A Project Report on

“Retail Loan Lending: Rise In Defaults, Reasons and Suggested Measures

For Recovery”

Carried out at

“HDFC Bank”
Pimple Saudagar Branch, Pune

In partial fulfillment for the award of the degree of

MASTERS OF BUSINESS ADMINISTRATION (M.B.A)

In

MARKETING

DEPARTMENT OF MANAGEMENT SCIENCES (PUMBA)

SAVITRIBAI PHULE PUNE UNIVERSITY
PUNE – 411007
(2018-2019)

Submitted By: Project Guide:

MINAL PATIL Prof. Hemant Katole
Roll No. : 17217 DMS, SPPU (PUMBA)

MBA++ I YEAR (MARKETING)

DEPARTMENT OF MANAGEMENT SCIENCES (PUMBA)
SAVITRIBAI PHULE PUNE UNIVERSITY (SPPU)
 SAVITRIBAI PHULE PUNE UNIVERSITY
DEPARTMENT OF MANAGEMENT SCIENCES (PUMBA)
Ganeshkhind, Pune-411007

CERTIFICATE

This is to certify that Minal Patil, student of MBA, studying at Department of

Management Sciences (PUMBA), Savitribai Phule Pune University, has
successfully finished his internship at HDFC Bank, Pimple Saudagar Branch,
Pune from June 4th 2018 till July 31st 2018. The topic for the project is ‘Retail
Loan Lending: Rise In Defaults, Reasons and Suggested Measures For
Recovery.

To the best of my knowledge he has been found hardworking, sincere and

honest throughout the internship.

We wish him every success in his future career.

Prof Hemant Katole Dr. Prafulla Pawar

Internal Guide Head of Department

 DECLARATION OF ORIGINALITY

I hereby declare that the project report on “Retail Loan Lending: Rise In
Defaults, Reasons and Suggested Measures For Recovery” have been carried
out by me, and to the best of my knowledge, a similar work has not been
submitted earlier, in partial fulfillment of the requirement for the course of
study.

The report is prepared in accordance with the guidelines issued by Department

of Management Science (PUMBA) Savitribai Phule Pune University

Name:Pune
Place: Sumit Todi Minal Patil

Date: Roll No.: 17217

 ACKNOWLEDGEMENT

“It is not possible to prepare a project report without the assistance & encouragement of other
people. This one is certainly no exception.”

On the very outset of this report, I would like to extend my sincere & heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation & encouragement, I would not have made headway in the
project.

I acknowledge with a deep sense of reverence, my gratitude towards my parents and family
members, who have always been there to support me morally as well as economically.

I am ineffably indebted to Mr.Dinesh Borse, BM, HDFC Bank, Pimple Saudagar Branch,
Pune for conscientious guidance and encouragement to accomplish this assignment.
Furthermore I would like to express my sincere gratitude to Bank for providing me excellent
guidance, learning opportunity and creating an environment of ease to work and acquire all
necessary information required to prepare this report. I am also indebted and would also like
to thank all the staffs of HDFC Bank who have helped me during the project and gave their
valuable recommendation despite their busy schedule.

I am extremely thankful and pay my gratitude to my internal guide Prof. Hemant Katole for
his valuable guidance and support on completion of this project. Discussions and
deliberations with him have enriched my knowledge to form my project with an enhanced
approach.

I extend my gratitude to DMS (PUMBA), Savitribai Phule Pune University for providing
me with this opportunity and platform.

At last but not least gratitude goes to all my friends who directly or indirectly helped me in
completion of this project report.

Any omission in this brief acknowledgement does not mean lack of gratitude.

Thank You
Minal Patil
17217
MBA++ (2018-2019)
Department of Management Sciences (PUMBA)
 Executive Summary

The Public Sector Banks(PSU’S) have been greatly affected at present context
due to increase in their Non-Performing Assets (NPA’S) at an alarming rate.
The retail segment too has witnessed considerable defaults in the last few year.
Thus, to ensure the immediate step to tackle with this problem is the ultimate
aim of the Reserve Bank of India by systematically conduct the recovery
process.

