EXECUTIVE SUMMARY

Introduction:
This project gives an idea about the Debt Recovery Process and Collection Process. Debt
Recovery is inseparable from Recovery Agents and Agencies so keeping in mind their vital role
this projects highlights their duties, functions etc as well. For understanding the exact recovery
methods in banking industry, the modes of recovery and Debt restructuring in Punjab National
Bank is also been included.

Importance Of Study:
As we all know growing percentage of Non Performing Assets is a big concern for
modern as well as traditional financial institutions. If recovery is been made effective then
certainly it will reflect positively on reducing percentage of NPA’s. So recovery management, be
of fresh loans or old loans, is central to NPA management. Thus qualified recovery personals is a
prime need of the banking industry.

Objectives:

1) To study the Debt Recovery and Collection Process of Banks.

2) To study the importance of Debt Recovery Agents and Agencies in respect of recovery.
3) To study Non Performing Assets in a brief.

Limitations of the study:

As Punjab National Bank is second largest public sector bank in India, its operations are
very vast so due to time and cost constrains it was not possible to visit each and every branch
office of the bank for collecting primary information.

Also due to space restrictions it was not possible to cover entire available secondary data.

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METHOD OF COLLECTING DATA:

Primary data was been collected by visiting the bank and having an Interview with Mr. T
P Rajmohan, Senior Manager (Loans), PNB House, Fort, Mumbai 01. Even other professionals
in bank guided for the collection of primary data.

The information collected from Internet, Reference Books and Magazines has constituted
secondary data of the project.

EXPECTED CONTRIBUTION:

This project will be helpful to the professionals from the banking industry, the policy
makers, the students of banking studies and people conducting research. Also banks can make
use of the available study for analyzing debt recovery policies.

CHAPTER SCHEME:
1) Introduction
2) Debt Recovery process and Process for Tribunals
3) Debt Recovery Agents and Agencies
4) Punjab National Bank
5) Conclusion and Suggestions

Signature of student Signature of Guide

Name of Student Name of Guide

Table of Contents

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 Sr. No. Title Pg. No.

1 Introduction To Debt Recovery 01

1.1 Introduction 02
1.2 Debt 03

1.3 Classification of Debt 04

1.4 Recovery 07

1.5 Defaults Of Loan 08

2 Debt Recovery Process And Process For Tribunals 12

2.1 Debt Recovery process 13

2.2 Important Points To Be Remembered 16

2.3 Elements Of Debt Recovery 17

2.4 Strategies For Debt Recovery 18

2.5 Debt Recovery Tribunals 20

2.6 Procedure Of Tribunals 22

3 Debt Recovery Agents And Agencies 28

3.1 Debt Recover Agents 29

3.2 Engagement Of Recovery Agents 31

3.3 Debt Recovery Agencies 33

3.4 Soft Skills For Debt Recovery 34

3.5 Rights Of Recovery Agents Of Banks 38

3.6 Duties Of Recovery Agents 40

3.7 Training of Recovery Agents 42

3.8 Functions Of Debt Recovery Agents 43

4 Punjab National Bank 46

4.1 Introduction 47

4.2 History 49

4.3 Loan Recovery Policy 50

4.4 General Guidelines 51

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 CHAPTER 1:

INTRODUCTION TO DEBT REOVERY

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1.1 Introduction:

Banks in past were never so serious in their efforts to ensure timely recovery and
consequent reduction of Non Performing Assets (NPA’s) as they are today. This because of the
modern, complex, competitive market conditions that are making banks to undertake this step. It
is important to remember that recovery management, be of fresh loans or old loans, is central to
NPA management. This management process needs to start at the loan initiating stage itself.
Effective management of recovery and NPA comprise two pronged strategy. First relates to
arresting of the defaults and creation of NPA thereof and the second is to handling of loan
delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of
urgency in the minds of staff of bank and gave them a message that either they perform or
perish. The prudential norm has forced the bank to look into the asset quality.

A debt from a loan, credit line or accounts receivable that is recovered either in whole or
in part after it has been written off or classified as a bad debt. Because it generally generates a
loss when it is written off, a bad debt recovery usually produces income.

In accounting, the bad debt recovery would credit the "allowance for bad debts" or "bad
debt reserve" categories, and reduce the "accounts receivable" category in the books.

Not all bad debt recoveries are "like-kind" recoveries. For example, a collateralized loan
that has been written off may be partially recovered through sale of the collateral. Or, a bank
may receive equity in exchange for writing off a loan, which could later result in recovery of the
loan and, perhaps, some additional profit.

1.2 Debt:
The word Debt comes from the Latin Debere which means ‘to owe’.

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 Debt is that which is owed, usually referencing assets owed, but the term can also cover
moral obligations and other interactions not requiring money. In the case of assets, debt is a
means of using future purchasing power in the present before a summation has been earned.

A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern
society, debt is usually granted with expected repayment; in many cases, plus interest.

Debt can be represented by a loan note, bond, mortgage or other form stating repayment
terms and, if applicable, interest requirements. These different forms all imply intent to pay back
an amount owed by a specific date, which is set forth in the repayment terms.

Definitions:

1) Business Dictionary defines a Debt as, “A duty or obligation to pay money, deliver goods, or
render service under an express or implied agreement. One who owes, is a debtor or debitor; one
to whom it is owed, is a debtee, creditor, or lender. Use of debt in a firm's financial structure
creates financial leverage that can multiply yield on investment provided returns generated by
debt exceed its cost. Because the interest paid on debt can be written off as an expense, debt is
normally the cheapest type of long-term financing.”

2) According to Recovery Of Debts Due To Banks And Financial Institutions Act, 1993 a
debt means, “Any liability (inclusive of interest) which is alleged as due from any person by a
bank or a financial institution or by a consortium of banks or financial institutions during the
course of any business activity undertaken by the bank or the financial institution or the
consortium under any law for the time being in force, in cash or otherwise, whether secured or
unsecured, or whether payable under a decree or order of any civil court or otherwise and
subsisting on, and legally recoverable on, the date of the application.”

1.3 Classification of Debts:

A) On the basis of Security:

On the basis of security debts can be classified as secured debts and unsecured debts:

1) Secured Debts:

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 A loan is in which the borrower pledges some asset (e.g. a car or property) as collateral
for the loan is called as secured debt owed to the creditor who gives the loan. The debt is
thus secured against the collateral. In the event that the borrower defaults, the creditor
takes possession of the asset used as collateral and may sell it to satisfy the debt by
regaining the amount originally lent to the borrower, for example, foreclosure of a home.
From the creditor's perspective this is a category of debt in which a lender has been
granted a portion of the bundle of rights to specified property.

