IIBF JAIIB / DBF

Paper IV Retail Banking & Wealth Management

Module B – Units 14 and 16

Unit 14 : Recovery of Retail Loans

Unit 16 : Securitization
Repayment in Retail Loans – certain terms
• Repayment modes : Monthly instalments/ Equated Monthly instalments / Bullet payment
• Moratorium / Holiday period: time allowed for the borrowers during the loan term, when
they are not required to make any principal repayment
• Default in Retail Loans : Genuine default / Wilful default
• Rescheduling of Retailing Loans in case of genuine default
 To pay the higher EMI so that the repayment period is kept at the same level
 To pay reduced EMI and extend the repayment period beyond the earlier committed period
but within the total repayment period permissible or extend even beyond that
• Monitoring of loan accounts: process for maintaining the asset quality
• Special Mention Accounts (SMA) : Irregularity in loan accounts –
 SMA 0 – overdue accounts for the period 1 to 30 days
 SMA 1 - overdue accounts for the period 31 to 60 days
 SMA 2 - overdue accounts for the period 61 to 90 days
 Classification of Irregular Loan Accounts
• Income recognition: The policy of income recognition has to be objective and
based on the record of recovery. A Retail 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;
i. interest and/ or instalment of principal remains overdue for a period of more than
90 days in respect of a term loan,
ii. the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC),
iii. the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted.
• However, interest on advances against Term Deposits, National Savings Certificates
(NSCs), Kisan Vikas Patras (KVPs) and life insurance policies may be taken to income
account on the due date, provided adequate margin is available in the accounts
 Asset Classification
• Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
realisability of the dues:
(i) Substandard Assets (ii) Doubtful Assets (iii) Loss Assets
• Substandard Assets would be one, which has remained NPA for a period less than or equal
to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the
liquidation of the debt and are characterised by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.
• Doubtful Assets: an asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months.
• Doubtful I – an asset which has remained in doubtful category up to 12 months
• Doubtful II - an asset which has remained in doubtful category for more than 12 months
and up to three years
• Doubtful III - an asset which has remained in doubtful category for more than three years
 Asset Classification
• Loss Asset : an asset is considered uncollectible and of such little value that its continuance
as a bankable asset is not warranted although there may be some salvage or recovery
value. Classification of assets is to be borrower wise and not facility wise,
 In respect of accounts where there are potential threats for recovery on account of
erosion in the value of security or non-availability of security and existence of other
factors such as frauds committed by borrowers it will not be prudent that such accounts
should go through various stages of asset classification. In cases of such serious credit
impairment, the asset should be straightaway classified as doubtful or loss asset as
appropriate:
 a) Erosion in the value of security can be reckoned as significant when the realisable
value of the security is less than 50 per cent of the value assessed by the bank or
accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be
straightaway classified under doubtful category.
 b) If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is
less than 10 per cent of the outstanding in the borrowal accounts, the existence of
security should be ignored and the asset should be straightaway classified as loss asset.
 Provisioning Norms
• In conformity with the prudential norms, provisions should be made on the
non-performing assets on the basis of classification of assets into prescribed
categories.
• Taking into account the time lag between an account becoming doubtful of
recovery, its recognition as such, the realisation of the security and the erosion
over time in the value of security charged to the bank, the banks should make
provision against substandard assets, doubtful assets and loss assets as below.
• Loss assets should be written off. If loss assets are permitted to remain in the
books for any reason, 100 percent of the outstanding should be provided for.
• In case of Doubtful assets, 100 percent of the extent to which the advance is
not covered by the realisable value of the security to which the bank has a
valid recourse and the realisable value is estimated on a realistic basis and is to
be provided for.
 Provisioning Norms
• In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 25 percent to 100 percent
of the secured portion depending upon the period for which the
asset has remained doubtful.
Period for which the advance has remained in ‘doubtful’ category Provisioning requirement (%)
Up to one year 25
One to three years 40
More than three years 100

