Lenders in India recover classified loans using five main techniques: rescheduling the loan, persuasion and follow-up, amicable settlement, a recovery agent, or disposal of collateral. Which one works best depends on why the borrower defaulted, whether the loan is secured, and how much time and cost the lender can absorb.
Loan recovery is one of the hardest parts of running a lending business. Formal recovery norms exist, but in practice, they can be slow to enforce. This feeds a culture of non-repayment that raises liquidity issues for the lender and pushes up the cost of disbursing loans. A platform like Finezza can flag early warning signs before an account turns bad, but once it does, the five techniques below still apply.
Key Takeaways
- Reschedule the loan first if the borrower has the means to repay but needs more time.
- Start persuasion and follow-up as soon as a single payment deadline is missed.
- Try an amicable settlement before going to court, since legal recovery in India is slow and expensive.
- Bring in a recovery agent when the borrower is untraceable, unwilling, or the security is hard to dispose of.
- Treat disposal of collateral as the last resort, and only after legal approval and proper notice to the borrower.
5 Loan Recovery Techniques for Classified Loans
Here are the five best techniques to recover classified loans given by banks or NBFCs:
1. Reschedule the Loan
The RBI has provided guidelines for the rescheduling of loans. This covers default loans which can be saved if the recovery timeline is increased. Banks and NBFCs can take advantage of these guidelines to cut their losses and recover the full amount, including principal and interest.
There are some instances in which the rescheduling of the loan is the best option and should be tried first. It is also the option that provides the borrower with the highest benefit of the doubt and is considerate of the financial predicament of the borrower.
However, there are certain circumstances in which rescheduling of loans might not work. This happens when the loan recipient does not have the means to repay the loan, irrespective of the timeline for repayment. For example, if you’ve disbursed a business loan but the business has failed, then it may be difficult to recover the full loan amount despite rescheduling.
2. Use Persuasion and Follow-Up
This technique, known as loan recovery techniques, works best when the default has been made with mala fide intentions, and the borrower has the means to repay the loan amount. Unfortunately, a lot of the time, a business may start facing liquidity or cash flow issues, and the company may default while still having the means to repay the loan.
When should you start persuading a borrower to pay their instalments? This should start when the account’s performance becomes unsatisfactory. Lenders need to wait till a few defaults and late payments have taken place. However, once a single deadline has been missed, you can start persuasion.
There are several ways to put pressure on the borrower to repay the loan amount. Even though these ways take time and effort, they are low-cost. The main aim should be to recover the loan amount as soon as possible and maximise the lender’s returns:
- You can issue letters and reminders to start the persuasion process.
- Once these go unanswered, you can turn towards personally phone calling the borrower.
- If the borrower is not amicable, the lender may visit the borrower’s offices or residence to persuade the borrower to return the loan amount as quickly as possible.
3. Reach an Amicable Settlement
The recovery of a loan through the legal process can be highly cumbersome, expensive, and time-consuming. The legal system in India is overburdened and the legal procedures are not conducive to a fast and smooth recovery. The courts may issue stay orders to lenders, which can stimy any efforts by the lenders to recover the overdue loan.
Hence, trying to recover the loan through amicable settlement and out of court should be the lender’s primary aim. How do you reach a peaceful settlement with a borrower?
The best way is to provide some leeway. You should not aim to recover the entire amount due, including the full interest. In fact, even if you recover the entire principal amount and 50% of the interest amount, it is a good day.
The worst-case scenario for an amicable settlement is that you do not receive any of the interest but manage to recover the principal amount. This should only be done in the direst circumstances when the loan is unsecured, or the documents are faulty.
4. Engage a Recovery Agent
Numerous recovery agents are operating in the Indian markets. The job of the recovery agent is to facilitate loan recovery that is completely stuck. However, there are certain situations in which taking the help of a recovery agent is the best foot forward.
These situations include when the chances of recovery are slim, the borrower is untraceable, the borrower is entirely unwilling, the disposal of the security is complex, the deposit is fake or forged, and other difficult situations.
What will the recovery agent do? The recovery agent will send periodic reports to update the lender on progressing the case. If the recovery agent successfully facilitates recovery, they will receive a commission from the lender.
5. Dispose of the Collateral (Last Resort)
This is the last resort when it comes to recovery. This technique assumes that the loan is secured and that the borrower has adequate security to pay off the loan amount. Before proceeding with this step, you need approval from your company’s legal and recovery divisions.
The first step towards the disposal of collateral is to provide adequate warning and chances to the borrower. Usually, you will need to send around 3-4 reminders. Next, you will need to send a legal notice through one of the empanelled lawyers of the bank.
If you do not get any responses or any repayment, you should start with legal proceedings. This involves taking stock of the security, assessing its market value, making arrangements for an auction, and taking a court date.
A Quick Comparison Between Different Ways to Recover Loan Techniques
Frequently Asked Questions
1. What is the best loan recovery technique for a classified loan?
There’s no single best option. Rescheduling and persuasion work well early on, while a recovery agent or collateral disposal suit cases where recovery has stalled.
2. When should a lender start persuasion for loan recovery?
As soon as a single payment deadline is missed. Waiting for several defaults before starting persuasion reduces the chances of recovery.
3. Why is amicable settlement often better than legal recovery in India?
Courts in India are overburdened, and legal proceedings can be slow, costly, and subject to stay orders. An amicable settlement often gets a lender their principal and part of the interest faster than a court case would.
4. When should a lender use a recovery agent instead of handling recovery in-house?
When the borrower is untraceable or unwilling, the security is complex to dispose of, or the documents involved are suspect. Recovery agents work on commission, so the lender pays only on successful recovery.
5. Is disposal of collateral always the first option for secured loans?
No. It’s the last resort, and lenders need legal approval, several reminders to the borrower, and a formal legal notice before proceeding to auction.
Wrapping Up
There are several techniques to recover classified loans, and which way to choose depends on the facts of each case. It is best to rely on persuasion and follow-up in the early stages, while in the final stages, there may be no option but to rely on the courts. A recovery agent can help if the case is stuck or seems to be too difficult.
Check out the Finezza blog post for more bad debt recovery strategies.
You can also get in touch with us if you need help assessing lending risk and minimising your non-performing assets. Our state-of-the-art bank statement analysis tools come before you need to recover a bad loan, i.e., while deciding to disburse loans; Let loan recovery be your last resort…
Leave a Reply