The Internship report entitled “Retail Loan Lending: Rise In Defaults,

Reasons and Suggested Measures For Recovery” is prepared as
requirement of MBA program of Department of Management Sciences
(PUMBA), Savitribai Phule Pune University. The primary objective of
this project is to study the increasing defaults in the retail lending sector
of the public sector bank by deeply studying the retail loan products of
HDFC Bank and accordingly find out their reasons for defaults and
ultimately suggest the measures of recovery for such defaults. This
report presents the existing recovery process of retail loans at HDFC
Bank and some measures to prevent the defaults in retail lending sector.
 Table of Contents
Chapter 1: Introduction.......................................................................................................................... 1
1.1 The Indian Banking System ............................................................................................................ 1
1.2 Introduction to Retail Lending ....................................................................................................... 2
1.3 Types of Retail Loan Product ......................................................................................................... 2
1.4 Default in Retail lending ................................................................................................................. 3
1.5 Recovery ........................................................................................................................................ 3
Chapter 2 : Company Profile ................................................................................................................... 4
2.1 An Overview of HDFC Bank ............................................................................................................. 4
2.2 Mission Statement .......................................................................................................................... 4
2.3 A Saga of Vision and Enterprise ...................................................................................................... 5
2.4 Objective of HDFC Bank .................................................................................................................. 5
2.5 Global Presence of HDFC Bank........................................................................................................ 5
2.6 Overall Product Profile of HDFC Bank ............................................................................................. 7
2.7 Reatil Loan Products of HDFC Bank ................................................................................................ 8
Chapter 3 : Research Methodology ........................................................................................................ 9
3.1 Introduction ................................................................................................................................... 9
3.2 Research Design ............................................................................................................................. 9
3.3 Methodology Followed ................................................................................................................ 10
3.4 Objective of The Study ................................................................................................................. 11
3.5 Limitations ................................................................................................................................... 12
Chapter 4 : Defaults in Retail Lending and Measures for Recovery .................................................... 13
4.1 Reasons for Default in RetaiL lending .......................................................................................... 13
4.2 Early Symptoms for Recognizing defaults ................................................................................... 15
4.3 Debt Recovery Process ................................................................................................................. 16
4.4 Preventive Measures for Defaults in Retail Lending .................................................................... 20
4.5 Steps Taken by Government for Minimizing Defaults ................................................................. 23
Findings.................................................................................................................................................. 26
Conclusion ............................................................................................................................................ 27
Recommendations ................................................................................................................................ 28
Limitations ............................................................................................................................................ 29
Bibliography .......................................................................................................................................... 30
 CHAPTER 1

INTRODUCTION
1.1 The Indian Banking System

Banking in our country is already witnessing the sea changes as the banking sector seeks new
technology and its applications. According to Reserve Bank of India Act 1934, banks are
classified as scheduled banks and non-scheduled banks. The scheduled banks are those,
which are listed in the Second Schedule of RBI Act, 1934. Such banks are those, which have
paid- up capital and reserves of an aggregate value of not less than Rs.5 lakhs and which
satisfy RBI that their affairs are carried out in the interest of their depositors. All commercial
banks Indian and Foreign, regional rural banks and state co-operative banks are scheduled
banks. Non Scheduled banks are those not listed in the Second Schedule of the RBI Act,
1934.

Public Sector Banks

SBI and it’s Subsidaries Nationalized Banks Regional Rural Banks

Current Scenario
Currently, if we see the condition of public sector bank, they are greatly affected with a
sudden rise in the non-performing accounts that is hampering the income and financial health
of these banks.

Reserve Bank of India is an autonomous body, with minimal pressure from the Government
that is authorized to solve this burning problem of these banks. Recently, RBI has announced
to capitalized these bank and establish the Assets Reconstruction Company(ARC’s) to solve
the NPA problem of public sector banks. Along with this, RBI has even started it’s recovery
proceedings against the top 12 mega defaulters that has been responsible for 25% of the total
non- performing accounts of the public sector banks.