In case of Substandard assets ,a general provision of 15 percent on total outstanding

should be made without making any allowance for securities available. The ‘unsecured exposures’
which are identified as ‘substandard’ would attract additional provision of 10 per cent.
 Provisioning Norms
• Standard assets also attracts provision. Banks should make general
provision for standard assets at the following rates for the funded
outstanding on global loan portfolio basis:
Farm Credit to agricultural activities, individual housing loans and
Small and Micro Enterprises (SMEs) sectors at 0.25 per cent;
Advances to Commercial Real Estate (CRE)2 Sector at 1.00 per cent;
Advances to Commercial Real Estate – Residential Housing Sector
(CRE - RH) at 0.75 per cent
All other loans and advances not included above at 0.40 per cent.
 Recovery policy of Banks
• The debt collection policy of the Bank is built around dignity and respect to customers.
• Bank will not follow policies that are unduly coercive in collection of dues.
• The policy is built on courtesy, fair treatment and persuasion.
• The Bank believes in following fair practices with regard to collection of dues and repossession of
security 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 paying
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 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 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 inconsonance with the law.
 Recovery policy of Banks
• General guidelines:
All the members of the staff or any person authorized to represent the Bank in collection or/and 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 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.
4. The Bank is committed to ensure that all written and verbal communication with its borrowers will be in
simple business language and 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 the
special circumstances of his/her business or occupation requires the Bank to contact at a different time.
6. Borrower’s requests to avoid calls at a particular time or at a particular place would be honoured as far as
possible.
7. The Bank will document the efforts made for the recovery of dues and the copies of communication sent to
customers, if any, will be kept on record.
8. Inappropriate occasions such as bereavement in the family or such other calamitous occasions will be avoided
for making calls/visits to collect dues.
 Recovery policy of Banks
• Giving notice to borrowers: While written communications, 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.
• Any genuine difficulties expressed/disputes raised by the customer will be considered
by the Banks before initiating recovery measures. Bank will follow all such procedures
as required under law for recovery/repossession of security.
• Repossession of security: It 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. The Bank will take all reasonable
care for ensuring the safety and security of the property after taking custody, in the
ordinary course of the business and necessary cost will be charged to borrower.
 Recovery policy of Banks
• 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 claims against the customer.
• In case of hypothecated assets after taking possession if no payment is
forthcoming, a sale notice of 7 days time to respond will be sent to the
borrower. Thereafter, the Bank will arrange for sale of the hypothecated assets
in such manner as deemed fit by the Bank.
• In respect of cases under SARFAESI Act as per the provisions of the Act, 30 days
notice of sale will be sent. When public auction or by tender is envisaged, the
same will be published in two leading newspapers out of which one is in local
vernacular paper.
 Recovery policy of Banks
• Opportunity for the borrower to take back the security: The Bank will resort 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 and before sale transaction of the property takes place,
provided the Bank dues are cleared 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.
• However, this would be subject to the Bank being convinced of the arrangements made
by the borrower to ensure timely repayment of remaining installments in future.
• If the amounts are repaid, either as stipulated by the Bank or dues settled as agreed to
by the Bank, possession of seized assets will be handed back to the borrower within
seven days after getting permission from the competent/sanctioning authority within
seven days after date of permission from competent authority of the Bank or
court/DRT concerned, if recovery proceedings are filed and pending before such forums
THE SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSESTS AND ENFORCEMENT OF
SECURITY INTEREST ACT, 2002