2) Unsecured Debts:

An Unsecured Debt is a debt that is not backed by collateral. It is also known as a

signature loan or personal loan. Unsecured debt is typically a loan or credit card debt that
individuals carry and when they default, there is no course of action other than seeking a
judgment against the individual or reporting it to the credit bureaus. There is nothing the
lender can take from the individual in order to regain his or her money. Most types of
unsecured debt is offered in smaller amounts than secured debt, because there is no
guarantee the lender will receive the money back.

B) On the basis of amount held:

On the basis of amount held by whom debts are classified as

1) Public Debts:
Public debt is money (or credit) owed by any level of government; either central
government, state government, or municipal government . As the government draws its
income from much of the population, government debt is an indirect debt of the taxpayers.
Governments usually borrow by issuing securities, government bonds and bills. It is also
known as government debt or national debt.

2) Private Debts:
Private debt is Money owed by individuals and businesses within a given country.

C) On the basis of value:

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On the basis of value debts are classified as

1) Good Debts:
If the debt is financing something that’s going up in value, it’s usually Good debt.
Examples of good debt would be the mortgage on home and a loan for a college
education. A mortgage finances a house, an asset that, over the long term, goes up in
value, and a student loan finances an education, which is likely to result in a higher
paying job and better employability down the road.

2) Bad Debt:
If the debt is financing something that’s losing value, it’s usually Bad debt.
According to Wikipedia, In financial accounting and finance, bad debt is the portion
of receivables that can no longer be collected, typically from accounts receivable or
loans. Bad debt in accounting is considered an expense. A bad debt is money owed to
you that you can't collect.
An example of bad debt would be a car loan. Most new cars lose more than half of
their value within the first five years after being bought. A second example of “bad
debt” would be money borrow to buy something that’s losing value that you could
actually afford to buy without a loan, like a dinner out, for example.

Bad debts are further categorized as Business Bad Debts and Non business Bad Debts.

i. Business Bad debts:

a) A business bad debt, like its name, is a bad debt that arises from the taxpayer’s
trade or business e.g. A computer seller sells computer on credit, and the buyer
defaults on the loan

b) Business bad debts are deductible by the taxpayer at any time when they
become:
- Completely worthless (i.e. cannot be recovered)
- Partially worthless.
c) Generally, a business bad debt deduction is a business expense deduction and
may be used to offset other ordinary business income without any limitations.

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 ii. Non business Bad Debts:
a) A non business bad debt is a debt that is personal in nature, not related to a
trade or business e.g. You loan your friend some money and he cannot pay you
back.

b) Non business bad debts are deductible only when they become completely
worthless. They are treated as short term capital loss to the taxpayer.

1.4 RECOVERY:
Recovery is the process of regaining and saving something lost or in danger of becoming
costs.

Recovery is a key to the stability of the banking sector there should be no hesitation in
stating that Indian banks have done a remarkable job in containment of Non-Performing Assets
(NPA) considering the over all difficult environment.

Recovery management is also linked to the bank’s interest margin’s we must recognize
that cost and recovery management supported by enabling legal framework hold the key to future
health and competitiveness of the Indian banks. No doubt, improving recovery management in
India is an area requiring expeditions and effective actions in legal institutional and judicial
processes.

Banks and financial institutions at present experience considerable difficulties in

recovering loans and enforcement of securities charged with them.

The existing procedure for recovery of debts due to banks and financial institutions has
blocked a significant portion of their funds in unproductive assets, the value of which
deteriorates with the passage of time.

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1.5 DEFAULTS OF LOANS:

One major problem which the banks 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 banks are interviewed for finding out the causes of
defaults. These reasons may be useful for the Banks for the better recovery of loans in future.

Causes of Default of Loans:

1) Improper selection of an entrepreneur:

Selection of the right Entrepreneur is one of the major factors in the profitability
of Banks. Two major criteria 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 bank, 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.
2) Deficient analysis of project Viability:
a. 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

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 in an increase in the cost of the project and also in delay of production. This
inevitably causes default in repayment of loans.
b. There are many examples where the banks 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.
3) 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 banks,
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 Banks.
4) 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 probability, covering up his design to evade payment of the future dues.
And, the real problem surfaces when repayment of installment/payment of interest

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 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.
5) Fluctuations in statutory regulations and norms:-
Certain unforeseen, unpredictable and unexpected fluctuations in the statutory
regulations such as change in the Excise rates, Commercial Tax, Electricity Tariff
and other revenue tools of the government, tend to throw the entire planning of
the industrialist out of gear. It has been observed that these fluctuations are of
such a magnitude and are so unpredictable as to be beyond the comprehension of
the most skeptic and apprehensive of entrepreneur. In order to cope with these
unforeseen variations, which force the entrepreneur to put additional burden on
his financial resources, the natural and convenient remedy that comes to his mind
is to delay the repayment of the loan.

6) Lack of Follow up Measures:-

"A stitch in time saves nine"
a. Follow-up measures taken regularly and systematically keep the borrowing unit
under constant vigil of the banks. 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 banks but also often tread on wrong tracks, much to the
detriment of their own financial health and that of the banks.
b. 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.

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7) 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 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.
8) 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.

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 CHAPTER 2:
DEBT RECOVERY PROCESS
AND
PROCESS FOR TRIBUNALS

2.1 DEBT RECOVERY PROCESSES:

Debt recovery processes can be typically of following kinds, each involving different procedure:

1) 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

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guidelines, following procedure may be outlined for such recovery. However the recovery
agents should follow the bank-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:

i. The recovery agent has been authorized by the bank to collect the past due debt from the
particular customer.
ii. The customer has been notified by the bank of the details of the recovery agent for
collection of the past-due debt.
iii. Making customer calls: This is the first step in recovery procedure and following rules
should be followed generally:
A. Calls are made from the same number as advised by the bank to the customer.
B. The agents disclose his identity and authority at the first instance.
C. The agent contacts the debtor between 0700 hours and 1900 hours, unless the
special circumstance of his/her business or occupation requires the bank to
contact of a different time. Under no circumstances, can the customer be called
beyond 2100 hours.
D. All calls where the customer becomes abusive or threatening should be
appropriately documented.
E. 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.
F. 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.
G. 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.
i. Visit to customer (debtor): This would be the second step in collection process.
Following procedure should generally be followed.

