Overview of recovery

DEPOSITOR

BANKER

BORROWER

9%
DEPO

13%
LENDING

RECOVERY

BANK IS A MIDDLEMAN BETWEEN DEPOSITOR AND BORROWER.

RECOVERING LOAN WITH INTEREST IS THE RISK TAKEN BY BANK SPREAD IS THE REWARD FOR TAKING THIS RISK

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Importance of Appraisal
Appraisal of What? Appraisal of project Good Good Bad Bad Appraisal of person Good Bad Good Bad Decision Sanction Reject Reject Reject

Theory : Appraisal first Sanction next. Practice: Sanction first appraisal next or Never Decision should be information based and not impression based. If the information is correct, the quality of decision will be better. Project reports prepared by consultants present a rosy picture. If you analyse your NPA you will find that either the project is bad or the person is bad.

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Appraisal of Project
Project is deemed to be good If backward linkages are available. Viz. Raw materials, skilled labour, electricity, repairs, transport and water etc are available. And forward linkages viz. Scope for business & marketing are available. The concerned industry is doing well generally. Project is viable. DSCR is 1.5 or more

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Appraisal of person
Character: Honesty, integrity, sincerity, fairness and straight forwardness of the applicant should be verified. Past record of the borrower is good. Capacity: Experience, entrepreneurship skills, marketing skills, knowledge of profit & loss, knowledge of the business chosen by him. Communication skills. Repaying capacity. Debt service coverage ratio: 1.5:1 A ratio of more than 1.5 is better Capital Margin money should be really owned funds. Verify source. It shows the borrowers stake in business. It results in the affinity and sense of belongingness to the project. It is a proof of generating surplus. It reflects repaying capacity of borrower. Desirable debt equity ratio is 3:1. It means borrower has margin of 25%. A ratio of less than 3 is better. This decides the maximum loan that can be sanctioned to a borrower. A person having re.1/- in his pocket can dream of a loan of Rs.3/-.

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Importance of recovery
Industry Raw materials Bank Deposits

Finished goods

Loans

Sale

Recovery

Profit

Profit

Deposit mobilisation is Quarter final. Loaning is like Semi final Recovery is like Final. Profit is the Trophy for winning final Recovery is the most important parameter of performance of a bank. It is an yardstick of efficiency.

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Experience
Banker has Before Loan Money After Loan Experience Borrower has Experience

Money

A banker has to learn from his experience. He has to study the NPAs and analyse the causes and mistakes committed by Bank. Avoid those mistakes in future. Learn from your mistake. Learning by doing method. Experience is what you get when you do not get what you want. There is no substitute for experience. Remember! You are the architect of your NPAs.

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Before you Recover

1. Do not Recover. Recovery starts after the repayment stops. Give loans to those who can repay on their own without waiting for your reminder. Tie up with employer, buyer of the product. Cover before you Recover. Cover you advances with adequate security, (primary or collateral), proper documentation and insurance. Discover before you Recover. Discover your rights and duties, discover the guarantor, discover the borrower and his assets. Discover the legal provisions. Recover yourself before you Recover. Recover from your weaknesses, your ignorance and your laziness. Remember! A sleeping person has no right to exercise his rights. Your performance will be judged by your recovery and nothing else.

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Causes for NPA

Banks Fault: 1) 2) 3) 4) Faulty Appraisal Absence of Monitoring Absence of timely Follow up. Unrealistic repayment schedule

Borrowers fault: A) Willful Default B) Diversion of Funds. C) Lack of entrepreneurship qualities D) Lack of experience to do the business E) Business is in loss F) Natural calamities etc. A & B Take strong action against borrower including criminal action. C to E Rephase the repayment schedule, nursing, additional finance etc F: Claim insurance, One time Settlement etc.

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ABC ANALYSIS
A: Top 25 NPA accounts amount wise. B: 26 to 100 accounts. C: Remaining NPA accounts. Concentrate your efforts on big accounts first. Prevention of NPAs. Get a list of potential NPAs every quarter one month before quarter end. The list shows CADU= Critical Amount Due. It means the amount to be recovered to maintain PA status. If this amount is not recovered, the account will be NPA. CADU= overdue as on 31-12-2006 less recovery after 1-1-07 Develop a skill of interpreting the operations in the account.

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Analytical Skills
Develop the following skills. 1. Skills of assessing a borrower and his project 2. Skills of pre-sanction interview 3. Skills of post sanction visit. 4. Skills of analysing borrowers behaviour. 5. Skills of interpreting the operations in the account. 6. Skills of noticing the advance signals that a potential NPA gives. Too many cash transactions. Cheques of round figures. Cheques issued and returned Cheques deposited and returned. No swing in the account. Turnover not commensurate with sales/limit 7. Do not be an advocate of borrowers problems Be an advocate of a Bank.

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Framing policies
1. Frame policies for processing of loans, loan amount, documentation, security norms, visits, recovery, legal action, compromise etc. Prescribe procedure for implementing these policies. Have a system of inspection/surprise checks to find whether the procedure is followed. Have a system of rectifying the irregularities pointed in inspection reports. Have a system of rewards for good performers and punishment for inefficient employees. Review the policy once in a year and make the necessary amendments. Institute a recovery trophy for the branches or employees. Give weightage for recovery in performance appraisal. Train the recovery team once in a year

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