Recovery of non performing assets (NPA)

RECOVERY OF NON-PERFORMING ASSETS (NPA)
RECOVERY WITH A HUMAN TOUCH.

Supreme Court of India in its judgment on In Olga Tellis vs. Bombay Municipal Corporation (AIR 1986 SC 180 AT 193) observed, "The question which we have to consider is whether the right to life includes the right to livelihood. We see only one answer to that question namely that it does. The sweep of the right to life conferred by Art. 21is wide and far reaching. An equally important facet of that right is the right to livelihood because; no person can live without the means of living i.e. the means of livelihood." 

In Consumer Education and Research Centre vs. Union of India (AIR 1995 SC 922 at 939) dealing with the expression "life", it was held- "The expression 'life' assured in Art. 21 of the Constitution does not connote mere animal existence or continued drudgery through life. It has a much wider meaning which includes right to livelihood, better standard of life, hygienic conditions in work place and leisure." Besides, Quality if life contained under Article 21 of the Constitution includes right to human dignity. (AIR 1978 SC 1514) which is derived its strength from The Directive Principles of the State Policy.

The importance of Article 21 of the Constitution is that when fundamental rights of the petitioners under Article 21 have been violated by the tortuous acts of state or its servants, constitutional Courts can grant relief of compensation. 

An unbiased review of the measures taken for the recovery of debt by banks and financial institutions show that there is an underlying conflict of interest between them and the borrower client. Since "a conflict of interest is a set of circumstances that creates a risk that professional judgment or actions regarding a primary interest will be unduly influenced by a secondary interest", it is imperative to understand what is the primary interest for the bank / financial institution and the borrower. There exists a trust deficit and mutual suspicion creating a divide between the bank / financial institution and the borrower with regard to their perceptions about their respective roles in their contribution to the nation building activities and social obligations. 

The primary objective of commercial banks is to accept deposits from the public and to lend for productive purposes. When the banks accept the deposits from the public, they become the custodian of public fund and keep it under trust. The duty and responsibility of the banks start when they deploy the funds for progress and development of commerce and industry. The prime duty of the borrower is to utilize the funds for the productive purposes for which the bank has lent the funds. Hence, it is apparent that the roles of the bank and the borrower are complimentary to each other and not contradictory. But in the process of lending and utilization of funds, there arise conflicts of interest from time to time which affect the respective cash flows on either side depending on the situation prevailing then which results in the creation of non-performing assets which leads to recovery process being initiated by the bank which the borrower resents.  The perceived knowledge about non-performing asset by the borrower and the bank alike and the modus-operandi of the recovery process adopted by the banks leads to further conflict and prolonged litigations. This is counterproductive to the objectives of lending and utilization of funds affecting severely the economic wealth and health of the nation. Thus it is the inevitable necessity that such deterioration in the economic wealth and health of the nation should be arrested.

Understanding the respective roles of the bank and the borrower which are complimentary to each other is the first step. KYC (Know Your Customer) norms are already implemented. There is vast difference between knowing the customer and understanding the customer and hence more importantly new UYC (Understand Your Customer) norms are to be formulated in line with Banking Codes and Standards adopted by banks as per the norms announced by Banking Codes and Standards Board of India. The next step is to understand and accept the harsh realities and unpleasant truth regarding the prevailing situations in their correct perspectives by the bank and the borrower which may lead to a change of norms in the classification of the account as NPA. The initial two aforesaid steps are very important because "Understanding is the first step to acceptance, and only with acceptance can there be recovery." 

Effective communication is the key to understanding because the very purpose of communication is to understand and to be understood which will pave the way for an endearing and enduring relationship between the bank and its clients. But currently the emphasis is on technology, fiscal policies, system and procedures etc which are, no doubt, positive steps for making the banking and financial system robust and dynamic. But the fact is that technology innovation can bring only the marvels of technology but it cannot produce economic results. Economic results are produced only by knowledgeable and self actualized human resources and quality leadership and also that relationship can be built up only with human beings and not with machines or any policies. Unfortunately no such steps seem to being initiated to produce economic and financial results by building up healthy and strong understanding, endearing and enduring relationship between the bank and the clients. Today the 'relationship banking' has given rise to 'faceless baking' using technology and there seems to be no 'bonding' but only 'binding' between the bank and the customer. This is the basic difference found in what is being done in the recovery of dues of banks and what should have been adopted for the recovery such dues.

What is advocated now is a total change in the attitude and approach to recovery of dues by the banks and the borrowers. Since attitude is the approach that banks take to lend and recover the dues, the result depends upon their attitudes and similarly is the attitude and approach of borrowers with regard to utilization of funds received by way of loan and payment of dues.  Hence, a new concept of "Recovery with a Human Touch" is if understood properly and implemented diligently, would ease the recovery of debts with the mutual consent of bank and borrower and facilitate reduction of NPA to a great extent if not totally eliminating them without jeopardizing the interest and existence of either.

"Recovery with human touch" is the process of recovery without jeopardizing the interest of the bank and the borrower. The basic rule is to fix the problems and find solutions.  There are two types of problems namely the internal problems of the banks and the borrowers respectively as the case may be which are within their individual domain and the other problems are external over which none have any control. Thus it is very important to recognize the cause of the problems to find solutions. 

"Recovery with human touch" is based on the following human behavioral principles:-

"The greatest technology in the world hasn't replaced the ultimate relationship building tool between a customer and a business: the human touch" and "Too often we under estimate the power of a touch, a smile, a kind word, a listening ear, an honest accomplishment, or the smallest act of caring, all of which have the potential to turn a life around" and   more importantly the truth is that "Your situation is never permanent. It is what you make it. Life isn't solid. It's fluid. It changes".   

The "Recovery with human touch" method is based on the fact that it takes considerable time to build and it takes no time to destroy. Considering the roles of the banks and that of the borrower, any wrong step that the bank make either to lend or to recover would certainly affect the borrower and vice versa any erroneous path that the borrower takes would also affects the bank since their existence are interdependent and not independent. Any weakening of the banking system is detrimental to the economy of the nation and so also any adverse features inflicted on the entrepreneur organization would also affect the contribution to the welfare of the society and deprive the livelihood of the multitude of the employees and workers engaged by the enterprise and also other stake and share holders. Hence, the principle behind "Recovery with Human Touch" is that any recovery process being adopted should not jeopardize the existence of both the lender and the borrower aiming only to reconstruct and not to destroy.

In the ultimate analysis, the veritable realization of the organizational objectives and individual aspirations for banks and enterprises depend upon the following principle: "In management, the first concern of the company is the happiness of the people connected with it. If the people do not feel happy and cannot be made happy, that company does not deserve to exist."

There may exist a different situation where the borrower never has any problem but tend to become non-paying. They are the willful defaulters. Their case is to be treated differently and with a firm resolve. Therefore, it is imperative that there should be a definite distinction made between honest borrower with integrity and willful defaulter. This distinction should be made objectively and subjectively taking into account the human sensitivity. Expediency should not be a policy to declare a borrower under a willful defaulter category who has a long association with the bank or financial institution who has been doing well but who becomes a defaulter due to circumstances beyond his control.  

In the ultimate analysis it is imperative that any action taken by the bank / financial institution should not deprive the borrower his rights enshrined in the constitution under Article 21 and also should not infringe into the Human Rights and hence any recovery proceedings should be initiated with a human touch so that the interest of both the bank and the borrower should be sustained and maintained in the national interest.