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A. A customer should be visited for debt collection only after these conditions are
satisfied;
a. The debtor has not paid the due amount within the days of grace and the dues
are still outstanding against him/her.
b. The debtor has been notified of the amount due and also of the name of the
collection agent.
c. The collection agent has taken an appointment from the debtor for the visit.
A. 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.
B. At the first stance, the agent should utter salutation words ( like good
morning/evening…sir/madam, as per custom of the bank). The agent should
thereafter show his ID card and authority given by the principal for debt
collection from the debtor./ Only after these initial formalities, the conversation
regarding debt collection should start.
C. 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:
a. When the customer has expressly consented to that timing.
b. 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,
c. 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.
A. The agent should respect privacy of the debtor. Privacy policy as discussed above
for calls would apply during visits also.
B. 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.
C. 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.

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 1) Difficult recovery process:
It is the recovery process where the debtors are not willing to pay and who intentionally
resist or avoid recovery efforts. The recovery agent has to follow special process of
recovery against the recalcitrant defaulters, in consultation with the bank.
2) Assets possession process:

If the recalcitrant debtors do not eventually pay the dues, the movable assets charged to
the bank by way of hypothecation or pledge, can be possessed by the bank or the
recovery agent and thereafter auctioned or otherwise sold to recover the dues. The
detailed procedure for such recovery is discussed later, after explaining the meaning of
pledge, hypothecation etc.

3) Legal recovery process:

The intervention of the court is required to possess mortgaged immovable property by the
bank or its recovery agent. Also if the charged assets do not exist, or the debt is
unsecured, the debtor will have to be sued for recovery of the dues by the bank/recovery
agent.

2.2 IMPORTANT POINTS FOR DEBT RECOVERY:

On the basis of the foregoing procedure for normal recovery process, we may list below
certain Don’ts for the dent recovery, which are as follows:

1) Don’t violate or breach the recovery policy, procedure etc. prescribed by the principal.
2) Don’t exceed the authority given in the recovery arrangement.
3) Don’t make a call to the debtor before 0700 hours or after 2100 hours.
4) Don’t make anonymous calls or bunched calls to the debtor, which may be perceived as
harassment.

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 5) Don’t conceal or misrepresent your identity during calls and visit or other interaction
with the debtor.
6) Don’t show uncivil/indecent/dirty behavior or use such language during calls and visits to
the debtor.
7) Don’t harass/humiliate/intimidate/threaten the debtor-verbally or physically.
8) Don’t intrude into the privacy of the debtor’s family members, friends/colleagues.
9) Don’t disclose the customer’s debts/dues/account information to unauthorized person.
10) Don’t forget that the debtor is a human being and deserves to be treated with fairness and
courtesy, despite the fact that he/she is a debtor for the time being.

2.3 Elements Of Debt Recovery:

The agency agreement regarding debt recovery contains the main terms and conditions agreed by
the principal (say a bank) and the agent. The main elements of the debt recovery arrangement
and would generally include:

1) Specific tasks to be accomplished e.g. the amount to be recovered from the specified loan
accounts in default and the broad time frame.
2) Debt Recovery Policy and Procedure of the bank.
3) Code of conduct in recovery process: This may include dress code, verbal and written
communication rules top be followed by the individuals employed by the agency for the
purpose of collection.

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 4) Duties of the agent.
5) Rights of the agent, including the commissions/fees payable by the principal to the
agent/agency for the recovery of debt/other services.
The Debt Recovery Policy and code of conduct in the debt recovery will be regulations
compliant, i.e. in accordance with the directives and guidelines of the Reserve Bank of India
issued from time to time. If, however these are not incorporated therein, it is advisable for agents
to seek clarification from the principal, as compliance with the regulations is mandatory for the
banks and also their recovery agents.

The Debt Recovery Agreement between the credit institution and the debt recovery
agent/agency serves as the contractual arrangement that is legally binding on both. Such an
arrangement, being bank specific may vary from bank to bank in details. The duties of the
agent/agency the authority delegated and code of conduct prescribed by the bank in the process
of recovery function would to be carefully noted for strict compliance by the agent.

2.4 Strategies 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 bank-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

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 crops are sold. This will call for knowledge of bank 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:
a) Normal debtors, i.e., who ‘can pay’ and ‘will pay’ if reminded or/and persuaded
to pay.
b) Difficult debtors, i.e., those who ‘can pay’, but ‘will not pay’.
c) Doubtful debtors, i.e., whose who can pay the reduced amount as negotiated with
them.
i) 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:
a) 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.
b) Go through the ‘know Your Customer’ papers furnished by the bank and
know the customer’s identify and personal profile.
c) Go through the copy of the loan agreement of the debtor furnished by the
bank and note down the financial position, cash flow pattern, and assets charged to
the bank.
i) Record in notebook recovery efforts in chronological order for each debtors. This
would help you:
a) as evidence in court in cases where a suit has been filed later,
b) in sending periodic reports to the principal.

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2.5 Debts Recovery Tribunal:
Keeping in line with the international trends on helping financial institutions recover their bad
Debt quickly and efficiently, the Government of India has constituted 33 Debt Recovery
Tribunal and 5 Debt Recovery Appellate Tribunal across the country.

The Debt Recovery Tribunals are located across the country. Some cities have more than one
Debt Recovery Tribunal located therein. New Delhi and Mumbai have three Debt Recovery
Tribunals. Chennai and Kolkata have two Debt Recovery Tribunals each. One Debt Recovery
Tribunal each has been constituted at Ahmdabad, Allahabad, Arungabad, Bangalore,
Chandigrah, Coimbatore, Cuttack, Ernakulam, Guwahati, Hydrabad, Jabalpur, Jaipur, Lucknow,
Nagpur, Patna, Pune, Ranchi and Vishakapatnam. Depending upon the number of cases a Debt
Recovery Tribunal is constituted.

There are a number of States that do not have a Debt Recovery Tribunal. The Banks &
Financial Institutions and other parties in these States have to go to Debt Recovery Tribunal
located in other states having jurisdiction over there area. Thus the territorial jurisdiction of some
Debt Recovery Tribunal is very vast. For example, the Debt Recovery Tribunal located in

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Guwahati has jurisdiction over all the seven North Eastern States. Similarly, the territorial
jurisdiction of the Debt Recovery Tribunal located at Chandhigarh too has a very wide
jurisdiction over the States of Punjab, Harayana, Chandhigarh.

