Non-legal measures for Loan Recovery

Non-legal measures for loan recovery include different strategies to ensure recovery of non-
performing loan other than resorting to debt recovery related court. Various such measures
are presented bewlow.

Communication: The most successful approach to loan recovery is keeping the borrower in
touch, arranging meeting of the borrowers at a regular intervals; making frequent telephone
calls, issuing letters and visiting the business center and residence of the borrower. The
personal visit might be done by the branch, regional office and head office personnel based
on the complexity of the situation. The bank may think of both the formal and informal visit
to borrower’s business premises and residence. The communication should be aimed at an
integrative ‘win-win’ interest-based negotiation.

Persuasion: The borrowers might be persuaded to repay the loan providing him/her
counseling on the negative aspects of non-repayment from legal and ethical point of view;
offering some kind of incentives to the borrowers including rescheduling of loan, waiver of
interest, etc. for timely payment of installment. Some sort of relief will be offered only when
the borrower is sincere and comes forward for instant adjustment of the outstanding
liabilities.

Simultaneously bank can put pressure on the borrower through family members, relatives,
guarantors, business associates, trade associations, employer in case of a salaried person, and
local influential persons. Bank can initiate dialogue/negotiation with the borrower, guarantor
for amicable settlement.

If friendly meeting, notice, first reminder letter, second reminder letter, personal visit asking
for payment do not work, a third and final notice asking for full adjustment as well as
informing the borrower that if the loan is not adjusted within the given time, the loan file
shall be transferred to the legal department/lawyer of the bank for filing suit. Besides all
these, the bank will continue to upkeep constant pressure on the borrower by meeting with
and issuing notice to the family members, relatives, guarantors, business associates, trade
associations, employer in case of a salaried person a local influential persons, etc. In the
event borrower is found reluctant, immediate steps should be taken for encashment of
securities held and filing of suit accordingly. Even after filing suit, bank can continue

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dialogue/negotiation with the borrower/guarantor for amicable settlement and such settlement
can be informed to the court as per section 38 and 45 of Money Loan Court.

Motivating Credit Collection Staff: In most of the cases it is found that the bank employees
are ignorant about the effective recovery measures and/ or hesitant in loan recovery. The
bank employees can be motivated to sincerely work for loan recovery by providing
appropriate training, authority, incentives in the form of cash, kind, increments, promotion,
appreciation letter, etc through objective Key Performance Indicators.

Recovery Campaign: The recovery campaign is a formal meeting arranged by collecting

bank branch where the borrowers, local representatives and reputed persons, local
government officials, officer-in-charge of local police station are invited in advance. The
senior bank staffs of head office and regional office can also be there at that time. This sort of
campaign is usually done during the harvesting season in case of agricultural credit, and other
forms of business having seasonality such as brick field, trading business highly affected by
different festivals and the like.

Alternative Dispute Resolution (ADR)

The traditional method of resolving legal disputes through conventional litigation procedure
turns out to be very expensive, too slow, and too cumbersome for many civil lawsuits. This
concern led to the growing use of ways other than litigation to resolve disputes. These other
methods are commonly known collectively as Alternative Dispute Resolution (ADR). ADR is
a procedure for settlement of disputes by means other than litigation; e.g., by
arbitration/mediation. Such procedures, which are usually less costly and more expeditious
than litigation, are increasingly being used.

Considering the importance of outside court settlement the government included the
provision of ADR first in 2003 in the Money Loan Court Act, 2003. Subsequently the same
Act was amended in 2010 with major revisions with regard to ADR procedure. According to
the amendment, ADR had been made a mandatory step for settling the default loan. Section
22, 23, 24, 25, 38, 44(A), 45 of MLC covers the legal procedures related to ADR.

Appointment of Recovery agent

The handling of nonperforming assets sometimes requires skills that distressed banks lack
(Berggren, 1996). Branch employees remain busy in their day-to-day operations and hardly
could manage time to be attached with the absconding non-performing borrowers. Different

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external recovery agencies bear the responsibility of recovery of long-overdue loan. The
study found that a number of sample banks appointed Recovery Agents for recovery of stuck-
up loan cases. A loan case is transferred to a recovery agent only when the loan remains
unadjusted for long period of time instead of repeated persuasion and follow-up by the
branch; the borrower is untraceable/ absconding/unwilling to settle the account; there is
no/inadequate/defective collateral security and disposal of the security seems to be difficult.
But, the recovery agents should be monitored. If the loan cannot be recovered instead of all
out efforts then the banks shall file bankruptcy suit to declare the borrower bankrupt and
adjust the exposure accordingly.

Debt Restructuring
To restructure an NPL, the bank negotiates with the borrowers with the aim of strengthening
the ability of the later to service and eventually to repay the principal. This usually involves
redefining the terms of the original contract (may be increasing the grace period, increasing
the loan period thereby reducing repayment amount per installment, providing additional
loan if justified, inter alia). The process may also require some concessions on part of both
the lender and the borrower. Successful debt restructuring can benefit both the parties.
However, the process should be initiated only if the economic return from the rehabilitation
of the asset exceeds that of its liquidation (Woo, 2000).

