STRATEGIES FOR EFFECTIVE NPA RECOVERIES

By s.srinivasan retired bank unionist

This research and the findings, to our belief, will be very useful for OUR
BANK to adopt specific protocols for recovery of the NPAs in their books.
1. Introduction
Every strategy emanates from the market and market itself evaluates it over a period
of time. Wartime experiences encourage development of new tools and techniques.
The banking crisis which started from late 2008 was nothing less than a war where
banks were struggling to survive.
In cluttered conditions like above, 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. 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. Our analysis on different cases,
which comprises of NPA in our own bank ,based on my experience in the board of
directors for two terms and subsequent experience of other workmen nominees share to
me
with different types of company working on distinct Business grid, ahs
provided the impetus to this new theory of grid proposed by us . . Here we propose
a grid which can be well used as a protocol to be followed for NPA resolution. The
focus of my paper is not to clean the books by divestiture or swap of NPAs, but to
recover the NPA
2. Literature Review
The researches in the field of NPA are quite nascent. The papers have been
limited to providing a trend in NPA over the years. A research work by Justin
Bert(2009), vice president at Capstone Advisors on topic Developing an Action
Plan for Non-Performing Assets have tried to set up measures in place to check
lending in sub standard loans which leads to bad debt. This paper has put forward
ideas of judging asset quality and detailed legal review. However, this grid doesnt
take into account that, NPA cases emerge out of many different reasons and not only
because of operational inefficiency. Prashanth K Reddy, in his paper A
comparative study of Non Performing Assets in India in the Global Contextsimilarities and dissimilarities, remedial measures explained the formation of
NPA in Asian countries. However his analysis was focussed on the problems
of judiciary, polity and bureaucracy and hence the solutions proposed were
for amendments in regulations. In his paper named Resolving Non-performing
Assets of the Indian Banking System He Dong from International Monetary Fund

have enlisted the best practices to be adopted to help AMCs(Asset Management

Companies) meet the need of resolving NPA in banks. This is a descriptive list with
a narrow focus on AMCs. There havent been many efforts to explain and
optimize the recovery process of NPA. This is where we have put our thoughts to
present a grid, which takes care of the same and explains approaches to reduce the
hassle and risk of losing bad debt and customers. In our analysis we have found that
there can even be lot of collaborative approaches to NPA collection.

3. Pre Sales Analysis

In banking industry, the Collection team professionals face huge impediments in
meeting their KRAs (Key Result Areas). If you go by the analysis of Non
Performing Asset (NPA) accounts, the blame could be easily passed on to the
marketing t e a m . However, a contrary view might be that its due to the overambitious sales by the banks that the recovery experts are enjoying all importance in
the lending business industry. Bankers often follow the policy of "Sell and forget"
since the account is believed to be converted and will be there till any major
problem creeps in. Staffs get really desperate, to the point where they will convince
customers they need something when they really don't. The sales targets lead to
many corrupt practices like opening up an account and closing it the next day to
make sure that the targets are reached. For the customers, it becomes difficult to
understand whether the suggestions made are based on their needs, or the agents job
security or a bonus.
The Banking services, being a specialized service industry, personal selling is the
way banks prefer in expanding the sales. Personal selling in banks takes place in
two ways. Either the customers and banker perform interaction face to face at branch
office or the bank personnel (the customer representatives) g o to customers p l a c e .
Customer representatives are meant to be specialist in financial services to be
offered and they shape the relationship between lending institutions and
customer. But many companies adopt Hard selling way whereby they hire sales
person with least knowledge of the services and rely on their efforts and convincing
skills to win customers. This leads to customers subscribing to facilities which they
really don't need. However, the recession of 2008-09 made us go back to the
drawing board and rethink our strategies primarily pertaining to follow up with the
customers. This can undo the damages which Push sales would create.
Now that we claim the crisis is over, we say it's just a beginning, where lot of
gear shifts will be required. Running at controlled speed to grab the green shoots at
the same time being wary of falling in same trap again would help to ward off the
crisis faster. The learning curve for the last few years in this industry has been very

steep. The credit goes to the quick learning in the face of recession and the resilience
s h o w n by many banks .
We have seen lending i n s t i t u t i o n s u s i n g
innovative w a y s of resolving NPA. 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.
Leads should not be lost while the customer is transferred to a new team.
Though the lending institutions seem to be running on most conservative lines and
lending to the safest customers, it turns out to be a misleading notion when seen in
light of business knowledge of their clients. The standard process of following the
Gearing ratio, balance sheet analysis and cash flow test should be in addition to nonfinancial check points for the customer. The financial indices cannot capture the
intent of the promoters and their expectations from the company. The constitution
of the company plays a very important part in ascertaining their intent and avoiding
fraudulent customers. Once the prospective customer stands tall in these checks, its
business model, industry and average profitability b e c o m e s i m p o r t a n t . A credit
analyst needs to map the company on Michael Porters Value chain, which can
reveal the strength of company. Apart from this, the following table lists the major
industry wise checkpoints for Business Model of clients:
Checkpoints for Business Model Strength in different
industry
Industry
Pharmaceuticals

FMC
G
Trading & shipping
Transportation
Wood and Timber

Checkpoints for the Business Model

Investment in R & D.
Distribution Network is developed/ investment
required. Competent Distributors.
Integration of its Supply chain
Value added to product/service at its
end. Profit margin
Infrastructure in terms of warehouses, ships.
Number of Trucks
owned/leased. Transport
permits
Legal approvals for cutting trees.

