Manish Gadia

Vice President,

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Non Performing Assets (NPA) Recovery Grid

In cluttered economy of current times, Banks had a tough task of reducing / recovering the current NPA levels and at the same time address the increasing flow of good credit becoming bad. It's a general trend that rate of default is higher than resolution rate of NPA in times of financial downturn (Resolution of NPA means an exit from the asset through total or partial recovery of NPA, with or without external assistance from Asset Reconstruction Companies (ARCs), Debt Recovery Tribunal (DRT), Corporate Debt Restructuring (CDR) or other legal proceedings) In such demanding conditions, lending institutions must be equipped with more and more of expertise in recovery. The conventional methodologies in recovery need to be complemented with strategies which could be even standardised for the lending institution. Here we propose a grid which can be well used as a protocol to be followed for NPA resolution. The trigger points of NPA have been distinctly categorized with cause & effect. Lending Institutions can use this as a necessary checklist to avoid substandard loans. The focus of this IDEA is not to clean the books by divestiture or swap of NPAs, but to recover the NPAs.

The Grid - A 2 X 2 Matrix with Co-operation from Customer on X Axis and Commitment from Customer on Y Axis. Quadrant 1 to be Collaboration Strategy. Quadrant 2 to be Silence Strategy. Quadrant 3 to be DEAD strategy and 4 to be 2 Face Attack.

The set of customers, who are willing to collaborate with the bank are positioned in the first quadrant. They are high on co-operation as well as commitment.

2 Face Attack
There are many customers who appropriately entertain all calls from the agents and keep up to all the meetings to discuss recoveries. They are cooperative in talking to lending institutions. But they don’t honour most of their commitments of repayments.

Another 2 Strategies to be communicated below....

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    Dec 1 2011: Strategies for recoveries for a “DEAD” customer:
    - At any point if there arises an opportunity to move the defaulter to any of the other quadrants, the chance should be grabbed with most sincere efforts from the collection team. Offering waivers to customer on outstanding loan amount (subject to rules, case to case basis) can be one of the ways in which lending institution may try to make customer co-operative.
    - Legal proceedings, collections by agents (external & Internal) would be at highest level here. Lending institution on due course may be able to recover some amount on liquidation of assets if the loan is against a security.
    - In cases where these efforts don’t materialize, the customer should be approached for a one-time settlement (OTS). In these settlements, a higher waiver ranging from 20-50 percent can be given (based on parameters / rationale existing case to case). However, in many cases, the customers don’t respond to any communication and try to escape any kind of payments. In the end, when OTS doesn’t work out, the exit strategy should be to sell these assets selectively to an Asset Reconstruction Company (ARC). These companies buy a portfolio of assets at a certain percent of the value of portfolio. They are specialized in reworking the assets to make out maximum from the bad debts (Simon Mundy, 2010).
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    Dec 1 2011: Strategies for Silence Customers:
    - For these customers “Less is more”. They should be left with the payment plans with least of follow up from the agents’ side. Collection calls & regular follow-ups with customer may upset the customer and upset the repayment rhythm. However the continuous assessment must take place and if the commitments are not being met then this strategy has to be replaced with two Face attack.
    - Occasional meetings / phone calls may suffice as customer’s commitment here.
    - Option to move the customer from Silence to Collaborative quadrant should be explored.
    - Legal proceedings should be kept at minimal as the same can upset the repayment activities of customer as such customer can quickly go on bad note with the bank.
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    Dec 1 2011: Two Face Attack Strategies:
    - There should be two points of contacts from the lending institution for the defaulted customer, either two individuals or two separate teams. One of the individual / team should approach the customer with the aim to understand all latest developments and how it may affect the repayments. Efforts should be put to ensure customer commits repayments of loans by specifying some dates where in part/full payments can be given to the lending institution. All these insights of the customer are shared with second agent/team, who would be working in conjunction. This second person/team would be working to push the customer in meeting the commitments. Without the necessary push, these type of customers would have tendency to take leeway and dishonour dates of repayments.
    - The second team / individual would play an important part in the whole process by ensuring regular meetings with the customer are conducted. Activities of meeting customer and constantly being in touch will increase many folds when the commitment dates are near. This team may take help of external collection agents who are specialists in follow-ups.
    - Whilst the first individual / team are seen in positive angle by the customer, the second one will not share the same place. However both faces would be required to complete the recovery process together. Both individuals / teams will have to work on-going basis whereby one person/team makes the customer to commit while other will ensure that commitments are kept. Care should also be taken that customer puts in writing all the commitments.
    - Parallel to influencing the customer for new payments, the first agent should also try to ascertain new ways to collaborate with the customers. The proposals forwarded should pose win-win solution for both the party. This would shift the customer to the first quadrant i.e. Collaboration and thus simplifying the whole process.
    - Recovery process here may take a long time but continuity is t
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    Dec 1 2011: Strategy for Collaboration:
    - The lending institution should break customer’s outstanding loans in various tranches as against asking them to repay entire amount at one go. Bank should ensure customer accepts a written undertaking or accepts a memorandum of understanding specifying the same. The lending institution should put efforts in helping customer settle a credit by extending their due dates if a particular tranche of payments are being delayed on one off basis.
    - Lending Institutions should also make the payment process smooth by ensuring enough room is given to customer to conduct the business activities, as the repayment may only come through the same. Lending institutions should not press the panic button on default as that may lead to misunderstanding with the customer. Lending institution and defaulter on same page is the best possible situation. The recovery process gets very difficult when they are operating on different pages. Banks should do what is takes to ensure the customer is collaborative and stays that way.
    - Lending institutions should collaborate with these types of defaulters in real sense like helping them sell off their sick assets, which would be channelized to settle the NPA. Lending institutions can also try and aid customer in disposing off the excess finished goods, the customer may be sitting on.
    - Lending institutions should minimize the calls done by collection agents & also slow down on legal proceedings here. Lending institutions should refrain from hiring external collection agents and use on payroll professional for recoveries here.
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    Dec 1 2011: Silence:
    There are yet another group of customers who feel uncomfortable with the phone calls and meeting recovery agents/ bank employees. They certainly don’t believe in collaborating with the bank and request a “Do Not Disturb” from bank side. However they keep their commitments and make the payments on date, as per mutually agreed plans. Just like collaborative customers they accept their liabilities and will be willing to go extra mile to pay off their debts.

    A customer with no co-operation with recovery agents and also giving no commitment for repayments are placed in this quadrant. A defaulting customer should only be pronounced dead for recovery after considerable amount of time & effort has been spent towards the same. When all efforts of transferring the defaulting customer to any of other quadrants fail, the customer may be put under this category. Usually intentional fraudsters lie in this category. The promoters may have no intention to carry on operations of the company going ahead. Sometimes the lending institution may even have to trace the missing promoters altogether. Business associates of defaulter lying in dead category may deny links with the defaulter to protect themselves. A default company lying in this category may have defaulted with multiple lending institutions.