Corporate Restructuring of the Borrower’s Business

When a borrower defaults the insolvency system generally provides both the lenders and
borrowers with the option to initiate either liquidation or rehabilitation procedures. Banks
often opt for rehabilitation when the Restructuring of the Operations (including company
reorganization, downsizing, and lender’s representation in the BOD of the borrower and so
on) or Restructuring of Balance Sheet (including debt-equity swaps) of the borrower will
enable the creditors to recover more than they would expect through liquidation.
Rehabilitation may also serve a broader social interest, for example, by granting the borrower
a second chance as well as protecting the jobs of the employees of the borrower (IMF, 1999).
Workout often entails debt-equity swaps or appointing administrator/bank representative in
the board. In case of debt-equity swap banks sometimes become substantial shareholders or
majority shareholders in the borrowing firms. This new role requires banks to become
actively involved in the management of the firms.

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Preparation and Circulation of List of Defaulters
Preparation and circulation of a list of borrowers contributes a lot in recovering NPL,
especially in case of large willful defaulters. It is observed that before the national election
many large defaulters apply for rescheduling their long-overdue loan and even, some make
full payment to have clean CIB report. Moreover, publishing the loan default news of listed
corporate by DSE also have some positive results, as recently observed by BDBL. The
Reserve Bank of India has put in place a system for periodical circulation of willful
defaulters’ list of banks and financial institutions. The RBI also publishes a list of borrowers
(with outstanding aggregate rupees one crore and above) against whom banks and financial
institutions have filed suits as on 31st March every year. [http://www.cdrindia.org/].

Waiver of Interest
In certain circumstances where full recovery of bad loan seems to be impossible, banks may
think of waiving certain amount of interest to recover the remaining outstanding. The
circumstances, inter alia, may include death or disability of borrower, incurrence of huge
loss, inadequate collateral, and inability of borrower as well as guarantor to adjust full loan
amount. While considering waiver of interest bank shall examine each case prudently and
judiciously and if there are genuine grounds, bank may initiate negotiation with the
borrower/guarantor to waive interest to get back its investment. However, bank can waive
accrued interest partly or fully but interest credited to P/L account cannot be waived.

Write Off
When a loan is written-off, the bank assumes loss equivalent to its book value and removes it
from the balance sheet. The bank will normally do so when the prospect of recovery is very
low and when the cost of recovery or maintenance of the asset exceeds its value (Woo, 2000).
Writing off an NPL is not an effective measure of loan recovery because by writing off a loan
a bank can simply remove it from the balance sheet and cannot ensure recovery unless banks
adopt stringent measures for recovery.

Corporate Restructuring including Bail out of Banks

Bank restructuring becomes inevitable in case of unbearable loss. But, undercapitalized and
weak banks (and therefore do not want to recognize the true value of their nonperforming
loan), are generally reluctant to go into restructuring negotiations. To facilitate corporate
restructuring, some policymakers recently emphasize on enhanced approach to bank

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restructuring, including greater capital infusion from the public and private sector to weak
banks, merger, and acquisition.

Asset Management Company

Asset Management Company” (AMC) refers to any organizational unit created to manage
and recover financial assets acquired from troubled or failed financial institutions. Relieving
banks of the burden of NPL should allow them to focus better on financing the development
of new business opportunities that strengthen the economy. Literature shows that the AMC
was created in different countries as a conduit to recover NPL that was the result of policy
and directed lending. Creation of AMC is not a regular solution; rather it is a way of
removing bulk amount of bad loan from the balance sheet of state-owned banks to a separate
entity during financial crisis. One of the first government-owned AMCs was the Federal
Deposit Insurance Corporation (FDIC) in the United States, created nearly 70 years ago to
insure deposits. Also during the 1990s, other countries such as Mexico and Sweden
established major government-owned AMCs. Several countries in East Asia have similarly
set up AMCs to manage distressed assets. (Peiser & Wang, 2002).

Asset Securitization
Asset securitization is a process used by banks to transform their non-liquid assets to liquid
assets, thereby allowing them to allocate their capital more efficiently. In addition, asset
securitization also helps banks access diverse and cost-effective funding sources, and help in
the better management of business risks. In this process certain assets from the balance sheet
of a company get separated and are used as collateral for the issuance of securities. The
securitized assets like commercial papers, notes or bonds are typically sold through special
purpose vehicle (SPV) in order to provide funding.

Rescheduling With/ Without Interest Waiving

Rescheduling is a standard practice to deal with a nonperforming loan. Re-fixing loan
convents works better if the original terms and conditions do not match with the actual
business condition or if the problem faced by the borrower in repaying the loan proves to be
temporary. Regulations with regard to rescheduling have been elaborated in section III of the
paper.