Table of Content

Annex I – Bad Debt Review Form.........................................................................................1

Introduction ..................................................................................................................................1

Annex I – Bad Debt Review Form

 Workout Loans Procedure Manual

Introduction
As well known, extending credit is one of the main activities of a Bank so as
to meet the financial needs of businesses in different sectors of the
economy.

Accordingly, the United Bank, to deliver the lending activities, makes

judgments related to the creditworthiness of the borrower by making the
necessary assessments of financial as well as non-financial matters.

However, due to many factors like change in the economic environment,

attitude change of the borrower, force majeure, and others, the
assessments made may not always turn out to be sound and the
creditworthiness of some borrower may decline overtime. In effect, the
Bank may be at risk because the borrowers may fail to honor their
obligations as per the terms and conditions set on the contract.

Nowadays, non-performing loans (NPLs) has become one of the problems of

Banks. To tackle this problem, preparing standardized NPLs management
procedure, aimed at reducing and controlling the growth rate of non-
performing loans of the Bank, is believed to be mandatory.

1. Objectives

This manual is designed with the following objectives:

i. To formulate a consistent, standardized and well-defined

NPLs management procedures;

ii. To facilitate a speedy recognition and recovery of NPLs;

iii. To reduce non-performing loans;

iv. To control the growth rate of non-performing loans;

v. To identify loan cases requiring special attention; and

vi. To institute a better strategy for the treatment of sick loans.

Credit and Risk Mgt. Department 1

 Workout Loans Procedure Manual

2. Conditions for Transferring NPLs to the Credit Information,

Monitoring and Workout Section.

i. When a loan or advance is classified as non-performing loan

as per NBE’s directive no. SBB/43/2008;

ii. When there is potentially adverse condition for the

business/loan, as identified and approved by an appropriate
Credit-Approving Committee (i.e before the loan is turned in
to non performing status); and

iii. When an appeal against a foreclosure decision is accepted.

3. Transfer of NPLs to the Credit Information, Monitoring and

Workout Section

i. NPLs shall be transferred to the section as per the condition

set above.

ii. The Bad Debt Review Form (BDRF) should be filled in, signed
and stamped by the Branch for each NPL and forwarded to
the section. The Branch should keep a copy of the form in
the customer’s file for record purpose.

iii. Along with the Bad Debt Review Form, the latest loan file
should be forwarded to the section accompanied by the
following necessary documents.

 Copies of a recent loan analysis documentation,

 Copies of all correspondence with the customer,

 Details of all legal actions taken to date,

 Copies of all the financial accounts held,

 Details of the collateral held,

 Copies of all other relevant information.

Credit and Risk Mgt. Department 2

 Workout Loans Procedure Manual

iv. The section should confirm the Branch through transfer

confirmation memo format that it has received all the copies
of the necessary documents.
v. The Branch should ensure that the section has received all
copies of the BDRF.

vi. After ensuring the transfer of the account to the section,

then the Branch should mark “Accounts under the
management of the Credit Information, Monitoring and
Workout Section” on the copy of the BDRF retained in the
customer’s file.

vii. The Branch should update the list as and when new NPLs are
transferred to the section.

4. Duties and Responsibilities

4.1. Branch

i. Assists the section by providing requested

information in due course of recovering the NPLs.

ii. The requests shall be lodged by telephone

and/or writing and should be supplied with a duly signed
and sealed letter.

iii. While the case is under workout, the

Branch should not negotiate with the customer, unless the
section authorized to do so.

In this regard, the Branch Manager shall have the

following responsibilities:

i. Timely detecting and transferring of NPLs by

filling the BDRF to the section and making sure
that the transfer is communicated to the
appropriate organ on time;
ii. Providing information on the NPLs transferred to
the section when requested;
iii. Receiving back re-graded performing loans
resolved by the section;
iv. Maintaining a proper file for resolved workout
loan cases; and

Credit and Risk Mgt. Department 3

 Workout Loans Procedure Manual

v. Closely following up on the fulfillment of the

conditions and collection of the repayment of
restructured loans.

Head-Credit Information, Monitoring and Workout Section

i. Receives NPLs documents from Branch and

Committee.

ii. Monitors and does follow-up the cases under the

section.

iii. Reviews and approves credit risk grade

classification. (These will be applicable after
credit risk grading system is designed).

iv. Reviews and presents workout loan cases to the

appropriate approving organ.

v. Re-transfers resolved NPLs handled by the

section to the respective Branches.

vi. Reports on all issues required by Manager or

Assistant Manager-Credit and Risk Department.

