METHODOLOGY

46

Research Methodology

Introduction

The quality of the project work depends on the methodology

adopted for the study. Methodology, in turn, depends on the nature

of the project work. The use of proper methodology is an essential

part of any research. In order to conduct the study scientifically,

suitable methods & measures are to be followed.

Research Design

The type of research used for the collection & analysis of the

data is “Historical Research Method”.

The main source of data for this study is the past records

prepared by the financial institution. The focus of the study is to

determine the non-performing assets of the financial institution

since its inception & to identify the ways in which the performance

especially the non-performing assets of the Mahindra and

Mahindra FInance institution can be improved.

The data regarding financial institution history & profile are

collected through “Exploratory Research Design” particularly

through the study of secondary sources and discussions with

individuals.

Data Collection Method

By taking guidance from financial institution guide &

departmental guide.

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Secondary Data

Collection of data through financial institution annual reports,

financial institution manuals and other relevant documents.

Collection of data through the literature provided by the

financial institution.

Limitations of the study

Though sincere effort has been made during the study, certain limitations

cannot be avoided. They are as follows:-

Difference in definitions

Nonperforming assets is based on NPA statement of the financial

institution

Prepared as per accounting practices.

This practice in some cases may lead to window dressing to cover up

bad financial position.

This study is based only on 3 years NPA statement.

NPA statement suffers from inherent weakness of accounting practices,

such as their historical nature of matching principle etc.

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ANALYSIS AND INTERPRETATION

TABLE NO.1

The table showing the percentage change in NPA at the KSCAB Ltd.

YEAR NPA(Rs.in Lakhs) NPA in %

2011-12 20895.25 -14.68

2012-13 19201.99 -8.10

2013-14 14602.61 -4.64

The chart showing the percentage change in NPA at the KSCAB Ltd.

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr-16-14-12-10

-8-6-4-20

2011-122012-132013-14

Inference:

The above charts show in the financial year 2011-12 NPA is -14.68 from the financial year 2012-13 to 2013-14 NPA is increased.

This enhances the small amount of the NPA increased of the financial institution. The reduction in NPA can attribute to the positive strategies undertaken by Mahindra and Mahindra FInance institution.

49

Table 1: Table showing gross NPA of the financial institution (in lakhs) from 2012 to 2014

As at Gross NPA (Rs in lakhs)

2012 3831.36

2013 2679.22

2014 898.49

Analysis:

The table shows the gross NPA of Mahindra and Mahindra FInance

institution from 2012 to 2014. It is clearly evident from the table that the gross NPA

has come down from Rs. 3831.36 lakhs to Rs. 898.49 lakhs as on 2014 this is

appreciable, as the gross NPA has gradually reduced during the period.

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Chart 1: Chart showing gross NPA of the financial institution (in lakhs) in the last three years

2012 2013 20140

5001000150020002500300035004000

Chart Title

Inference:

Every best possible effort is taken by the financial institution to curb the

growth of NPA. The financial institution has been focusing its attention on the

recovery of the NPAs and as a result it has been able to reduce the NPA’s during the

last years. Since the gross NPA is an indicator of inherent quality of the financial

institutions credit appraisal capabilities, the financial institutions focuses to a large

extent in reduction of its gross NPA

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Table 2: Table showing the percentage of gross NPA of Mahindra and Mahindra FInance institution

Year Percentage of gross NPA (%)

2012 14.65%

2013 10.94%

2014 4.3%

Analysis:

The percentage of net NPA as on 2012 was 14.65%, where as in 2013 it was

10.94% this is the period where NPA level has drastically come down, and in the

2014 it is 4.3%, from this we can infer that the situation is under effective control.

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Chart 2: Chart showing percentage of gross NPA of Mahindra and Mahindra FInance institution from 2012 to 2014

2012 2013 2014

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%

Inference:

The analysis of the three years shows a gradual decrease in the percentage of

the gross NPA to the loans and advances. This is appreciable to the growth of the

profitability of the financial institution. This is achieved by adopting the various

recovery measures adopted by the financial institution.

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Table 3: Table showing the net NPA of the Mahindra and Mahindra FInance

institution from 200 to 2014

As at Net NPA (in lakhs )

2012 2944.78

2013 1388.59

2014 658.20

Analysis:

The table shows the analysis of the net NPA of Mahindra and Mahindra

FInance institution there is a gradual decrease in the net NPA from 2944.78 in2012 to

Rs. 1388.59 lakhs in 2013 and Rs. 658.20 lakhs in the year 2014.

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Chart 3: Chart showing net NPA of Mahindra and Mahindra FInance institution from 2012 to 2014

2012 2013 20140

500

1000

1500

2000

2500

3000

West

Series2

Inference:

The chart shows the analysis of the net NPA where it is decreasing

continuously. The decrease in NPA is due to the strict recovery strategies laid by the

financial institution and proper classification of assets and timely recovery of the

loans and advances. The decrease in the net NPA enriches the strengths of the

financial position of the company by decreasing the credit loss and increasing the

asset.

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FINDINGS

The operations of Mahindra and Mahindra FInance institution have

been increasing steadily over the past three years.