(SARFAESI Act)
• A structured platform to the Banking sector for managing their NPA
• A legal frame work for – Securitisation of financial assets / Reconstruction of financial
assets/Recognition of interest created in the security/ Power to enforce such security for the
realization of money due to the Banks/Enabling provision for setting up a Central Registry for
the purpose of registering the transactions of securitisation
• Financial asset" means debt or receivables and includes–
(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or
(iii) a mortgage, charge, hypothecation or pledge of movable property; or
(iv) any right or interest in the security, whether full or part underlying such debt or
receivables; or
(v) any beneficial interest in property, whether movable or immovable, or in such debt,
receivables, whether such interest is existing, future, accruing, conditional or contingent; or
(vi) any financial assistance;
 Enforcement of Security interest
• The SARFAESI Act can be initiated only if the loan account satisfies the
following conditions:
Loan account must have been classified as NPA backed by security
Outstanding in the account including the interest accrued/applied should
be more than Rs.One lakh
 Outstanding dues should be 20% or above of the principal and interest
Secured asset should not be an agricultural land
Documents should be enforceable and unexpired period of a minimum of
6 months must be available
In case of multiple lenders / consortium advances, leaders having a
minimum of 60% of dues outstanding are agreeable for initiating action
under the Act
 Enforcement of Security interest
• The possession of the secured assets should be taken only by the Authorised Officer
(AO) in presence of two witness. Inventory should be prepared by the AO in case of
movable assets.
• AO shall take possession of the mortgaged immovable property by delivering a
“Possession Notice” to the Borrower/ Guarantor. The possession notice should be
affixed on the outer door or such conspicuous place of the property. Within 7 days of
the taking possession, the possession notice should be published in two leading
Newspaper of which one of which should be in the vernacular language having
sufficient circulation in that locality where the property is situated.
• After taking possession, the AO should obtain valuation from the approved valuer. After
valuation, the AO should fix the “Reserve Price” of the property
• The AO should serve 30 days “Sale Notice” on the borrower/guarantor intimating the
reserve price,date,time and place of public auction
• Auction is compulsory except for the cases where the outstanding dues in the book is
less than Rs.5 lakhs
 Debt Recovery Tribunal (DRT)
• DRT is established by the Central Government for helping the Banks/FIs
recover their bad debts quickly. The setting up the DRT is dependent
upon the volume of cases.DRT is presided over by a Presiding Officer
who is a qualified to be District Judge.
• Application for recovery of dues shall be accompanied with a fee. The
DRT may pass an interim order against the defendant from transferring/
disposing of any property. The DRT may pass an interim order or final
order for payment of amount. The DRT is fully empowered to pass a
comprehensive orders like in Civil Courts.
• Any person aggrieved by the order passed by the DRT may approach the
Debt Recovery Appellate Tribunal (DRAT).The appeal is disposed within
6 months from the date of receipt of appeal.
 Recovery through Lok Adalat
• Lok Adalat is organized to constitute legal services authorities to
provide free legal services to weaker section borrowers to settle their
payment to Banks as One Time Settlement(OTS)
• Steps for Lok Adalat settlement:
Identifying NPAs upto Rs.20 Lakhs
Preparing a petition for each account for submitting to Lok Adalat
Referring to the Lok Adalat organized by the respective Legal Services
Authorities – be at National/ State / District or Taluk levels
The settlement may be made for –down payment / full payment as
lump sum or full payment in instalments within a short duration
 Engaging Debt Recovery Agents
• The recovery process is outsourced by engaging Debt Recovery
Agents (DRA) the guidelines for which are given by RBI
• Specific code of conduct and fair practices to be followed by the DRA
are derailed in the RBI guidelines
• Specific contracts are to be entered into between the Banks and DRA
specifying the fees/incentives to be given in the form of specific
amount or percentage of amount
• Periodical review of the DRAs are done by Banks to learn from
experience to effect improvements
Unit 16 : Securitization
 Securitization of Assets
Understanding the definition and terminologies

