The Collections & Recovery Policy of Shivalik Small Finance Bank Ltd. (hereafter referred to as “SSFB”) shall aim at making the recovery process robust, so that gross NPA level and overdues are maintained within the risk appetite of SSFB.
Objectives & Principles
The quality and performances of advances have a direct bearing on the profitability of a bank. Despite an efficient credit appraisal, disbursement and monitoring mechanism, problems can still arise due to various factors and give scope for Overdues and/or Non-Performing Asset (NPA). These factors may be internal or external.
Policy Review and Approval Process
The Policy would be reviewed and updated based on the following mechanism. The minutes of meeting of the Board and Management Committees would be documented.
Regulatory and other updates
Head-Recovery & Head-Credit
Board of Directors
As and when required
Default is considered to have occurred when an asset is classified as non-performing asset (‘NPA’)
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the Bank. A "Non-performing Asset" (NPA) is a loan or an advance where:
Interest and/or instalment of principal remain overdue for a period of more than 90 Days
Overdraft/Cash Credit Limit
The account remains ‘out of order’ for a period of more than 90 days
Short Duration Crops (crops with a crop season of less than one year): The instalment of principal or interest thereon remains overdue for two crop seasons
Long Duration Crops(crops with a crop season of longer than one year): The instalment of principal or interest thereon remains overdue for one crop season
Applicable to transactions undertaken on the basis of the extant guidelines on securitization. The amount of liquidity facility remains outstanding for more than 90 days.
Any amount to be received remains overdue for a period of more than 90 days.
‘Out of Order’ status2:
An account should be treated as 'out of order' if:
Any amount due to the Bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the Bank.
Collections and Recovery – Governance Framework
Organization Architecture 4
The collections and recovery responsibilities of the organization are split between multiple teams which have distinct roles and responsibilities and have different reporting lines (but ultimately reporting to Collections and Recovery Head) which are outlined in the department architectures shown below:
Scope of different teams:
The broad division of scope between the Credit Monitoring Team (under the Risk Management Department) and Collections/Recovery Team shall be as follows:
Post-disbursement compliances for all facilities
Credit Monitoring Team
Monitoring of non-financial compliances for all facilities
DL/OD against bank deposit, NSC, KVP, LIC
Credit Monitoring Team (1-90 DPD) Collections/Recovery Team (NPA stage)
All other facilities (TL, CC, OD etc.)
The scope of work for different teams in the Collections and Recovery Department shall be as follows:
NPA Recovery Team
SMA-0 Collections Team
SMA-1/2 Collections Team
Any other facility
Prudential Norms on Income Recognition, Asset Classification and Provisioning
Income recognition, asset classification, provisioning, reversal of income, appropriation of recoveries and other clauses related to IRAC norms have been covered in the Credit Policy (Section 10).
Asset ClassificationCategories of NPAs
Banks are required to classify non-performing assets into the following three categories based on the period for which the assets have remained nonperforming and the realizability of the dues.
Guidelines for classification of assets
Classification of assets into the above categories is to be done taking into account the degree of well - defined credit weaknesses and the extent of dependence on collateral security for realization of dues. Bank has established appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs by automating the NPA marking system in CBS
Account with temporary deficiencies
The classification of an asset as NPA should be based on the record of recovery. Bank shall not classify an advance account as NPA merely due to the existence of some deficiencies mentioned above which are temporary in nature such as, death or illness of a family member, sudden cash needs, late paymentof salary, slowdown in business balance outstanding exceeding the limit temporarily non- availability of adequate drawing power based on the latest available stock statement
In all the cases related to temporary deficiencies, SSFB shall ensure that concerned officials immediately investigate such cases for the following items:
For Working Capital Accounts, ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are normally appropriated first in times of distress. Drawing power is to be arrived based on the stock statement which is current (not older than 3 months)
For other loans such as SHG, Term Loans, Retail Loans (Business Loans, Education Loan, Gold Loan, Vehicle Loan etc.), Credit Officer/ Recovery Executive shall investigate the cause of overdue and persuade the borrower to clear the dues. In all the cases related to temporary deficiencies, SSFB shall ensure that concerned officials immediately investigate such cases and take appropriate corrective actions as per guidelines as covered in the Bank’s Credit Policy. In case of a SHG facility, Microfinance Executive /Loan Officer shall investigate the cause and ask the group to repay overdue. Microfinance Executive /Loan Officer shall constantly follow up with the customer and their group members for recovery of overdues in case of SHG.