Credit Monitoring Follow-up and Workout Officer

i. Handles the loan portfolio of problem accounts,

monitors and follows-up on them until they are
resolved and become performing or are settled
and develops a feasible workout strategy that
protects the interest of the Bank.

ii. Analyzes and evaluates each NPL assigned to

him/her.

iii. Negotiates the terms and conditions of the loans

to be restructured.

iv. Recommends on the resolution of NPLs and

defends the arguments in the recommendations
and explains their findings to the appropriate
approving organ,

Credit and Risk Mgt. Department 4

 Workout Loans Procedure Manual

v. Draws up an action plan in collaboration with

Head-Credit Information, Monitoring and Workout
Section.

vi. Reviews and proposes a credit risk grade

classification of the NPLs assigned to him/her.

vii. Monitors the implementation of the action plan

viii. Monitors and does follow-up on the rescheduled

cases until the loan is re-graded back to a regular
status, or until it has been fully settled.

ix. Draws lessons from the NPLs experience as a

feedback toward improving the Credit
Procedure/Policy.

Legal Service Department

i. Receives legal documents pertaining to NPLs

approved for foreclosure/litigation from the
Credit Information, Monitoring and Workout
Section and/or the Branches.

ii. Reviews the legal documents, comments on

them.

iii. Refers any customer appeal on foreclosure/

litigation decision to the Section or Branches.

Manager and/or Assistant Manager-Credit and Risk Department

i. Plans, directs, coordinates and supervises the

activities of the section.

ii. Controls all non-performing loans and other loans

as well as advances that require special
attention.

iii. Initiates, when necessary, the amendment of the

NPLs Management Procedure.

Credit and Risk Mgt. Department 5

 Workout Loans Procedure Manual

5. Negotiations

Negotiations are discussions intended to reach an agreement with the

defaulter or the concerned parties on the recovery of NPLs.

5.1. The organ responsible for negotiations

i. Manager and/or Assistant Manager-Credit and

Risk Department.

ii. Head-Credit Information, Monitoring and Workout

Section.

iii. Credit Monitoring, Follow-up and Workout Officer.

iv. Sometimes it might be important that the Branch

Manager involves in the negotiation process, but
if and only if he/she is invited by the Department
or Section.

5.2. Negotiation Points

 The Bank’s negotiators should consider and

negotiate the following points with the defaulter
or the concerned parties.

i. The defaulter’s/guarantor’s proposal for repaying

his/her/its debt;

ii. Source and capacity of repayment(down payment

and periodic repayments);

iii. Requirements of the NBE to consider rescheduling;

iv. Settlement condition;

v. Collateral;

vi. Grace period;

Credit and Risk Mgt. Department 6

 Workout Loans Procedure Manual

vii. Tenure/duration of restructuring or rescheduling a

loan

viii. Purpose for injecting an additional loan and

disbursement arrangements (if a loan injection is
deemed necessary). However, in this particular
case, the negotiator should consult the top
management of the bank before reaching oral
agreement with the defaulter; and

ix. Covenants, etc.

 All oral promises or commitments made during

negotiations are documented in writing in the
file.

6. Risk Assessment

The credit Information, Monitoring and Workout Section shall

undertake the following assessments of each NPL.

i. Reviews the sub sector that the business in

which the borrower is engaged in;

ii. Determines the track record of the borrower and

the current status of the business whether or not
the business can generate sufficient income.

iii. Identifies problems from the customer side for

the failure to meet his/her/its obligation as well
as from the Bank side.

iv. Reviews errors or irregularities in the

descriptions of collateral such as the following:
 The comments made by the Bank’s
engineers on the property valuation form;
 The insurance coverage of the
collateral;
 Collateral coverage;
v. Reviews the adequacy of the documentation of
collateral such as:

 The period of limitation for both the

loan and mortgage contracts;

Credit and Risk Mgt. Department 7

 Workout Loans Procedure Manual

 The proper registration of the collateral;

 Whether or not the title deed in the
custody of the Bank is original;
 Whether or not the contracts are signed
by the spouse of the customer and/or the
mortgagor as well;

vi. Investigates whether the customer has any other

attachable property or not (which will be used as
additional collateral in case of litigation);

vii. Reviews the status of the title deed of the

property;

viii. Reviews the genuineness and dependability of

the presented financial statements

ix. Assesses the banking relationship of the

borrower in relation to:

 The borrower’s past credit records and

dealings with the Bank;
 His/her/its repayment track record with
respect to the loan under the section; and
 His/her/its relationship with other Banks
and creditors.