• Obligor: means a person who is liable, whether under a contract or otherwise, to pay a
debt or receivables or to discharge any obligation in respect of a debt or receivables
• Originator: refers to a Bank or Company that transfers from its balance sheet a single asset
or a pool of assets to an SPV as a part of a securitization transaction and would include
other entities of the consolidated group to which the Bank belongs
• Securitization: means a process by which a single performing asset or pool of performing
assets are sold to a bankruptcy remote Special Purpose Vehicle (SPV) and transferred from
the balance sheet of the originator to the SPV in turn for an immediate payment
• Special Purpose Vehicle : means any Company,Trust,or other entity constituted or
established for a specific purpose – (a) activities of which are limited to those for
accomplishing the purpose of the Company,Trust,or other entity as the case may be and
(b) which is structured in a manner intended to isolate the Corporation,Trust or entity as
the case may be, from the credit risk of an originator to make it bankruptcy remote
• Sponsor: means any person who establishes or promotes a special purpose distinct entity
 Securitization Process
Securitization refers to the process of converting debt ( assets, usually illiquid assets ) into
securities, which are then bought and sold in the financial markets

Banks/ FIs will collect money into a Division of pool into small parts and selling them
pool as securities

Process
These securities are called as Buyers of these securities get invest/mortgage
“ Mortgage Backed Securities” payments

Usefulness Limitations
• Boosts liquidity • Risky for lenders
• Helps raising funds • Difficult to assess the risk factor in securities
• Portfolio diversification
• Quality returns
 RBI directives for Securitization
• RBI specified Minimum Retention Requirement (MRR) for different asset classes
• For underlying loans with original maturity of 24 months or less, the MRR shall
be 5% of the book value of the loans being securitized
• For underlying loans with original maturity of more than 24 months as well as
loans with bullet repayments, the MRR shall be 10% of the book value of the
loans being securitized
• In the case of residential mortgage backed securities, the MRR for the originator
shall be 5% of the book value of the loans being securitized, irrespective of the
original maturity
• The minimum ticket size for issuance of securitization notes shall be Rs.One crore.
• Banks can securitize only after a Minimum Holding Period (MHP) counted from the
date of full disbursement of loans for an activity/ purpose. The MHP is 6 months
 Accounting and Asset classification of
MRR
• The asset classification and provisioning rules in respect of the
exposure representing the MRR is :
The Originating Bank may maintain a consolidated account of the
amount representing MRR if the loans transferred are retail loans.
In case of transfer of a pool of loans other than retail loans, the
Originator should maintain borrower-wise accounts for the
proportionate amounts retained in respect of each loan
The overdue status of individual loan accounts should be determined
with reference to repayment received in each account. The basis of
classification of the entire MRR/individual loans as NPA in the books of
the Originating Bank depends upon the method of accounting followed
 Securitization of NPAs
• As per the guidelines of RBI,Banks shall, with the approval of their Board,
identify and list internally the specific financial assets for sale to other
institutions, including Asset Reconstruction Companies(ARCs),at least once in a
year, preferably at the beginning of the year. The assets identified for exit shall
be listed for the purpose of sale. Banks may offer the assets for sale to ARCs
and other banks/NBFCs/FIs etc.Particiption of more buyers will result in better
price
• Where the investment by a Bank in Security Receipts (SRs) backed by
stressed assets sold by it is more than 10% of SRs, there is a need to keep
provision of the assets.
• IBA have floated an idea of creating a “Bad Bank” to buy out the NPAs of high
value from Banks. National Asset Reconstruction Limited (NARCL) is a new
bad bank. India Debt Resolution Company Limited (IDRCL) will professionally
manage the assets acquired by NARCL for resolution
 Summing up
• Subjects discussed :
 Unit 14 : Recovery of Retail Loans: Repayment in Retail Loans –
certain terms- Classification of Irregular Loan Accounts -Asset
Classification-Provisioning Norms -Recovery policy of Banks -
SARFAESI Act-Debt Recovery Tribunal (DRT)-Recovery through Lok
Adalat-Engaging Debt Recovery Agents
 Unit 16 : Securitization - Securitization of Assets-Understanding the
definition and terminologies- Securitization process-RBI directives
for Securitization-Accounting and Asset classification of MRR-
Securitization of NPAs

Thanks