Upgradation of loan accounts classified as NPAs
Accounts can be upgraded from NPA category to ‘standard’ assets under the following circumstances. An account which is has been marked NPA due to multiple reasons (financial and/or non-financial) mustclear all the reasons before it can be marked as ‘standard’.
These instructions are not applicable for restructured NPA accounts for which separate guidelines exist.
Accounts regularized near about the balance sheet date:
The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without any scope for subjectivity. It should be ensured that,
Asset Classification to be borrower- wise and not facility wise
Advances against Term Deposits, NSCs, KVP/IVP
Loans with moratorium for payment of interest
Government guaranteed advances
For all projects financed by the FIs/ banks, the ‘Date of Completion’ and the ‘Date of Commencement of Commercial Operations’ (DCCO), of the project should be clearly spelt out at the time of financial closure of the project and the same should be formally documented. These should also be documented in the appraisal note by the bank during sanction of the loan.
There are occasions when the completion of projects is delayed for legal and other extraneous reasons like delays in government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring/ reschedulement of loans by banks. Accordingly, the following asset classification norms would apply to the project loans before commencement of commercial operations. For this purpose, all project loans have been divided into the following two categories:
For the purpose of these guidelines, ‘Project Loan’ would mean any term loan which has been extendedfor the purpose of setting up of an economic venture. Further, infrastructure sector is a sector as defined in extant harmonized master list of infrastructures of RBI.
The entire asset should be written off. If the assets are permitted to remain in the books for any reason,100 per cent of the outstanding should be provided for.
Sub Standard and Doubtful Assets
100 per cent of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse, and the realizable value is estimated on a realistic basis. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 15 per cent to 100 per cent of the secured portion depending upon the period for which the assethas remained doubtful:
D1 – Up to one year in doubtful category
D2 – One to three years in doubtful category
D3 – More than three years in doubtful category
Valuation of security for provisioning purposes:
The provisioning requirements for all types of standard assets shall be as per extant guidelines of RBI. The provisions on standard assets should not be reckoned for arriving at net NPAs. The various other guidelines on netting off, provision for Medium Enterprises, etc. are provided in the Master Circular of RBI.
If the customer does not adhere to the repayment schedule, a defined process in accordance with the laws of the land and the customer's contract with the Bank will be followed for recovery of dues. The process will involve reminding the customer by sending him/her a notice or by making personal visits/calls and/or repossession of security if any;
Recovery and Resolution of NPAs
Continuous and focused follow up on a regular basis is the underlying principle for good recovery and also for identifying genuine problems of the borrowers so that timely assistance can be extended to correct any temporary mismatch of the cash flow/review of repayment schedule etc
Up gradation of NPA Accounts
As soon as an account turns in to NPA, efforts should be made by the branch to collect all the arrears such as interest or overdue EMI in the account to avoid further slippage in the asset class. When all the arrears, including interest and/or installments/overdue EMI and all suspended outgoings in the NPA account are fully paid, the Recovery Unit should consider upgrading the account. However, in case of accounts where review of credit facilities are prescribed or drawing is linked to drawing power, bank should take up review of the limits with the concerned authority with all required documents and only on renewal of the limit the accounts should be upgraded and allowed to be continued.
Accounts where deficiencies observed are due to temporary in nature SSFB may consider such accountsfor restructuring upon request of the borrower and the account will be upgraded post satisfactory conduct of the account for the period of one year from the date of restructuring.
Closure of NPA Accounts
As soon as an account turns into NPA, efforts should be made by the branch to upgrade an account. However, many times the efforts of the branches to upgrade the account proves to be futile due to willful default, poor financial position etc. of the borrower. Branches and Recovery department must identify such accounts and act immediately post NPA for recalling the NPA account and start legal actions as mentioned.
Write off/Waiving of Legal action
1Master Circular on Wilful Defaultershttps://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9044
SSFB may consider exit/exposure reduction on accounts gone into recovery or on accounts where the return on capital is not commensurate with their overall strategy. Since an exit strategy result in cessation of the relationship with a customer, approval for the same shall be obtained as per the Recovery and Collections Manual.
Tools for Recovery
SSFB shall use any of the following broad methods for management of problem accounts:
This represents those accounts where the borrower is willing to repay his dues to SSFB but does not have the capacity/funds to do so right away. In such cases, the recovery team should examine the causes of sickness and recommend the course of action. The first focus of NPA management in such cases will be possible up gradation of the loan, by rehabilitation of the borrower’s business.