1
1.2 Introduction to Retail Lending
From past few years, after facing the huge defaults in loans from corporate sectors, the public
sector banks has identified one of the safe and secure segment for lending, that is, Retail
Lending. Today retail lending is considered to be one of the most secured and safe means of
lending as:
➢ The amount of risk involved is comparatively less to that of corporate sector
➢ The investment amount is very small
➢ There are variety of schemes and product available in retail sector for a bank to generate
profit.
➢ With well diversified portfolios the needs of a large number of customers can be met.
➢ The target customers are generally individuals or small organisations.
➢ Standard products are offered to customers.
➢ Because of decentralisation, banks can make quick credit related decisions.
➢ These loans are designed to cover varied segments of risks.
➢ Volume of business is high.

1.3 Types of Retail Loan Products

1. Home Loan
➢ For construction of new dwelling unit and purchasing of new residential house/ flat.
➢ For purchase of old dwelling unit (not more than -25- years old).
➢ For purchase of plot of land, subject to the condition that a house will be constructed
thereon
➢ For repayment of the loan already availed from any other Bank / Housing Finance
Company and/or other sources, provided documentary evidences are produced.
➢ For improvement of the existing house.

2. Car Loan
➢ For purchase of New Four wheeler (i.e., Car, Jeep, Station wagon etc.) for private use.
➢ For purchase of four wheeler

3. Mortgage Loan
For any purpose except for financial speculation of any type.

4. Education Loan
For higher studies and abroad education lending purpose.

2
5. Personal Loan
Personal loans are intended to meet any kind of personal expenses of the borrower such as
family functions, medical expenses, travel expenses in India and abroad, marriage expenses
of children, buying computers/laptops, festival celebrations etc.

6. Two wheeler loans

➢ For two wheeler purchase.

1.4 Default in Retail Lending

Default is a situation when a borrower or a debtor has not met his or her fixed repayment
obligations in the form of interest and principal according to the debt contract. Default may
occur if the debtor is either unwilling or unable to pay their debt. Thus, default can be either
willful or the various external and internal forces hinders the capability of the borrower to
repay his/her fixed repayment obligations.

1.5 RECOVERY

Recovery is the process of regaining and saving something lost or in danger of becoming
costs. At the present, for the recovery of loans, banks needs to file the suit at Debt Recovery
Tribunal due to which the recovery process has been simplified and shortened to a great
extent.

For defaulters who are unwilling to pay their debt, the only means to recovery is to take
possession of their assets and auction them under the SARFAESI Act with the help of debt
recovery officer appointed by debt recovery tribunal(DRT). And similarly, for unwillful
defaulters, their amount can be recovered through by banks themselves without taking any
help from the DRT unless required.

Just recently, RBI has been empowered by government to handle the non-performing assets
of the public sector banks and ensure the recovery proceedings for cleaning the balance sheet
of these banks. Along with this, RBI has even started it’s recovery proceedings against the
top 12 mega defaulters that has been responsible for 25% of the total non performing
accounts of the public sector banks.

3
 Chapter 2

Company Profile

HDFC Bank is a leading Indian retail bank. Innovative products

and smart banking solutions make us the banker of choice for
millions of users each day. With a nationwide network
of branches, ATMs and 240,000+ merchants (point-of-
sale)accepting HDFC Bank credit and debit cards, we continue to
redefine banking convenience.
Personal banking solutions from HDFC Bank offer smart features
and benefits to ensure that you make the most of your
relationship with us. Our retail banking products and services are
designed to meet the end-to-end needs of all types of users.
From zero balance savings accounts to customized salary
accounts, flexible home and personal loans to 360 NRI Banking
services, HDFC Bank is for everybody.
HDFC Bank is preferred because it offers the entire banking
experience under one roof. Amazing offers, customized solutions,
minimum paperwork and quick turnaround times are some of the
hallmarks of HDFC Bank that has made it the banker of choice in
India.

2.2 Mission Statement

“To be a top ranking National Bank of International

Standards committed to augmenting stake holders' value
through concern, care and competence”.