Cold storages in place

Perishable commodity Efficient distribution Network.
Textile

Investment to build a brand

Brand strategies for differentiation

Retail
Chemical

The Rental cost.

The value addition and value captured
Brand recall.
Quality check procedures
ISO Norms and regulatory bodies.

Note: we have not included priority sector lending and agriculture which are aimed at
financial inclusion where recover through existing procedures have yielded satisfactory
results.
The above parameters are hardly taken care of by the bankers. The facilities and
limits are decided upon by fixed templates provided by their back office. Another
most influencing agent in their decision making happens to be the target for the
month/quarter. The visit to debtors and physical verification are often compromised.
Thus the huge increase in NPA and i n c r e a s e in problem loans linked to
commercial activity and commercial real estate was not only due to macro
economic reasons.]
4. Post Sales Issues & NPA Recovery Grid
The figures of NPA levels has a direct impact on profitability of banks and hence
stability of economy. Huge amount of credit got trapped for building provisions for
Bad loans during recession for most of the banks. As a matter of fact, due
importance has been given to reduction of NPA by regulators of most countries. Still
recovery is one of the most challenging tasks in banking. Lending institutions often
employ barely legal methods for recoveries (K R Sreenivas, S Shyam Prasad,
2010). The lending institutions employ relationship managers for handling each
customer separately. All efforts are taken to retain them. But often this
relationship is based on the amount of business they bring to the company. Seldom
is the customer profiling done on the basis of risks they pose and taking dynamic
inputs from the relationship managers. In troubled times this becomes increasingly
important. The recovery teams often increases the customer follow up which
becomes counterproductive. Strategizing a recovery process is paramount and
following the NPA recovery grid would aid the process.
The grid is based on two decision-making parameters: Commitment from
customers and co-operation from customers. These are most pragmatic parameters
to be used by recovery agents to understand their clients and differentiate cases.
The customer is placed in one of the below quadrants based on their co-operation
level a n d a c t u a l c o m m i t m e n t
shown i n m a k i n g p a y m e n t s . The
j u d g m e n t s on the parameters should reflect the current state of the asset and the
customer. Profile and track record of the customer can also be considered for this
assessment. Before categorizing the customer into one of the quadrants, the

recovery team must have some experience with the customer or should have
sufficient data justifying the co-operation & commitment levels. The relationship
managers of the company defaulting can based on his judgement classify the
company in four quadrants too. Timely review of the cases can be done justifying
their classification. The NPA Recovery grid is applicable as long as legal
proceedings are in place and ongoing or if they have not started at all. If there were
an outcome in the court the grid would obviously be of no help. The NPA recovery
grid is also sensitive towards the kind security in place for the loan given to the
client. A lending institution having taken good security for giving loan and
operating in a country having faster effective legal system may not have need to
use this grid. In that case, bargaining power of the lending institution will always be
much higher and can make any customer accept their terms. The applicability of the
NPA Recovery grid will be more when legal proceedings takes lot of time and the
lending institution holds less security (or unsecured loans). NPA recovery Grid has
been explained by considering examples from Small & Medium Enterprise segment.
The Grid works well within the boundaries of this segment. However, since the
grid deals with human behaviour and integration, it can be used in all categories,
be it Global corporate or large local corporate. Timely review about companies can
be taken to ensure change in quadrants and thus change in strategies.

Figure- 1 NPA Recovery Grid

Commitment from Customer
High

Low

SILENCE

DEAD

COLLABORATION

TWO FACE ATTACK

Low

High

Co-operation from customer

Collaboration
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. They do
entertain all the calls and meetings initiated by collection departments of lending
institutions. Collaborative customers accept their liabilities and are willing to go
extra mile to pay off their debts. Mostly, the dates decided with the lending
institution for repayments are honoured. More often than not the companies have
defaulted on the loans due to a rare economic downturn or a big setback on
adopting a wrong strategy. Usually such companies have market goodwill and plan
to continue operations after payment process, which give them motivation to repay
quickly.
Strategy for collaboration
- The lending institution should break customers 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.
Example 1 ABC Textiles: This Company was into manufacturing garments
and the NPA resulted due to issues in textile industry downfall (2008 09 recession
of world textile industry). They approached their bank and rolled out a plan for
settling the full amount. A NPA of worth USD 2 Mn was settled in course of 9
months. The loan was unsecured. According to the exit strategy agreed with customer,
every 15 days a payment was to be made by ABC Textiles, which was always
honored. The bank promised to withdraw the legal case on receiving the last
tranche of payment. Bank also allowed ABC Textile to undergo normal business
activities and agreed to meet them only when ABCs customers were not around.
Further, the Bank also promised to give the customer a Conduct certificate
stating entire recoveries have taken place within a day of full recovery to
facilitate them in receiving new working capital. If the bank had tried to mandate
the customer in paying them USD 2 Mn immediately, customer had to probably shut
down the business operations. In all possibility nothing would have been recovered
then (Bankers who had taken security and lent to ABC Textiles would have claimed
their fixed assets) Bank also had let know the customer through the process that
they reserve the right to increase the activities of collection agents & legal
proceedings if the collaborative approach by customer was let go off.
Example 2 XYZ
vegetables with