The setting up of a Debt Recovery Tribunal is dependant upon the volume of cases.
Higher the number of cases within a territorial area, more Debt Recovery Tribunal would be set
up.

Each Debt Recovery Tribunal is presided over by a Presiding Officer. The Presiding
Officer is generally a judge of the rank of Dist. & Sessions Judge. A Presiding Officer of a Debt
Recovery Tribunal is assisted by a number of officers of other ranks, but none of them need
necessarily have a judicial back ground. Therefore, the Presiding Officer of a Debt Recovery
Tribunal is the sole judicial authority to hear and pass any judicial order.

Each Debt Recovery Tribunal has two Recovery Officers. The work amongst the
Recovery Officers is allocated by the Presiding Officer. Though a Recovery Officer need not be
a judicial Officer, but the orders passed by a Recovery Officer are judicial in nature, and are
appealable before the Presiding Officer of the Tribunal.

The Debt Recovery Tribunals are governed by provisions of the Recovery of Debt Due to
Banks and Financial Institutions Act, 1993, also popularly called as the RDB Act. Rules have
been framed and notified under the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993.

After the enactment of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interests Act (SRFAESI Act for short) borrowers could become first
applicants before the Debt Recovery Tribunal. Earlier only lenders could be applicants.

The Debt Recovery Tribunals are fully empowered to pass comprehensive orders like in
Civil Courts. The Tribunal can hear cross suits, counter claims and allow set offs. However, they
cannot hear claims of damages or deficiency of services or breach of contract or criminal
negligence on the part of the lenders.

The Debt Recovery Tribunal can appoint Receivers, Commissioners, pass ex-parte ordes,
ad-interim orders, interim orders apart from powers to Review its own decision and hear appeals
against orders passed by the Recovery Officers of the Tribunals.

23
 The recording of evidence by Debt Recovery Tribunal is some what unique. All
evidences are taken by way of an affidavit. Cross examination is allowed only on request by the
defense and that too if the Tribunal feels that such a cross examination is in the interest of
justice. There are a number of other unique features in the proceedings before the Debt Recovery
Tribunal all aimed at expediting the proceeding.

2.6 PROCEDURE OF TRIBUNALS:

1) Application to the Tribunal:

(1)Where a bank has to recover any debt from any person, it may make an application to the
Tribunal within the local limits of jurisdiction
(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.

(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 bank, 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 bank also has claim to recover
its debt, then, the later bank or financial institution may join the applicant bank 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

24
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.

(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 defense.

(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 defense or before the time
limited for delivering his defense 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 actua
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.

(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.

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2) Appeal to the Appellate Tribunal.

(1) 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.

Where an appeal is preferred by any person from whom the amount of debt is due to a
bank or a consortium of banks, 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.

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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;

(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.

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 CHAPTER 3:

DEBT ECOVERY AGENTS AND AGENCIES

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3.1 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 bank for purchasing a car, Ram becomes the debtor (or borrower), the bank 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 bank 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.

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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 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 bank 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 bank (creditor) engages XY will be called as Debt Recovery Agent of the
bank. The bank may prefer to utilize its resources in terms of staff, time etc for its core banking
functions like deposit taking, lending, remittance, foreign exchange business and out-source the
debt recovery function by engaging Debt Recovery Agents on certain terms and conditions,
including fee or commission for their services.

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3.2 Engagement of Recovery Agents:

Banks are advised to take into account the following specific considerations while
engaging recovery agents:

Agent’ in these guidelines would include agencies engaged by the bank and the agents/
employees of the concerned agencies. Banks 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, banks 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. Banks may decide the periodicity at which reverification of antecedents should
be resorted to.

To ensure due notice and appropriate authorization, banks 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 bank along with the identity card issued to him by the bank or the
agency firm / company. Further, where the recovery agency is changed by the bank during the
recovery process, in addition to the bank 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. Banks 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. Banks may take reasonable precaution such as intimating the customer that the
conversation is being recorded, etc.

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 The up to date details of the recovery agency firms / companies engaged by banks may
also be posted on the bank’s website. Where a grievance/ complaint has been lodged, banks
should not forward cases to recovery agencies till they have finally disposed of any grievance /
complaint lodged by the concerned borrower. However, where the bank 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. Each bank should have a mechanism whereby the borrowers'
grievances with regard to the recovery process can be addressed. The details of the mechanism
should also be furnished to the borrower while advising the details of the recovery.

Incentives to Recovery Agents:

It is understood that some banks set very stiff recovery targets or offer high incentives to
recovery agents. These have, in turn, induced the recovery agents to use questionable methods
for recovery of dues. Banks are, therefore, advised to ensure that the contracts with the recovery
agents do not induce adoption of uncivilized, unlawful and questionable behavior or recovery
process.

3.3 Debt Recovery Agencies (DRA’s):

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 Debt recovery agents are employed Debt Recovery Agencies who work for banks subject
to certain terms and condition. Debt recovery agencies are third-party businesses that collect
dues past-dues and other receivable of banks in exchange for a fee. DRAs charge the
Banks/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, banks begin their work banks 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’s. 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. Direct contact is most useful in bringing pressure or turning up the heat on
debtors who have been identified as those having no intention to pay their dues/bill.

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 banks to collect severely overdue accounts.

3.4 Soft Skills For Debt Recovery:

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 The previous unit focused on the regulatory requirements in debt collection process,
including the bank-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 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 Skills:

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 :

i. Verbal communication by spoken words,

ii. 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).

i. The agent’s language (verbal as well as body language) should be civil and courteous, as
per the bank-specific requirement.
ii. The objective of the communication should be clear.
iii. The language used should be clear simple and courteous.
iv. The language used should be easily understood by the receiver.

36
 v. The agent should be watchful and sensitive to the receiver’s responses (including his/her
body language as mentioned above).
vi. Make sure that the non-verbal communication (or body language) is not adverse to
debtor, though unintentional.