4
Best Banking Performer, India in 2016 by Global Brands Magazine Award.

Best Performing Branch in Microfinance among private Award for Best Performance in
sector banks by NABARD, 2016 Microfinance[16]
Bank of the year & best digital banking
KPMG study of India's Best Banks
initiative award 2016[17]
Business leader of the year- Aditya
AIMA Managing India Awards 2015
Puri[18]
Most Valued brand in India for third
BrandZ Rankings
successive year[19]
Best managed public company -
FinanceAsia poll on Asia's Best Companies 2015
India[20]
Barron's World's 30 Best CEOs - Aditya Puri[21]
Best in class straight through
J. P. Morgan Quality Recognition Award
processing rates[22]

2.4 Overall Product Profile of HDFC Bank

➢ Deposits Products
➢ Retail Banking
➢ SME Banking
➢ Wholesale Banking
➢ Rural/Agri Banking
➢ Internet Banking
➢ ATM/Debit Cards
➢ Wealth Management
➢ Demat Facilities

5
2.7 Retail Loan Products of HDFC Bank

HDFC Bank offers a wide range of retail loans to meet the diverse needs of the customers.
Whether the need is for a new house, child's education, purchase of a new car or home
appliances, the unique and need specific loans will help the customers to make their dreams
to reality.

Whatever be your need, we have a loan for you. Choose HDFC Bank for quick check on eligibility, competitive
interest rates, flexible terms, minimum paperwork and fast disbursal.

Name of the Product Nature of Facility(Purpose/Eligible Persons)

Home Loan to Individuals Housing Loans to Resident Indians

Mortgage Loan Advance Against Properties

Education Loan • Education and Training

• Vidya Laxhmi
Auto Loan Resident Individuals/HNIs/Corporates

Other Retail Loans:

• Personal Loan
• Loan against property
• Loans for professional
• Gold Loan
• Business loan

6
 CHAPTER 3

RESEARCH METHODOLOGY

3.1 Introduction
Research methodology is a way of systematically solving the research problem.
It helps to find out accuracy, validity and suitability of the study. It may be
understood as a science of studying how research is done systematically.

Therefore, research methodology refers to the various sequential steps adopted

by a researcher in studying a problem with certain objectives in view. When we
talk of research methodology we not only talk of research methods but also
consider the logic behind the methods that we are using in the context of our
research study and explain why we are using a particular methods or techniques
and why we are not using others.

This study will help us to know the reasons of defaults in retail lending and
what are the best possible ways to overcome those defaults and whether how to
ensure the smooth recovery of existing defaults. It makes an in depth study and
analysis of the financial as well as business environment of retail lending in
current scenario.

3.2 Research Design

Research design is the combination of condition for the collection and analysis
of data that aims to combine relevance to the research purpose with economy in
procedures. Research design is the plan, structure and strategy of investigation
conceived so as to obtain answers to research process and to control fluctuation.

7
3.3 Methodology Followed

Generally, research is understood to follow a certain structural process. Though

step order may vary depending on the subject matter and researcher, the
following steps are part of this formal research, both basic and applied.

1. Observations and Formation of the topic: Consisted of the subject area

of one’s interest and following that subject area to conduct subject
related research. A keen interest in the chosen subject area was advisable.
The research is to be justified by linking its importance to already
existing knowledge about the topic.
2. Hypothesis: A testable prediction was designated to present the
relationship between two or more variables.
3. Conceptual definition: Description of a concept by relating it to other
concepts.
4. Operational definition: Details in regards to defining the variables and
how they will be measured/assessed in the study.
5. Gathering of data: Consisted of identifying the population and selecting
samples, gathering information from and/or about these samples by using
specific research instruments.
6. Analysis of data: Involved breaking down the individual pieces of data
in order to draw conclusions about it.
7. Data Interpretation: Represented through tables, and then described in
words.
8. Test, revising of hypothesis
9. Conclusion

8
3.4 Objective of the Study

• The overall objective of this project is to study the reasons behind rising
defaults in retail loan lending and suggesting the optimum measures for
recovering those defaults.
• To understand the existing recovery process of HDFC Bank.
• To understand the efforts taken by the government and RBI to tackle the
non-performing accounts of the PSB’s
• To know about the importance of documentation and processes pre and post
sanctioning of loan
• To understand the basic lending process in retail banking
• To study about the business environment that is currently being faced by
HDFC Bank in retail lending and it’s current scenario.

3.5 Data Collection

The report is prepared by collecting the data through the primary and
secondary sources.