The rehabilitation option will be examined in cases where there is prim face scope for restoring viability of the business. The action plan will be put in place in such cases where it is possible to bring the unit back into good health by extending minimum additional funds and marginal concessions by which the unit will be able to meet its obligations fully within a maximum period of 5-7 years.
The rehabilitation approach will generally be adopted provided SSFB is satisfied that:
The following steps can be taken to rehabilitate the unit so that it may gain enough strength to service the borrowings over a period of time:
Types of Rescheduling
The appropriate authority shall be entitled to authorize a change in repayment terms and structures of a customer’s loan post thorough assessment of the customer’s inability to repay asper the original terms.
Procedural Guidelines for Restructuring due to borrower’s inability to pay
This approach will be adopted by SSFB:
Only if the borrower is not a willful defaulter. However, the Committee may review the reasons for classification of the borrower as a willful defaulter and satisfy itself that the borrower is in a position to rectify the willful default. The decision to restructure such cases shall have the approval of the Board, along with the recommendation of the Committee which has classified the borrower as willful defaulter.
Corrective Action Plan for MSMEs2
Rectification- This approach will be adopted by SSFB after:
2 Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs) https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10304 Details of MSME account monitoring and subsequent CAP are covered in the Credit Policy
3 Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)
4 Refer Appendix VII for more detail and process
Legal Recovery proceedings would be initiated against the borrower/ guarantor wherever exit, restructuring and rehabilitation or settlement / compromise have been exhausted or are not possible. All legal recovery actions shall be approved by the designated approval authorities as per the Delegation of Authority of the SSFB in recovery and collections manual. In cases of willful default, (e.g. diversion and siphoning of funds), fraud and malfeasance on the part of the borrower, legal action may be the first andonly option for recovery, as any other option of recovery would not be appropriate. The legal recovery options in respect of NPA borrowers are summarized below:
Action under SARFAESI Act 2002
The provision of SARFAESI Act 2002 has proved an effective tool in recovering the dues in assets wherever they are secured by security assets and the outstanding is above Rs 1 lakh without much of additional expenditure/ delay. Action under SARFAESI Act should be initiated if the recall letter does not evoke the desired results as per the procedure laid down in the Act. The recovery teams should submit the details of the account in the prescribed format given in Recovery and Collections Manual, to the Legal Department for initiating the action.
Wherever possible action for enforcement of security under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (“SARFAESI”) Act, 20025 should be taken as per the procedures defined in the Recovery and Collections Manual.
All assets hypothecated to SSFB may be seized / repossessed subject to the following:
Use of Judicial Process
Civil Suits and DRT:
5 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 http://www.drat.tn.nic.in/Docu/Securitisation-Act.pdf
Wherever it is not feasible to file the case in DRT/ Civil Suit, SSFB will file the case under arbitration for relief.
Engagement of Collection Agency, Recovery Agents, Detective, and Investigative agencies:
SSFB may utilize the services of external agencies for collection of dues, repossession of securities and other activities to support collections & recoveries. Agents will be appointed as per regulatory guidelines7 issued in this regard. In this respect:
6Refer Order XXXVIII, Arrest and Attachment Before Judgement, The Code Of Civil Procedure, 1908
Sell down to Securitization/Restructuring Company/other entities
7 RBI Circular on Recovery Agents engaged by Banks https://www.rbi.org.in/commonman/English/Scripts/Notification.aspx?I34 7
8 “Recovery Agents should adhere to extant instructions on Fair Practices Code for lending (Circular DBOD. Leg. No. BC.104 /09.07.007 /2002-03 dated 5th May 2003)as also their own code for collection of dues. If the banks do not have their own code they should, at the minimum, adopt the Indian Banks Association's code for collection of dues and repossession of Security”. Refer Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks, RBI/2006/167 DBOD.NO.BP. 40/ 21.04.158/ 2006-07 dated November 3, 2006https://rbi.org.in/scripts/NotificationUser.aspx?Id=3148&Mode=0
Giving notice to borrowers
While written communications, telephonic reminders or visits by SSFB's representatives to the borrowers’ place or residence will be used as loan follow up measures, SSFB shall not initiate any legal or other recovery measures including repossession of the secured assets without giving due notice in writing. Any genuine difficulties expressed/ disputes raised by the customer shall be considered by SSFBbefore initiating recovery measures. Bank shall follow all such procedures as required under law for recovery / repossession of secured assets.