2) Listening Skills:

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 :

i. Hear attentively to what the debtor is saying. One may hear, but not listen, if he/she is distracted
or inattentive.
ii. Lack of listening conveys lack of regard/ respect for the communicator ; hence it should be
avoided.
iii. Do not show impatience or haste while listening to the debtor. You may lose some important
information the debtor washes to say.
iv. Do not show anger or disapproval, or other such facial/ body expression, while listening to
the debtor’s point of view.
v. 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

37
skills (explained above), 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 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 :

i. Communicate and listen properly and effectively, as described in the preceding

paragraph.
ii. Show empathy and respect to other party, not with standing the fact that he/she debtor to
the principal.
iii. 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.
iv. 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
prospect.

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

38
of the debtor. Some of the elements of the persuasion in debt recovery may be suggested as
follows :

Explain that the bank (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 bank to pay
the deposits when demanded by the depositors.
i. 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.
ii. 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.
iii. Explain that non-payment may adversely impact the debtor’s credit history, which may
make his/her future borrowing with any bank costlier and difficult.

Also that non-repayment of the loan dues would amount to breach of the loan agreement and
would result in the bank charging higher interest rate. Recovery agent’s efforts should appear as
persuasive and not threatening, to the debtor.

3.5 RIGHTS OF RECOVERY AGENTS OF BANKS:

1) Right to remuneration:

Contract of Agency under the contract Act does not provide a mandatory duty on the principal to
remunerate the agent for the work done on behalf of the principal. Thus there is no automatic

39
right of an agent to get remuneration from the principal, unless the agency agreement expressly
or impliedly provides for remuneration payable by the principal to the agent.

Although the contract Act does not specifically provide for an agent’s right to remuneration, a
bank and a recovery agent can agree to a scale of fees for various kinds of debt recoveries.

Where an agency contract does not provide for any fee or other remuneration, the principal may
be liable to pay to the agent only the fee as per the customary practices of the industry.

2) Right to retain:

The right to retain means that an agent can retain the money belonging to the principal, for
meeting the following kinds of expense, and thereafter remit the balance amount to the principal.

I. The expenses incurred during the course of agency,

II. Any sum due to the agent as remuneration.
This right is given under section 217 of the contract Act. An agent can retain money only for the
expenses incurred during the transaction in question, and not for the previous dues for services
rendered.

However, this right is practically of little consequence where debt recovery agency agreements
provide for the agent’s remuneration and also the manner and timing of the payment obligation
of the principal. As the money collected represents payment by a customer to the bank towards
dues it would be ideal if the money is remitted in full and not adjusted towards the dues of the
bank to the agent.

1) Right to compensation:

The principal is liable to compensate the agent in respect of any injury caused to him either
because of the principal’s neglect or want of skill (section 225 0f the contract Act) This question
generally arises in construction contracts where the contractor’s laborer suffers injury due the
negligence lack of skill of the principal. However, in debt recovery contingencies of this nature

40
where the principal is negligent or lacks skill, will generally not arise and so also will be the
question of compensation to the agent.

2) Right to indemnity:

Section 222 of the contract Act provides that the employer of an agent is bound to indemnify him
against the consequences of all lawful acts done by such agent in exercise of the authority
conferred upon him. Thus there are two essential conditions to be satisfied by an agent to claim
indemnity from the principal:

I. The agent must have acted lawfully when the injury was sustained.
II. The act should have been done in the course of the agency business.
However, an agent is not entitled to any indemnity from his principal for any criminal or
wrongful act. This is provided in section 224 of the act “where one person employs another to
don an act which is criminal, the employer is not liable to the agent, either upon express or an
implied promise, to indemnify him against the consequences of that act”.

3.6 Duties of recovery agents:

1) Duty to follow instruction:

The foremost duty of a recovery agent is to follow the instructions of the principal who has
engaged him for stipulated tasks and pay remuneration for doing so. In this regard, following
points should be noted:

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 I. The instructions of the principal have to be clear, unambiguous and lawful.
II. It is the duty of the agent to follow only the lawful instructions. Where the acts which
the agent has undertaken to perform are unlawful or void in law, the principal cannot
compel the agent to perform and the principal also cannot claim damages against the
agent for failure to perform such acts.
III. If an agent acts contrary to the instructions/directions of the principal, he may be held
liable to the principal for the loss suffered by the principal due to such default.
In this regard the bank’s policy towards customers and the code of conduct of the agents as
prescribed by the bank/IBA should be kept in mind and adhered to by the DRA.

1) Duty to follow trade customs:

A recovery agent has to discharge his duties according to the terms of the agency agreement with
the principal. Where the instructions are not given in detail, the agent has to follow the
commercial customs and industry practice. For instance, for debt collection for banks, RBI and
IBA have laid down some guidelines which have to be followed in recovery process. As
explained in Unit 1, if an agency agreement does not provide any behavior code in collection
process, the RBI/IBA code or guidelines would require to be followed by the recovery agent
while collecting dues from the debtors.

2) Duty to exercise care and skill:

A recovery agent has a duty to take all care and skill in discharging his duties as if he is
managing his own affairs. Section 212 of the contract Act says that an agent is bound to conduct
the business of agency with as much skill as is generally possessed by persons engaged in similar
business, unless the principal has notice of his want of skill. An agent is bound to act with
reasonable diligence and also to use his skill. He is also liable to compensate the principal in

42
respect of the direct consequences of his own act. The tests of reasonableness and acting for
one’s own business are applied in determining the degree of skill and core.

3) Duty to communicate:

It is the duty of an agent” to use all reasonable diligence in communicating with his principal in
case of a difficulty, and obtaining his instruction”. Whenever there is some doubt or difficulty,
the agent has to act according to the principal’s wishes, rather than to do whatever he feels like.
Thus a recovery agent should seek instruction from his principal on all those points where the
agency arrangement is silent. As indicated in unit 1, where the agency agreement is silent on
code of conduct in recovery process, it is advisable for the agent to seek confirmation from the
principal that the code of conduct for recovery agents prescribed by IBA would be applicable.

4) Duty to render accounts:

An agent is bound to render proper accounts to his principal on demand (vide section 213 of the
contract Act). He should keep his principal’s accounts up-to-date, so that they can be furnished
to the principal on his demand further, an agent is required to keep his principal’s money
separate from his own.

3.7 Training for Recovery Agents:

In terms of Circular issued by Reserve Bank of India (RBI) dated November 3, 2006 on
guidelines on managing risks and code of conduct in outsourcing of financial services by banks,
banks 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.