Foods Pvt Ltd) was into export of processed foods and

100% export oriented units. Due to export slump and material rejection, the
company defaulted with the bank. The Company had well experienced promoters
who approached the bank for help in selling off a sick sister concern, thus aiding
them in tiding off the capital crunch. The bank went forward to the extent of
providing advisory services for the purpose thus working towards a win-win
situation.

Two Face Attack:

Figure 2: Two Face Attack

strategy

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 dont honour most of their commitments of
repayments. They will miss the commitment dates regularly and often come up with
multiple reasons for the same. These customers should be exposed to two faces of
bank a resolute one and a co-operative one.
Two
Face
Strategies:

Attack

- 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 the key.
Example 1- Medial Prints (MP) used to deal in various types of printed plastic and
bin bags. During the recovery process the promoters of MP use to always pick up
call and share the problems of credit flow to agents. They would always commit
but very rarely they would meet commitments. These insights were gained by one
of the agent who patiently gathered maximum information regarding certainty of
payments from the customer. Then another agent from the collections would approach
the customer multiple times before the payment dates to ensure that customer doesnt
go back on commitments. Initially when the second agent was not introduced,
customer would not pay to the bank sighting credit crunch as the reason but would
keep on spending on expensive cars. The two-face attack approach helped to recover
most of the outstanding.
Silence
There are yet another group of customers who feel uncomfortable with the phone calls
and meeting recovery agents/ bank employees. They certainly dont 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. Mostly, the dates decided
with the bank for repayments are honoured. More often than not, just like
Collaborative customers they defaulted on the loans due to a rare economic
downturn or a big setback on adopting a wrong strategy.
Strategies
for
Customers:

Silence

- 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 customers
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.
Example 1 ABC Foods, was a pioneer of 'Ready-to-Eat' Snacks, an established
brand in potato chips manufacturing in Asia. They were also into exporting a wide
range of snacks. The company was keen on not receiving any calls or pushing from
agents and promised few deadlines for payments. Initially a two Face attack was
adopted which got the company into wrong foot with the lending institution. For 30
days nothing came out of the strategy. Then a joint call with the customer was
taken to go on with the Silence strategy i.e Bank will not follow-up with the
customer for the payment, except for once in a week (Every Friday evening).
Customer will repay on weekly basis. Customer missing one or two deadlines will not
tantamount to bank switching over to two Face attack again. But the moment customer
misses the third one; bank will have option to expedite activities with respect to legal
proceedings & re initiate follow-ups by lending institution. The customer agreed
upon this strategy. The customer accepted a written confirmation of the same.
This ensured the bank recover all its outstanding along with interest payment,
which was 15% of the size of facility.
Dead:

Figure 3: Dead
strategy

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.
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 dont 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 dont respond to any communication

and try to escape any kind of payments. In the end, when OTS doesnt 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).
Example 1 XYZ Pharma drugs Limited (MPDL) faced immense problems due
to finished products getting rejected by their client. MPDL availed a USD 1 Mn
unsecured loan from a bank. When agents started calling for overdue, the calls
were not entertained. The employees also stopped co-operating. Multiple trials to
establish contact with the customer did not yield anything substantial.
Simultaneously, the case was filed in court. Legal proceeding was left to take its
own course. Later on, the promoter was found to be already behind bars. Many
banks having lent to the customer after taking security were already after the
customer & the fixed assets. After 2.5 years, Unsecured Bank had to sell the asset
(loan to Company) to an ARC company at around 3 to 4 percent of its original value.
When secured lenders were struggling to recover, there was no possibility for an
unsecured lender. The lending institutions also had to decide on the time they can
afford to keep the debt portfolio in their books or how long they can keep expensive
resources chasing DEAD categorized clients.
.

Any NPA bears a direct impact on banks liquidity, profitability, equity and its
operations. Though the risk analysis, accounting for NPAs and ratio analysis for
lending are quite developed subjects, the researches done on NPA recovery gives a
clear indication that it has not grabbed enough attention of strategist. This paper
attempts to provide strategies which could improve and standardize the NPA recovery
process. Our proposed decision making grid can be used as a modus operandi
across all branches of banks to remove the mayhem which prevails in this
unorganised function of highly organised lending institutions. This grid emanates
from the learning of a large number of live cases which makes it indirectly tested.