7. Workout Assessment

The Credit Information, Monitoring and Workout Section shall carry out a
comprehensive review and analysis of NPLs cases that can serve as a basis
to design the best recovery strategy. The analysis shall consider:

7.1. Assessment of business strength

a. Financial Statement Analysis

 Receives recent financial statements and

projected cash flow;

Credit and Risk Mgt. Department 8

 Workout Loans Procedure Manual

 Analyzes the present income-generating capacity

of the business;

b. Non-financial matters

 The borrower’s commitment to paying his/her/its

debt;

 The strength of the financial management

system;

 Business risk;

 Management risk;

 Ownership risk; and

 Legal risk

7.2. Assessment of the strength of the security

 Check if the security is properly registered and

documented or not;

 Analyze the security to loan ratio;

 The value of the collateral can be taken from the

estimated value of the Bank’s engineers for the
building, insurance values for machinery, and
etc. Also, we should always consider discounted
values of collaterals for the computation
purpose.

8. Alternative Workout Strategies

Once it is identified that some of the granted loans are classified as non-
performing loan, it needs to take a quick action to correct the problems
that make the loans to be non-performing loans in order to safeguard
the interest of the Bank. Of the different workout strategies to resolve
the problem loan, the most commonly used are:

Credit and Risk Mgt. Department 9

 Workout Loans Procedure Manual

 Convincing the customer to clear his/her/its irregularities

without taking any further action;

 Restructuring of the problem loan for a further period of

time;

 Injection of additional finance (re-financing) to resolve the

working capital shortage of the customer;

 Voluntary liquidation of assets; and

 Foreclosure and/or litigation.

If the recovery of the loan is feasible, appropriate decisions must be
made as to the particular elements to be included in the recovery
package, which may include any one or a combination of the following
options:

i. Restructuring/Extension of the repayment period with the

consent of the concerned parties. It may be done with or
without any additional injection of loans;

ii. Changing the form of the loan fully, or partially( e.g. O/D
to a term loan);

iii. Requesting additional collateral or change of collateral;

iv. Cross-collateralizing multiple loans;

v. Putting additional covenants;

vi. Arranging transfer of loans from one borrower, based on

the mutual agreement of both the borrower and the
would-be buyer of the loan, when an acceptable
agreement is submitted to the Bank and a new buyer of
the loan is deemed to be better than the actual customer;

vii. Voluntary liquidation of collateral;

viii. Voluntary realization of other assets of the borrower;

ix. Replacement or improvement of the management of the

borrower’s business;

Credit and Risk Mgt. Department 10

 Workout Loans Procedure Manual

x. Assigning a co-manager or a controlling staff to work with

the borrower’s capacity on behalf of the Bank;

xi. Reduction of O/D to a lower limit, by collecting or

converting some part of the O/D to term loan;

xii. Persuading owner, shareholders, and directors/managers

of borrowers to enter into a personal guarantee contract
with the Bank;

8.1. Restructuring/Rescheduling NPLs

Conditions to qualify NPLs for restructuring;

 The Credit Information, Monitoring and Workout Section

proves that the restructuring is done fulfilling the minimum
requirement of the NBE and our Bank,

 Borrowers should be ready and willing to pay accumulated

interest starting from the time that the loan turned non-
performing;

a. Restructuring of NPLs that are not transferred to legal

action

i. By taking the cash flow and repayment capacity of the

business into account, NPLs shall be rescheduled or
extended for a reasonable period of time as by the
approval of the appropriate approving body as per the
discretion limit.

ii. The Credit Information, Monitoring and Workout Section

should ascertain the repayment capacity of a business
from the information available, or from the additional
information provided by the customer during an
interview and site visit;

iii. The Section should reproduce the net cash flow from the
operation of the main business and other income to
determine the modality, tenure and periodic repayments.
The customer may reduce his/her/its bad debt from the
sale of assets held or not held as collateral, which would
leave him/her/it with sufficient repayment capacity to