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Reserve Bank has requested the Indian Banks’ Association to formulate, in consultation with
Indian Institute of Banking and Finance (IIBF), a certificate course for Direct Recovery Agents
with minimum 100 hours of training. Once the above course is introduced by IIBF, banks 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 banks
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/ bank’s own training colleges may provide the
training to the recovery agents by having a tie-up arrangement with Indian Institute of Banking
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

3.8 Functions Of Debt Recovery Agents:

The core function of a debt recovery agent is to collect dues/receivables from specified
debtors of the bank 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.

44
 Apart from the easily collectible receivables, most banks 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.

1) Collecting Dues Receivables:

As mentioned above, collecting dues is the core function of a debt recovery agent.
Receivables refer to the sums of money which have become 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:

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

B. Repayment obligation of the debtor to repay the loan/advance in part or whole, to the
creditor, as per the loan/advance agreement.
C. 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 bank 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 bank 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:

I. The loan agreement

II. 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.

1) Remitting Collected Funds:

45
 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 bank
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.

2) 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 separate for each principal. It would constitute the following minimum
requirements of book-keeping for a recovery agent.

I. 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 debtors 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.

II. 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 bank. Normally agent cannot adjust
its dues on account of fee against the recoveries made on behalf of the bank.
III.Copies of loan/advances:
Agreements between the debtors and the bank 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
bank and also as regards the collections made remitted by him to the principal.

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47
 CHAPTER 4:

PUNJAB NATIONAL BANK

4.1 Introduction of bank:

Punjab National Bank (PNB) of India, the first Indian bank started only with Indian capital, was
nationalized in July 1969 and currently the bank has become a front-line banking institution in
India with 4525 Offices including 432 Extension Counters. The corporate office of the bank is at
New Delhi. Punjab National Bank of India has set up representative offices at Almaty
(Kazakhistan), Shanghai (China) and in London and a full fledged Branch in Kabul
(Afghanistan).

Punjab National Bank Provide a wide variety of banking services which include corporate and
personal banking, industrial finance, agricultural finance, financing of trade and international
banking.

Punjab National Bank is serving over 3.5 crore customers through 4540 Offices including 421
extension counters - largest amongst Nationalized Banks.

Punjab National Bank with 112 year tradition of sound and prudent banking is one among 300

48
global companies and seven Indian companies which are expected to emerge as challengers to
World’s leading blue chip companies. While among top 1000 world banks, “The Banker”, the
leading magazine in London, has placed PNB at the 248th position, the bank features at 1308th
position among Forbe’s Global 2000 list of global giants and fast growing companies.

At the same time, the bank has been conscious of its social responsibilities by financing
agriculture and allied activities and Small Scale Industries (SSI). Considering the importance of
small scale industries bank has established 31 specialized branches to finance exclusively such
industries.

Punjab National Bank also offers Internet Banking services in the country for Corporate as well
as individuals. Internet Banking services are available through all Branches of the Bank
networked under CBS. Providing 24 hours, 365 days banking right from the PC of the user,
Internet Banking offers world class banking facilities like anytime, anywhere access to account,
complete details of transactions, and statement of account, online information of deposits, loans
overdraft account etc. PNB has recently introduced Online Payment Facility for railway
reservation through IRCTC Payment Gateway Project and Online Utility Bill Payment Services
which allows Internet Banking account holders to pay their telephone, mobile, electricity,
insurance and other bills anytime from anywhere from their desktop.

Keeping in tune with changing times and to provide its customers more efficient and speedy
service, the Bank has taken major initiative in the field of computerization. All the Branches of
the Bank have been computerized. The Bank has also launched aggressively the concept of "Any
Time, Any Where Banking" through the introduction of Centralized Banking Solution (CBS)
and over 5000 branches (as on 29th October 2009) have already been brought under its ambit.

49
4.2 History of Punjab National Bank:

a) 1895: PNB commenced its operations in Lahore. PNB has the distinction of being the
first Indian bank to have been started solely with Indian capital that has survived to the
present. (The first entirely Indian bank, the Oudh Commercial Bank, was established in
1881 in Faizabad, but failed in 1958.)

b) 1904: PNB established branches in Karachi and Peshawar.

c) 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.

d) 1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore,
but continued to operate in Pakistan.

e) 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942).

f) 1961: PNB acquired Universal Bank of India.

g) 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).

h) September 1965: After the Indo-Pak war the government of Pakistan seized all the offices
in Pakistan of Indian banks, including PNB's headoffice, which may have moved to
Karachi. PNB also had one or more branches in East Pakistan (Bangladesh).

50
 i) 1969: The Government of India (GOI) nationalized PNB and 13 other major commercial
banks, on July 19, 1969.

j) 1986: PNB acquired Hindustan Commercial Bank (est. 1943).

k) 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.

l) 1998: PNB set up a representative office in Almaty, Kazakhstan.

m) 2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala.PNB
also opened a representative office in London.

n) 2004: PNB established a branch in Kabul, Afghanistan. PNB also opened a representative
office in Shanghai.

o) 2005: PNB opened a representative office in Dubai.

p) 2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with
two offices, one in London, and one in South Hall.

q) 2008: PNB opened a branch in Hong Kong.

r) 2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong
Kong, this in Kowloon.

4.3 Loan Recovery Policy:

The debt collection policy (recovery policy) of the bank is built around dignity and
respect to customers. The Bank 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 bank
believes in following fair practices with regard to recovery of dues from borrowers and taking
possession of security (properties / assets charged to the bank 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 Bank will be fixed taking into
account the repaying capacity and cash flow pattern of the borrower. The bank 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 bank would expect the customers to

51
adhere to the repayment schedule agreed to and approach the Bank for assistance and guidance
in case of genuine difficulty in meeting repayment obligations.

The Bank’s Security Repossession Policy (taking possession of the mortgaged properties
under SARESI Act or acquiring the property as non banking 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 bank for follow up and recovery of dues
and repossession of security will be in consonance with the law.

4.4 Policy On Collection of Dues and Repossession of security:

1) General Guidelines:

All the members of the staff or any person authorized to represent Bank 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 Bank for follow up and
recovery of dues would be made known to the borrowers at the first instance. The bank staff or
any person authorized to represent the bank in collection of dues or / and security repossession
will identify himself / herself and display the authority letter issued by the bank upon request.
3. The bank would respect privacy of its borrowers.

52
 4. The bank is committed to ensure that all written and verbal communication with its
borrowers will be in simple business language and the bank will adopt civil manners for
interaction with borrowers.
5. Normally the bank’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.
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 bank 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.