Reporting of Non-Cooperative Borrowers
A non-cooperative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues. As per the RBI guidelines, the information on such a borrower is to be reported to Central Repository of Information on Large Credits (CRILC).10
Internal record keeping for blacklisted / negative individuals
The bank should maintain an internal list of accounts that are not fit to be extending credit facilities to. This would be based on the following:
Security type wise policy
This section outlines different recovery measures based on the type of security available in an NPA account.
It is noted that most of the times the borrower does not handover the peaceful possession of the security to the bank. In such scenario bank can file an application to the DM/ CMM for providing police protection to the bank officers for taking physical possession of the security under section 14 of SARFAESI Act.
Tenanted Properties / Lease hold Mortgaged properties
Tenanted/ Leased properties are the matter or great concern for the banks due to difficulties faced while taking physical possession of the security. SSFB shall follow the below process as per the Law time being in force
Important guidelines laid down by the Hon’ble Supreme Court for the CMM/DM to decide on the legality of tenancy/ taking possession of property/are:
9RBI Fram ework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP) https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8754&Mode=0
Stock, Plant & Machinery and book debts / receivables etc.
It may be noted that where security is held by way of hypothecation charge on the moveable assets of the borrower, the SSFB must enforce the security interest as we are secured creditors and have every right to file application to DM/CMM user section 14 of SARFAESI Act for taking possession of the security. Further field level functionaries should take the under- mentioned precautions / steps to safeguard their interest:
Nursing Homes, Hospital, Schools etc.
It is general observed that the officers of the banks are hesitant in taking physical possession of the secured assets of the Nursing Homes / Hospitals / schools mortgaged to the bank. It is considered “difficult to remove / shift patients / students admitted in the Nursing Homes / Hospitals / Schools”. The job being sensitive the physical possession of the property is generally ignored in most of the cases. In this connection,it is suggested, that with a view to avoid any adverse situation the bank may adopt the following system to avoid hurdles in taking the physical possession / selling the mortgaged property. It is advisable that the bank sale the secured asset based on symbolic possession on “as is where is, whatever there is and without recourse basis”. In this connection it may be noted that as per ruling by the Hon’ble Supreme Court (in the case of M/s Transcore v/s Union of India) there is no dichotomy between symbolic and actual possession under the SARFAESI Act. In the view of said verdict bank is permitted to sell the immovable property on symbolic possession through one of the prescribed modes.
It is advisable that the Bank may take the following steps for taking physical possession of the secured assets:
10Refer Appendix VI for more detail
Caution: It may be noted that the secured creditor should make arrangements in coordination with concerned official of the Atomic Energy Regulatory Board before possession/removal of Telecobalt unit and any other such equipment which is of sensitive nature.
Possession of Abandoned Movable / Immovable Properties:
There are cases in which the borrower leaves the property unattended and flees away without any notice. Such properties are not even properly locked and remain vacant for a long period. The bank may treat such properties as abandoned properties and may go in for taking actual possession of such mortgaged / charged property by informing the concerned police authorities before and after the actual possession to avoid adverse complaints (The authorized office may handover the copy of the written communication to respective office of the SP, if deemed necessary). Possession notice should be published in two local newspapers within seven days from the date of possession.
Undivided immovable properties
It has been experienced that in some cases immovable property mortgaged with the bank is merged with other properties and requires demarcation. The authorized officer should ensure that before taking over the symbolic / actual possession of the specific portion of the Plot / House / floor etc. demarcation is available and in special case the specific property is not identifiable the authorized officer should file an application to the concerned revenue / municipal authority / development authority and get the property demarked as per the records of the bank i.e. as mentioned in the respective title deed(s).
Sealed properties by the Government departments:
Sale of secured Asset
Repossession and initiation of sale of secured asset
Repossession of secured assets is aimed at recovery of dues and not to deprive the borrower of the secured assets. The recovery process through repossession of secured assets will involve repossession, valuation of secured assets and realization of secured assets 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 secured assets. SSFB shall take all reasonable care for ensuring the safety and security of the secured assets after taking custody, in the ordinary course of the business and relevant cost will be charged to borrower. Valuation and sale of secured assets repossessed by SSFB shall be carried out as per law and in a fair and transparent manner. SSFB shall have right to recover from the borrower the balance due if any, after sale of secured assets. Excess amount if any, obtained on sale of the secured assets shall be paid to the person entitled thereto in accordance with his rights and interests, after meeting all the related expenses, provided SSFB is not having any other claims against the customer. Bank's right to general lien and its implications shall be made clear to the borrower while executing the loan documents. Please refer to the bank’s Credit Policy for details related to the valuation of securities.