Credit and Risk Mgt. Department 11

 Workout Loans Procedure Manual

service the remainder of the debt over a specified time

span;

b. Restructuring of NPLs after Foreclosure/Litigation

Decision

i. When it is confirmed that a defaulter is ready to

cooperate with the Bank by offering repayment and/or
additional collateral, the Bank should be ready to take the
opportunity and start negotiations with him/her/it;
ii. The customer should submit a letter of application
requesting the suspension of the decision or an
immediate rescheduling of the loan, to the lending
Branch, Credit Information, Monitoring and Workout
Section, Credit and Risk Management Department, V/P
Operation or the President;

iii. The Branch/concerned organs should refer the request

immediately to Credit Information, Monitoring and
Workout Section;

iv. The bank has to demand a minimum down payment that

is at least equivalent to the percentage points indicated
in the following Table to have the foreclosure decision
suspended for three months, provided that there is
nothing that the Bank would lose in the process;

The Minimum Down Payment Percentage Points for Suspending a

Foreclosure Decision

Credit and Risk Mgt. Department 12

 Workout Loans Procedure Manual

No Case Description Rate for rescheduling

. Category Loans Secured against Loans
trucks Secured
against
building
1. Foreclosure When a customer 5%- 10% of the - 2% - 7% of
Decision comes to negotiate outstanding balance the
after the including accrued outstanding
foreclosure/litigation interest (but a minimum balance,
decision has been of the accrued interest). including
made and he/she/it The required repayment accumulated
has been served a amount will be decided interest
30-day legal notice by the HOCC

2. Vehicle When a customer -Accumulated interest Not

seizure comes to negotiate should be cleared plus applicable
after his/her/its 8-15% of the outstanding
vehicle has been balance
seized
3. Building’s When the customer Not applicable -Accumulated
estimate comes to negotiate interest
after the building has should be
been estimated for cleared plus
auction purposes 7-10% of the
outstanding
balance
4. Notice of When a customer -Accumulated interest -Accumulated
sale comes to negotiate should be cleared plus interest
after public - 30% of the outstanding should be
announcement of balance cleared plus
auction to sell the - 12% of the
vehicle/building outstanding
balance

*If the loan is secured against both building(s) and vehicles or other types
of collateral with an acceptable coverage, the minimum down payment
percentage requirements could be the average of the percentage points
given in the Table on which the negotiations could be based.

*However, in all the cases the Management can increase or decrease the
minimum payment requirement if it is found justifiable.

- Also, please note that the above down payment is valid when the loan is
restructured for the first time. However, we may use NBE’s rate if the loan

Credit and Risk Mgt. Department 13

 Workout Loans Procedure Manual

is going to be restructured for over one time as stipulated under NBE’s

Directive no. SBB/43/2008.

c. Restructuring with an Injection of an Additional Loan

An injection of an additional loan for NPLs may take place in

exceptional cases where;

i. The financial statement analysis prepared by the Credit

Information, Monitoring and Workout Section clearly
demonstrates that an injection of an additional loan is
essential to resolve the case and that the collateral
coverage is sufficient;

ii. Shortage of working capital is clearly observed and the

borrower can bring the work orders, or sale contracts;

iii. The purpose of the additional loan is clearly stated;

iv. The repayment capacity can be clearly established;

8.2. Settlement in Cash

It may be possible that a customer proposes a full settlement through

payment of cash.

A negotiated settlement of a loan through cash collection or disposal of

properties may be possible under the following circumstances:

a) The customer has failed to repay the loan as per the

contract, and the Bank is likely to foreclose the properties
held as collateral;

b) The properties held as collateral are already auctioned and

sold, but there remains an outstanding balance, and the
Bank is ready to litigate for other attachable properties; and

c) If the customer is willing to fully settle the loan by selling

properties not held as collateral in order to save the property
held as collateral, the foreclosure decision should be

Credit and Risk Mgt. Department 14

 Workout Loans Procedure Manual

suspended for only three months, until the loan is fully

settled.

8.3. Voluntary Liquidation of collateral toward the partial

settlement of the loan

If a customer decides to reduce the total outstanding balance by

selling some of the properties held as collateral in order to reduce the
regular periodic repayment, etc, the Credit Information, Monitoring and
Workout Section will consider the following:

i. If the customer requests to partially sell properties held as

collateral in the form of vehicles to settle a part of the
loan, written information should be obtained from the
Legal Service Department about the prices of similar
vehicles sold by the Bank in order to establish an
acceptable price;

ii. In case the Section finds that the voluntary liquidation

proposed to the best advantage of the Bank, it has to
ensure that the security coverage is still better than, or at
lease equal to, the former ratio and should seek an
approval for the proposal from the appropriate approving
organ, based on the discretionary lending limit;

iii. When a voluntary liquidation toward the partial settlement

of a loan involves collateral in the form of buildings, it
should be ascertained if the proceed puts our Bank into a
better position;

iv. A negotiated settlement should be sealed with a written

commitment by the borrower to the terms of the
agreement which should have a commencement as well
as a final date. The final date should not exceed three
months for trucks, and six months for building, starting
from the commencement date.

