Question

Explain the processes including how you would:

• review a default case
• negotiate payment terms with the debtor
• explain and initiate the debt recovery process
• financial delegations and authorisation limits

Answer 1

There are several reasons a loan can go bad. These reasons include Willful acts of the borrower or unforseen events or adverse market conditions or Management crisis at the borrower's end.Hence it require a loan sanctioned need to be reviewed by the bank periodically. Following are the steps involved :-

A loan is called as default when the borrower fails to make payment of instalment for consecutive 3 months or 90 days. The loan then called as default. While reviewing the defaulted loan case one must follo the following steps :-

Review of Default Loan Case :-

1] Checking the repayment track record of the borrower for the previous / first instalments.

2] Cross checking whether the repayment method adheres to the sanctioned terms and conditions.

3] Checking whether the interest rate mentioned in the sanction letter and actual rate of interest are matching and charged as per the sanctioned terms.

4] Checking the cash flows are generated from the project and the project is actually in working condition. Review of last cash flows routed through the bank account or not. If not what are the reasons of diversion. Are the market conditions favorable for the business.

5] Review need to be taken of the collateral security given and condition of the asset given as collateral security. Insurance of both the primary assets and assets given as collateral security and ensuring the policies are in force.

6] Visiting the borrower and digging it out and cross checking whether he is having any personal issues persisting such as major illness of a family member, seperation of joint family and seperations in business, Affected by any natural calamity and insurance claim is not there.

Negotiating Payment Terms :-

While handling the default case negotiation with the borrower plays an important role. The options given by the recovering office to the borrower need to protect the interest of the bank and be suitable to the borrower. Hence the options should be negotiated with the borrower in a diplomatic way so that the advance or loan gets recovered easily without following the recovery procedure. The points for negotiation are as below :-

1] Prompt repayment of all the overdue amount within 30 days to protect the loan from falling further in default and restore the status to standard asset with NIL arrears.

2] If the borrower is willfully not paying the dues and the sanctioning authority gets such clue the loan need to be fully recovered by the financer or sanctoning authority without giving further extension and relief to the borrwer. This needs to be done after checking all the cash flows of the borrower and confirming the sources of funds and receipt of actual money to the borrower.Advicing the borrower that doing this it will not impact much on his creditworthiness.

3] Restructuring :- This is one of the most favorite option one can suggest the borrower. This is only suggested if the borrwer is facing financial crunch due to adverse market condition, stiff competition or strigent government policies. In this case one must recover the overdue amount and bring the advance to standard asset. Further the outstanding amount and interest combinely need to be divided into small instalments by increasing the tenure or by changing the repayment terms. Which will give some relief to borrower such as paying every six month instalments instead of paying it every month.

4] One Time Settlement (OTS):- This is one of the major recovery formula for default advances. This helps the institutions to reduce the level of NPAs and the borrowers to clear and settle their dues rapidly with some savings in iterest portion on the loan. Even this saves the borrower from wasting time in judicial procedures if the bank files a suit on the borrower.

Debt Recovery Process :-

Debt recovery process starts from the day the advance goes bad and the borrower commits default. There are several steps involved in recovery of the default loans.

1] Recovery Notice :- The borrower need to be sent first recovery notice within 15 days from the loan became default. The second notice need to be sent after one month from the date of first notice if the borrower does not replies to the notice. The third notice need to be sent within one month from the date of second notice if the borrower does not replies to the notices of the financer. If the borrower comes to the financer after the first or second notice the round of negotiation starts and one must urge the defaulting borrower to pay the overdue amount at the earliest.

2] Notices to Guarantors :- Notices to guarantors need to be sent in the same manner as of borrower. As the rule of RBI states clearly that if a borrower defualts a loan and if the financer has taken guarantee from any third party to that loan that need to be paid by the guarantor as it becomes the responsibility of the guarantor to repay.

3] Legal Suit / DRT Suit Filing :- If the borrower fails to reply to the notices of the financer the financer can file a legal suit on the borrower. The financer can file a DRT suit if the loan is above Rs. 20 Lakh. DRT stands for Debt Recovery Tribunal. If the borrower agrees in the court to repay the loan need to be recovered as per the guidelines given by the court and the terms and conditions of the bank.

4] Possession of Collaterals and Primary Assets:- Even if the borrower is not repaying the loan even after recovery notices, Legal notices, Personal visits and other recovery measures such as suits in the court of Law. The financer is well in condition of seizing the primary as well as collateral assets of the borrower. If the collateral security given by the borrower is a Land or building it can be attached as per the rules of SARFAESI Act and the rights given to financial institutions for recovery. A notice of symbolic possession of the assets is being sent to the borrower 15 days/1 month prior to the actual possession. If he does not respond within the given time frame the symbolic possession of the assets is taken by the competent authority of the financer.

5] People's Court (Lok Adalat) :- Now a days there is one more option available to banks and financial institutions that is referring the default cases to the People's Court called as Lok Adalat. This mechanism is designed to rapidly resolve the NPA Cases and other recovery cases from the court with the help of people working with banks and financial institutions. This is one of the easy way to settle the NPA cases amicably and mutually by the defaulter and financer.

Financial Delegations and Authorisation Limits:-

Every Bank or Financial institution has its own rules and models for granting discounts, reliefs and authorising deviations and permitting the recovery people for following major steps on behalf of the bank. Hence the rights and duties and delegation of powers differs from one another and even the rights and limits of the person to do so.