In the case of hypothecated assets after taking possession if no payment is forthcoming, a sale notice of 30 days’ time to respond will be sent to the borrower. Thereafter, SSFB shall arrange for sale of the hypothecated assets in such manner as deemed fit by SSFB. In respect of cases under SARFAESI Act as per the provisions of the Act, 30 days’ notice of sale shall be sent. When public auction or by tender is envisaged, the same shall be published in two leading newspapers out of which one is in local vernacular paper.
Opportunity for the borrower to take back the secured assets
SSFB shall resort to repossession of secured assets only for the purpose of realization of its dues as the last resort and not with intention of depriving the borrower of the secured assets. Accordingly, SSFB shall be willing to consider handing over possession of secured assets to the borrower after repossession and before concluding sale transaction of the secured assets, provided SSFB dues are cleared in full. If satisfied with the genuineness of borrower's inability to pay the loan instalments as per the schedule, which resulted in the repossession of secured assets, SSFB may consider handing over the secured assets after receiving the instalments in arrears. However, this would be subject to giving an undertaking by the borrower to repay the remaining instalments / dues in future and to maintain the loan account as performing asset until closure of the account as per the terms of the loan agreements(s) to the satisfaction of SSFB.
If the amounts are repaid, either as stipulated by SSFB or dues settled as agreed to, possession of seized assets shall be handed back to the borrower within 7 working days after date of permission from the competent authority of SSFB or Court/DRT concerned if recovery proceedings are filed and pending before such forums.
Sale of different types of securities
Sale of Security under SARFAESI Act 2002.
Sale through Private Treaty & by obtaining quotations:
Sale through inviting public tender or by public auction including e-auction
Sale of Tangible/Perishable movable property
Sale by the way of Attachment in DRT
Sale of Movable Property
Sale of Immovable Property
Reassignment of Securities
For recovering the dues in NPA accounts, the bank takes measures right from follow up with the borrowers and in some cases, it goes till realization of the security assets through sale either under SARFAESI or by DRT. During the course of the process, we have come across situations where the sale was not successful even though the reserved prices fixed were much realistic. On some occasions the reserved prices were reduced over the previous sale to attract fresh bids and even then, there were no bidder for various reasons. In such situations, bank resorts to participating and bidding the secured asset in its name, to protect the interest of the bank. Thus, the secured asset gets assigned in the name of the bank. A situation may arise when the borrower may come forward on a future date with request to reassign the collateral security in his name (if he was the original owner of the asset). In that case, bank will be following the line of action/ process explained below:
Taking a lenient view in certain cases
Recovery shall be made in any manner that is deemed fit, proper and legal. The primary effort shall be to convert the impaired assets as performing ones or to get the account closed by persuasion, as far as feasible without resorting to legal action.
In cases where non-payment of the dues is due to circumstances beyond the control of the borrowers and if the bank is convinced that the unit/business can be brought back on rails, a lenient view may be taken so that remedial measures by re-scheduling/re-phasing of repayments/rehabilitation, with or without further funding, can be considered on merits.
Insurance cover for securities standing in the name(s) of borrower / co-obligants / guarantors
All assets charged to the bank as security are to be kept fully covered by insurance at all times, even after filing of civil suit for recovery of dues of the Bank. However, CMU /RU should ensure availability of the securities before renewing the policies.
Studies on staff lapse
An account may become non-performing on account of many reasons which may be within or beyond the control of the borrower. However, the aspect of staff accountability, if any in an account becoming NPA should be examined in respect of all accounts. The accounts are to be bifurcated into two categories:
The study should be completed within a period of one month from the quarter.The review authority is shown below:
A Committee comprising the following:
Details of the account (sanction terms, compliance, documentation, post sanction follow up etc.) from branch should be obtained as per the prescribed format provided in the Collections
and Recovery Manual
Executive Committee of the Bank shall receive a detailed report in the prescribed format. The decision of the committee will be passed on to HR for further disciplinary action, if required.
Granting of fresh loans to the NPA borrowers
Proposals for fresh credit limits to the NPA borrowers whose accounts were settled under OTS/ outstanding for any reason as indirect liability (either as individual/ proprietor or / partner/director of a firm/company or guarantor), should be considered strictly on merits by Credit Department at Head office. However, the borrowers shall not be willful defaulters or should not continue to be in the RBI defaulter’s list/CIBIL.
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