1) Giving notice to borrowers:

While written communication, telephonic reminders or visits by the bank’s representatives to the
borrowers’ place or residence will be used as loan follow up measures, the bank will not initiate
any legal or other recovery measures including repossession of the security without giving due
notice in writing. The Bank will follow all such procedures as required under law for recovery /
repossession of security.

2) 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.

53
 3) Valuation and Sale of Property:

Valuation and sale of property repossessed by the bank will be carried out as per law and in a fair
and transparent manner. The bank 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 bank is not having any other
claim against the borrower.

4) Opportunity for the borrower to take back the security:

The bank resorts 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
bank 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 bank 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 bank may
consider handing over the property after receiving the installments in arrears.

4.5 Guidelines on Asset classification:

All accounts need to be classified into four categories taking into account the degree of
well defined credit weaknesses and extent of dependence on collateral security for
realization of the dues as given under :-

1) Standard Assets :
Standard asset is one which does not disclose any problem and which does not carry
more than normal risk attached to the business. Such an asset is not an NPA. However,
Central Govt. Guaranteed advances, although categorized as NPA for the purpose of
Income Recognition, are to be treated as Standard Assets.
2) Sub-standard Assets :
With effect from 31st March, 2005 a sub-standard asset is one, which has remained NPA
for a period less than or equal to 12 months.
3) Doubtful Assets :

54
 With effect from 31st March, 2005 an asset is classified as doubtful if it remained in the
sub-standard category for 12 months. In certain cases of serious credit/security
impairment, the account may straightway be classified as Doubtful Asset.
4) Loss Assets :
A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI Inspectors but the amount has not been written off, wholly or
partly. If the realizable value of the security as assessed by the bank / approved valuer /
RBI is less than 10% of the outstanding in the borrowal accounts, the existence of
security should be ignored and the asset should be straightaway classified as loss asset.
However, the unsecured advance identified as sub-standard, though not having any
tangible security, will not be considered Loss Asset.

4.6 Modes of Recovery:

1) Assignment/Sale Of Decrees:
Assignment/Sale of Decree can be adopted as a measure of recovery in those cases where
borrowers do not pay decreed amount in terms of decree in maximum one Year’s time.
Transfer/Sale of Financial Assets to Securitisation
Companies/Reconstruction Companies

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act) provides also for sale of financial assets (NPAs) by banks / FIs to Asset
Reconstruction Companies (ARCs). Financial assets would be offered for transfer / sale to only
those Securitization Company/ Reconstruction Company who has / have obtained the Certificate
of Registration from RBI under Section 3 of the SARFAESI Act. Only those NPAs, to which
provisions of the SARFAESI Act are applicable, shall be considered for sale.

2) Engagement Of Recovery Agencies:

55
Various Banks including Private/ Foreign and Nationalized Banks have been outsourcing the job
of recovery in small NPA accounts through Recovery Agents by payment of nominal fee to
resolve small NPAs, where multiple complexities are involved i.e. borrowers in scattered areas,
recalcitrant borrowers, advances having no collateral security/guarantee, hindrances in
repayment due to local leaders etc. Bank’s policy in this regard provides that NPA accounts
(whether non-suit filed, suit filed or decreed) with ledger outstanding up to Rs. 10 lakh are
eligible under the scheme, except accounts where compromises have been approved (including
those reached at in Lok Adalats) and have not been treated as failed. Moreover, written off
accounts can also be entrusted to Recovery Agencies to effect recovery.

I. Recovery Agencies of repute, having good track of effecting recoveries of the Banks, are
required to get themselves empanelled by Zos and are required to provide Bank
Guarantee/ Security deposit of Rs.1 lac in each Zone subject to maximum of Rs.3 lac.

II. Provisions of model code of conduct on collection of dues and possession of securities
are strictly complied with in the light of recent Supreme Court judgment in the matter of
ICICI Bank Ltd. Vs Prakash Kaur & Others cautioning the Banks against use of
coercive methods for recovery of loans and also in the light of other case on the same
issue, wherein State Consumer Forum of New Delhi has given stern warning to Banks
that if any complaint is received against any Bank alleging use of force by recovery
agents, the punishment of minimum one month imprisonment shall be imposed under
section 27 of the Consumer Protection Act 1986.

III. In terms of latest guidelines of Bank, the recovery agents preferably be given only
doubtful and loss assets cases.

IV. The Zonal Offices allocate Region(s) to the Recovery Agency. And the Regional Offices
allocate the branches in the Region to the Recovery Agencies.

56
 V. The Agency or any of its personnel must not have any access to the record (ledger /
register etc.) of the branch.

VI. One account should not be allotted to two Recovery Agencies simultaneously.

VII. The field staff of Recovery Agency shall not himself accept cash. Cash recoveries, if
any, shall be directly deposited by the borrower or his representative in the branch. The
field staff of Recovery Agency shall not receive any cheque/draft in his name or in the
name of the Agency. The cheques / drafts should be drawn in favor of THE BANK A/c
___________ (title of the account for which collection is made) and crossed ‘A/c Payee
only’.

1) One Time Settlement:

Resolution of Non Performing Assets through one-time settlement (OTS) has been recognized as
an effective non-legal remedy by the Bank due to twin advantages of faster recovery of dues and
income generation by recycling of funds otherwise likely to be blocked for a long time. One time
settlement of dues refers to a negotiated settlement under which the bank endeavours to recover
maximum amount within least possible time, with least possible expenses.

2) Recovery camps :

In case of accounts under small segment the platform of Recovery Camps be used by the field
functionaries with proper spade work. For on the spot decision on One Time Settlement
proposals received in such recovery camps, participation of officials from controlling offices is
advisable.

3) Write Off:
When all recovery measures have failed to yield any result, there is no primary/collateral security
and means of borrower/ repaying capacity are negligible/remote Bank may be left with no option

57
but to write off such advances. Recovery efforts should be continued even in the written off
accounts.
Non-borrowal fraud cases may be considered for write off, on fulfillment of following
conditions:-

I. Account is listed under loss assets and 100% provision is made.

II. Insurance claim, wherever applicable, has been finalized / settled.
III. Police / CBI investigations have been completed or final report / charge sheet has been
filed by the investigating agencies.
IV. All avenues of recovery have been exhausted and there is no prospect of recovery / no
enforceable security is available/ legal action is not feasible.
V. In cases where criminal cases are in progress, technical write off leaving a notional
balance of Rs.100/- till finalization of action may be considered.

