Treatment:

Generally when a credit is classified as Substandard, Doubtful or Bad according to prevailing classification rules, the entire interest that has been accrued/charged in the account since last “Reference Date” (the date on which previous classification exercise was done) is suspended. Subsequently, all interest charged in the account is also suspended till the account remains classified. However, the classification rule provides that any actual recovery made, after such classification is applied first to interest in suspense and then to the interest overdue or currently due (i.e., interest due before any principal is offset). Therefore, interest suspense is booked into income to the extent the actual recovery takes place.  

Identification of Possible Recourses for Recovery of Delinquent Debts: When an account turns delinquent in spite of all-out efforts, it becomes necessary on the part of the Bank to initiate appropriate actions to recover the debt. Possible recourses, depending on situation, can be as follows:

Issuing Notices/Legal Notices A registered, acknowledgement due notice, preferably through a lawyer is sent to the borrower and to the guarantor (if any) demanding payment of all dues, including interest upto the eventual date of payment, giving a time frame, usually fifteen days. This should normally be done after obtaining proper authority. The borrower and the guarantor should be threatened with a suit after the period mentioned in the notice is expired.   The post office receipts) for sending the registered letters) and the acknowledgements) by the addressee should be carefully preserved as it/these may have to be tendered in the court as documentary evidence. In case the borrower or guarantor refuses to accept the registered notice, the post office would return it to the Bank in due course with remarks “Refused”. This is sufficient service in law. The cover with the remarks of the post office should be kept intact with the other relative documents.   The Bank should carefully scrutinize the documents before serving legal notice or filing a suit. Any discrepancy in the documents, if noticed, should be tactfully got corrected by the borrower, as it might be difficult to secure cooperation of the borrower, after the notice is served. The documents must be kept safely in proper custody, preferably under dual control.  

Goods under Pledge In case of default in payment of the debt by a pedgor, the Bank, as a pledge, has two alternatives. It may bring a suit against the borrower upon die debt, and retain the goods pledged as security or it may sell the goods pledged after giving the borrower a reasonable notice of sale. It should be kept in mind that any sale of pledged goods without notice of sale or during the tendency of the notice period may be held to be invalid by a court of law.   It is not ordinarily expected that any bank would exercise the right such as filing a suit as opposed to selling of goods, unless the goods have become unassailable. If the security has to be ultimately disposed of, it is always expedient to do so as quickly as possible, preferably with the consent of the borrower.

Goods under Hypothecation In a charge by way of hypothecation, the Bank, under the relative document, has a right to take possession of the security and treat it as a pledge. The Bank may, therefore, take possession of the goods and start selling them after giving reasonable notice to the borrower.

The following should be meticulously observed in selling the security:

• In a private sale, written offers from at least two intending buyers who deal in such goods should be invited, after they have inspected the goods.
• Security should be sold to the extent required to adjust the liabilities except when the security is indivisible.
• Record of sale transactions should be maintained properly.
• Borrower should be notified in writing of sale of goods undertaken from time to time.

The principles would apply mutatis mutandis in case of sale of securities by public auction.  

Mortgages:

In recovery of advances allowed against mortgage of property, a suit will have to be filed against the mortgagor to sell the mortgaged property.   A preliminary decree is passed by the court against the mortgagor in the first instance giving him/her/ them time to redeem the mortgaged property.   A final decree is passed ordering the sale of the mortgaged property if the mortgagor (judgment debtor) fails to pay the dues to the mortgage (decree holder).  

Unsecured Advances If it happens that security obtained against an advance does not cover the dues or in cases where no security is available, attempt should, in such cases, be made to secure the advances. If it is not possible, and the client does not repay after a notice has been served, a suit may have to be filed, after carefully assessing the chance of recovery of the debt, with the approval of the competent authority.  

Borrower’s Death

a) In case of death of an individual or proprietor of a sole proprietorship concern:

• No further withdrawals or debit in the account should be permitted.
• If the borrower’s successors and heirs approach the Bank for continuance of the facility, the proposal pursuant to a legal opinion, need to be approved by the competent authority.
• On approval, the debit balance in the account of the deceased should be transferred to a new account in the name of the successors) alongwith the securities held in the account.
• If the heirs or successors do not come forward for such an arrangement, the Bank would have no option but to enforce the securities and invoke guarantees, if any. For the balance amount, a suit may have to be filed, if an out-of-court settlement does not work It should be kept in mind that the heirs of the deceased borrower are responsible to the extent of assets of the deceased, which comes to their hands. They are not personally liable.

b)   In Case of Death of Partner

• Unless there is an agreement to the contrary between the partners, a partnership is dissolved by the death of any partner. If a partnership account is overdrawn and the Bank desires to retain its claim against the estate of the deceased or if securities belonging to the deceased partner are held for the firm’s account:

• The account should be stopped and a new one opened for future transactions. (Otherwise the rule in Clayton’s case shall apply, i.e., all sums paid to credit will release the deceased’s estate to the extent of the amount of such credits, and all debits will form a fresh debt against the new partnership, for which, the estate of the deceased will not be liable.)

• In case where a guarantee is held from a third party, the account should also be broken on the death of a partner, until fresh arrangements are made, with the firm and with the guarantor.
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• c)     In case of death of a joint customer or a guarantor

Steps similar to those stated above, are to be taken.  

Insolvency When a person is unable to pay his debt in full and upon his adjudication as an insolvent, his property in certain circumstances, is taken possession of by the Official Receiver or Official Assignee, under orders of the court. He realizes the debtor’s property and distributes pro rota the proceeds among his creditors.   The Bank, like all other persons claiming to be creditor of the insolvent in respect of debts provable against him, has to tender proof of its debts by producing the evidence of the amount and particulars thereof.   It is the court, who determines the creditors of the insolvent and the amount of such debts.  

Litigation and Costs While recommending institution of legal proceedings in any case, branches are generally required by Head Office to indicate the chances of recovery of the amount involved, the estimated cost of the litigation (court fees. Legal Advisor’s fees, miscellaneous expenses) and the appropriate time that would be required for getting a decree. On the basis of information supplied. Head Office decides whether it would be worthwhile to take legal action or to write off the amount.   If it is decided ultimately to file a suit, it has to be done against all parties, the principal or his heirs, successors or assignees, and the guarantor or his heirs etc., if any, as the case may be. After a decree is obtained, it has to be executed through court process by attachment and sale of the judgment debtor’s property. If in the meantime, the borrower is declared an insolvent, the provisions of relevant Act in this case shall apply.

Loan Loss Provision

When an account turns delinquent and stands classified as “Substandard”, “Doubtful” or “Bad” depending on the degree of delinquency. Loan Loss Provision, at prescribed rates, applicable for each of the category of classification, should be made.   In addition, general provision for each of the unclassified loans should be made at the rate prescribed by the Central Bank.   Usually, the Loan Loss Provision is centrally handled at Head Office, on quarterly basis, based on detailed loan classification exercises undertaken and provision requirement assessed by branches, as per Central Bank’s rules in force. The rates for provision requirement on each of the category of classified loans is the minimum prescribed by Central Bank and Banks are free to make increased provisions.  

Write-off When all the avenues of recovery of a debt stands exhausted, or had to be abandoned for genuine reasons, the question of writing off a debt arises. Branches to approach Head Office for such writing off, reasonably establishing that no other avenue is left to recover the dues.