8.4. Legal Proceedings

If negotiations are not found to be the ultimate solution, or if the cost of

correction is not justifiable, the strategy shall be to exit, and it will be up to
the Credit Information, Monitoring and Workout Section to recommend an
exit plan to this end in terms of Foreclosure and Litigation.

Credit and Risk Mgt. Department 15

 Workout Loans Procedure Manual

a) Foreclosure

The Credit Information, Monitoring, & Workout Section will advice the
Branch to recommend for foreclosure under the following conditions:

i. The borrower is not willing to negotiate with the Bank;

ii. The borrower is unable to generate sufficient cash flow to

service his/her/its debt, as the business has
deteriorated/bankrupted;

iii. The borrower does not accept the terms of the

negotiations proposed by the Bank;

iv. The borrower fails to submit essential documents ( e.g. a

financial statement and a renewed trade license);

v. The borrower fails to repay the rescheduled debt as per

the agreement;

vi. The period of limitation expires in less than a year;

vii. The customer is deceased and no legal heirs have come

forth;
viii. The borrower disappears and the Branch confirms that no
capable or legally responsible person exists to assume
responsibility for the loan repayment; and

ix. When the customer starts damaging the collateral, etc.

Credit and Risk Mgt. Department 16

 Workout Loans Procedure Manual

b) Litigation

i. Litigation or legal proceedings could be resorted to as a

strategy to resolve and settle the loan when:

a) The loan is granted against personal guarantee

and the guarantor is not willing to pay the loan;
b) The loan is extended on a clean basis;
c) The collateral held is foreclosed and does not
cover the full settlement of the loan;
d) Other unforeseen circumstances (like
cannibalization) exist.

ii. All assistance must be given to the Bank’s legal

representative, once a decision is made to pursue the
legal route, as delays often reduce the amount of money
eventually recovered;

iii. The Credit Information, Monitoring and Workout Section

should supply the legal personnel with all the information
it has, if any, and follow-up on the implementation of the
decision.

8.5. Write-Off/write-back

The last and the most undesirable action for banks is write-off decision. All
write-off decisions shall be emanated from Branch taking in to account
points stipulated in the write-off handling procedure manual. Therefore,
write-off and write-back process is the responsibility of the lending branch.

9. Application of Penalty Rates on NPLs

a) The Bank charges an additional

penalty rate of 3% as soon as a loan account turns non-
performing, as per NBE’s pertinent directive;

b) The 3% penalty rate will remain intact

until the status of the loan is changed to performing
status, though restructuring/rescheduling decision is
passed;

Credit and Risk Mgt. Department 17

 Workout Loans Procedure Manual

10. NPLs Presentation and Recommendation

After the negotiations and analysis are accomplished, the Credit

Information, Monitoring and Workout Section shall bring the
recommendation to the attention of the appropriate decision-
making body, along with the necessary annex.

11. Workout Process Time

Once the case is transferred to the section, the processing time of

the case should not exceed 45 working days. However, if there is a
justifiable reason to extend the workout process time, it can be
extend by the approval of the appropriate organ as per the
discretion.

12. Empowerment

The decision of all workout proposals shall be the discretion of the

Head Office Credit Committee.

13. Communicating the Decision

The Manager or Assistant Manager of Credit and Risk Department or

shall communicate the decisions, in writing, to the branch and the
concerned organs of the Bank.

14. Implementation and Monitoring

i. The Credit Information, Monitoring and Workout Section

shall assist Branches in the implementation of the
approved decision;

ii. The Section shall monitor and do follow-up on the progress

of the rescheduled/restructured NPLs until the loan is re-
classified as performing loans(pass status);

iii. If a borrower fails to repay his/her/its rescheduled loan for

three consecutive times, the Credit Information,
Monitoring and Workout Section shall recommend an exit
through foreclosure/legal proceedings.

15. Effective Date

Credit and Risk Mgt. Department 18

 Workout Loans Procedure Manual

This procedure shall enter into force effective from February 1,

2010.

Credit and Risk Mgt. Department 19