Theft / dacoit / robbery etc. cases may be considered for write off, on fulfillment of following
conditions:-

i) Final report has been filed by the police authorities.

ii) Insurance claim has been finalized / settled.
iii) Staff side action has been decided against all erring officials.
iv) Account is classified under Loss Assets and 100% provision is held.
v) There is no prospect of recovery.

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4.7 DEBT RESTRUCTURING:

A. SMALL AND MEDIUM ENTERPRISES(SME’s):

Objective:
The objective of the Debt Restructuring for SMEs is to ensure timely and transparent
mechanism for restructuring the debts of potentially viable entities facing problems for
the benefit of all concerned. In particular, the framework will aim at preserving viable
SMEs that are affected by certain internal and external factors and minimize the losses to
the creditors and other stakeholders through an orderly and coordinated restructuring
program.

Eligibility Criteria:
These guidelines would be applicable to the following entities, which are viable or
potentially viable:
a) All non-corporate SMEs irrespective of the level of dues to banks.
b) All corporate SMEs, which are enjoying banking facilities from a single bank,
irrespective of the level of dues to the bank.

59
 c) All corporate SMEs, which have funded and non-funded outstanding up to Rs.10
crore under multiple/ consortium banking arrangement.
d) Corporate indulging in fraud and malfeasance and accounts classified as loss
assets will not be eligible for restructuring. In accounts classified as willful
defaulters, the reasons for such classification need to be reviewed by the banks,
especially in old cases where the manner of classification of a borrower as willful
defaulter was not transparent and satisfy themselves that the borrowers are in a
position to rectify the willful default provided an opportunity under DRM for
SMEs is granted. However, such willful default cases shall be admitted for
restructuring only after approval of the Board of Directors of the bank.

A. CORPORATE DEBT RESTRUCTURING ( CDR):

Based on the experience of countries like the U.K., Thailand, Korea, etc. of putting in place
institutional mechanism for restructuring of corporate debt and need for a similar mechanism in
India, a Corporate Debt Restructuring System was evolved, and detailed guidelines were issued
by RBI in August, 2001 for implementation by banks.

A Special Group was constituted in September 2004 with Smt. S. Gopinath, Deputy Governor,
RBI, as the Chairperson to review and suggest changes / improvements, if any, in the CDR
mechanism. Based on the suggestions of the Special Group, the CDR Guidelines have been
further revised by RBI in November, 2005.

CDR is a non-statutory mechanism which is a voluntary system. One of the main features of the
restructuring under CDR system is the provision of two categories of debt restructuring under the
CDR system. Accounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the
creditors, will be restructured under the first category (Category 1). Accounts which are
classified as ‘doubtful’ in the books of the creditors would be restructured under the second
category (Category 2).

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Objective:

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring the corporate debts of viable entities facing problems,
outside the purview of Debt Recovery Tribunals and other legal proceedings, for the benefit of
all concerned. In particular, the framework will aim at preserving viable corporates that are
affected by certain internal and external factors and minimize the losses to the creditors and other
stakeholders through an orderly and coordinated restructuring program.

Eligibility Criteria:

a) CDR is applicable to only multiple banking accounts / syndication / consortium accounts

of corporate borrowers with outstanding fund-based and non-fund based exposure of
Banks and Institutions of Rs.10 crore and above
b) The corporate indulging in frauds and malfeasance even in a single bank will be
ineligible for restructuring under CDR mechanism.
c) The accounts where recovery suits have been filed by the creditors against the company,
may be eligible for consideration under the CDR system provided, the initiative to
resolve the case under the CDR system is taken by at least 75% of the creditors (by
value) and 60% of creditors (by number).
d) Core group may allow admittance of willful default cases for restructuring after
reviewing the reasons for classification of the borrower as wilful defaulter and satisfying
itself that the borrower is in a position to rectify the wilful default provided he is granted
an opportunity under the CDR mechanism. However, cases involving frauds or diversion
of funds are not covered.

Disclosure:

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Banks discloses the total number of accounts, total amount of loan assets and the amount of
sacrifice in respect of corporate debt restructuring undertaken during the year, in their published
annual Balance Sheets, under "Notes on Accounts".

CHAPTER 5:

CONCLUSION AND SUGGESTIONS

62
5.1Conclusion:

To conclude with, till recent past, corporate borrowers even after defaulting continuously
never had any real fear of bank taking any action to recover their dues despite the fact that their
entire assets were hypothecated to the banks. This is because there was no legal Act framed to
safeguard the real interest of banks.

However with the introduction of Securitization Act, 2002 banks 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 banks 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
banking sector stocks that in turn resulted into an improvement in their share prices.

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5.2Suggestions:

Recovery of Debts is a big concern to all the modern as well as traditional financial institutions.
Lack of strong initiatives, improper and inadequate measures of recovery by banks leads to the
growing percentage of NPA. So far banks have not succeeded in overcoming this major growing
concern of banking industry. Thus based on the study following suggestions can be drawn in
order to strengthening the recovery process and in turn strengthening banking sector as a whole.

1) Strengthening of Legal System

Amend the laws with appropriate provisions to empower the existing recovery officers.
The legal recovery officers should have authority to grant immediate incentives or
impose penalty.
2) On the basis of Know Your Customers (KYC), banks must adopt a policy like Know
Your Borrower (KYB). Social and economic status of borrower along with his future
plans and projects.
3) Granting of loans and advances on checking Future Cash Inflows carefully.
4) Prompt and effective use of Lok Adalats and Debt Recovery Tribunals.
5) Effective execution of present fair recovery policies by recovery officers, agents and
agencies.
6) Speedy action in Recovery Process:

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There is always unnecessary and avoidable delay in recovery process which can be
overcome by taking prompt, efficient and in time action with positive attitude as it is
rightly said that A stitch in time saves nine.

ANNEXURE – I

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BIBLIOGRAPHY:

1) Books:
a. Handbook On Debt Recovery, IIBF
b. Sreekantaradhya B.S., Banking and Finance.
1) Magazines:
a. PNB Staff Journal, Vol.50 NO.3,2009

1) WebPages:
a. http://en.wikipedia.org/wiki/Debt
b. http://www.stock-picks-focus.com/icici-bank-fy09.html
c. http://www.indiadebtrecovery.com/
d. http://www.bankdrt.net/index.php

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