The study confines that there is continuous decrease in the Non-

Performing Assets from 14.65% in 2012 to 4.3% in the year 2013.

The financial institution is adopting various strategies in minimizing

NPA.

The NPA plays a major role in assessing the performance of the

financial institution and it also contributes to net profits of the financial

institution. Hence, financial institution has taken several steps for

recovery of NPA’S

The one time settlement policy and its implementation on a phased

manner was an important issue was a good exit policy to chronic

defaulters.

The loans and advances are increasing year after year in spite of the %

0f NPA is decreasing. The financial institutions performance has

improved showing a steady decrease in the sub standard assets. This is

enclave through continuous inspection and timely classification of

assets.

There is large number of scattered accounts in the financial institution,

which makes the financial institution difficult in realizing the accounts.

The financial institution is facing difficulty in controlling NPA’S

because of lack of adequate staff for the recovery.

The NPA is important because it enhances the growth of the financial

institution.NPA has a significant impact on the profit and loss account

and balance account of the financial institution.

The cash recovery of the financial institution has increased due to the

various strategies used and by implementing SARFAESI act.

Mahindra and Mahindra FInance institution has considerably less

percentage of gross NPA when compared with various other scheduled

financial institutions.

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SUGGESTIONS

NPA has affected the profitability, liquidity and competitive

functioning of the financial institution to reduce the level of NPA of the

financial institution the following suggestions can be considered

Total estimation of NPA is not possible in financial institutioning

business due to externalities but their occurrence and incidence may be

minimized by following the proper timely asset classification.

Financial institutions should take advantage of mergers and

acquisitions of sick units in order to reduce the NPAs.

Financial institutions should take full advantage of the tribunals by

taking necessary steps it is hoped that establishment of few more Debt

Recovery Tribunals (DRT) and Asset Recovery Corporations (ARC)

will help the financial institutions.

Recovery performance should become part of the corporate goal and

branch employee performance should be linked to it.

Regular review of loan account to make sure that the borderlines do not

slip in to NPA category.

The corporation should concentrate on the recovery of principal and

interest of loans and advances that are lent to it clients.

Focus on high value NPA accounts can be done by improving quality

of credit appraisals and prompt action on credit audit reports should be

undertaken.

Head offices and regional offices should be proactive in having

‘industry watch’ and provide timely information to branches, about

difficulties faced by specific industry, to strengthen follow up of such

accounts.

Conducting and launching massive recovery campaign in each zone

and branch offices by making up to date information on the assets with

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greater consideration towards the assets, which are on the verge of

becoming loss assets.

Proper pre-sanction appraisal of the loan proposals by taking multiple

scenarios to arrive potentiality of the project.

Lending policy to various industries has to be studied thoroughly by

the corporation, corporation, so that they are in a position to raise the

level of business to new clients.

The bad debts which are unrecoverable, should be written off from the

financial institutions balance sheet because maintenance of this dead

weight in the long run is very expensive, as 100% provisioning should

be done.

DRT and ARC facilitate quick decisions but also induce borrowers to

enter in to settlements of assets recovery branches; critical centers for

undertaking recovery targets and drawing time bound action programs

will help to reduce the NPA’s to certain extent.

Physical verification of hypothecated, mortgaged properties and

ensuring collateral security for all the loans given.

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CONCLUSION

To conclude, it can be stated that the Mahindra and Mahindra FInance

institution has been following well-established systems, policies, and

procedures with respect to NPA and recovery. The Financial institution has

recovered the loans in a systematic manner, disbursement of loans/ advances

to all the priority sectors and has crossed the total business targets for 2012

and 2013. However, as suggested, the Financial institution should consider

some additional strategies and policies to face challenges of the competitors in

future, to improve the quality of its service of lending and recovery.

In sum the present, NPA assignment has been very useful in getting

firsthand experience with respect to the management of NPA in the Financial

institutions, with an insight into one of the important segments of recovery.

To conclude with, till recent past, corporate borrowers even after

defaulting continuously never had any real fear of financial institution taking

any action to recover their dues despite the fact that their entire assets were

hypothecated to the Financial Institution. This is because there was no legal

Act framed to safeguard the real interest of Financial Institution.

However with the introduction of Securitization Act, 2002 Financial

Institution can now issue notices to their defaulters to repay their dues or else

make defaulters face hard and tough actions under the aforementioned Act.

This enables Financial Institution to get rid of sticky loans thereby improving

their bottom lines. Also a hallmark of a good business is approaching it with a

fresh, new perspective and requires management that is fully awake, fully

alive and of course fully focused on making things better.

Also, the passing of the Securitization Act, 2002 came as a bonanza for

investors in financial institutioning sector stocks that in turn resulted into an

improvement in their share prices.

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BIBLIOGRAPHY

PRIMARY DATA:

IDBI Financial institution (Cuffe Parade, Mumbai)

SECONDARY DATA:

Book reference

Handbook on debt (Indian Institution of financial institutioning and

finance)

Business economics (T.Y.B.COM)

Hindustan times (newspaper)

Web reference

www.rbi.co.in

www.icicifinancial institution.com

www.iibf.org.in

- Mandar

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