➢ Primary Sources
o Collected responses on reason behind default through Questionnaire
o Observation
o Visit to courts for taking action against defaults
o Visiting the customer office for inspection
➢ Secondary Sources
o Internal Circulars
o Financial Records and Statement
o Access to credit files of the organization

9
 o Internet
o Newspapers
3.6 Limitations
The summer project report on “Retail Loan Lending: Rise In Defaults,
Reasons and Suggested Measures For Recovery” was completed gaining a
lot of practical knowledge and experiences. However, there were certain
limitations observed. The main limitations are:

• The report had been prepared by using the limited information due to the
limited time of internship performed at HDFC Bank.
• Some information was highly confidential and cannot be presented in the
report.
• The deep analysis could not be done due to the time constraint.
• It is based on the personal understanding of the internee regarding the
business operations during the internship period.
• Due to some unavoidable reasons, it was difficult to collect precise
information.
• The report could not cover entire concept of retail lending of HDFC Bank.

10
 CHAPTER 4

Defaults in Retail Lending and Measures for Recovery

4.1 Reasons for Defaults in Retail Lending

Reasons can be divided in to two broad categories:

A] Internal Factor

B] External Factor

Internal Factors

Internal Factors are those, which are internal to the bank and are controllable by banks

➢ Lack of Follow up Measures:-

"A stitch in time saves nine"
If bank is taking constant follow-up measures regularly and systematically of the repayment
schedule of the borrowing unit then it will help the bank to prevent or minimize the loss in
the coming future. Many ills can be checked through such follow-up measures by keeping the
borrowing units on their alertness and guiding them to rectify their mistakes in the first
opportunities or extending them a helping hand in tiding over their tight times.

In the absence of such follow up measures, it may result the borrowing units not only ignore
payment of their dues to banks but also often tread on wrong tracks, much to the detriment of
their own financial health and that of the banks.

➢ Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs. Proper appraisal of following is quite essential to ensure the
repayment of fixed obligation of the borrower:
• Borrower’s appraisal
• Technical appraisal
• Management appraisal
• Economic appraisal
• Market Appraisal
• Environment Appraisal

11
➢ Lending beyond FOIR

There is provision of co-applicant in the bank to meet the requirement of networth of the
primary borrower and thereby it increases the banks loan to value ratio for borrower whose
credit history is bit poor. As the income source can be easily manipulated, therefore bank are
witnessing default in their lending, simply due to lending beyond the FOIR of the principal
borrower. This has occurred due to the existence of co-applicant which has said to remain
boon for the borrower while making an application for loan at the bank.

➢ Poor lending decision

In past, the public sector did not identify the retail sector as their priority lending sector and
gave loan to the corporate sector inspite of lots of risk involved in that sector due to which
the level of NPA has been increasing at the alarming rate at the present.

Just in last few years, these banks has identified the retail sector as the most trustworthy
sector and has started focusing on their retail customer to minimize their NPA accounts.

➢ Lack of post disbursement supervision

➢
Most of the banks lacks the tendency of post credit supervision. It is just at the present
scenario that the banks are awaken due to their rise in defaults and have started proper post
credit supervision of their financed projects and other loan accounts.

➢ Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.

External Factors:
External factors are those, which are external to banks they are not controllable by banks.

➢ Fluctuations in statutory regulations and norms:-

Certain unforeseen, unpredictable and unexpected fluctuations in the statutory regulations
such as change in the taxation system, Excise rates, Commercial Tax, and other revenue tools
of the government, tend to throw the entire planning of the entrepreneur as well as retail
segment borrowers. Thus, this leads to either delay or ultimately default in the retail lending.
➢ Wilful Defaults

12
There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order to
get back the money extended to them as advances and loans.

If we see the current context, in Maharashtra, government has decided to forgive the
agricultural loans of all the farmers due to which those accounts has tend to become NPA in
the books of accounts of public sector banks and has adversely affected their profitability.
Due to this, even the wealthy farmers, who were able to pay back their loans have undergone
defaults in their loan

➢ Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, thereby reducing their profitability and liquidity.

➢ Industrial sickness
Improper project handling, ineffective management, lack of adequate resources , lack of
advance technology, day to day changing government policies give birth to industrial
sickness. Hence the banks that finance those industries ultimately end up with a low recovery
of their loans reducing their profit and liquidity.

➢ Diversion of funds
There may be intention of the borrower to use the borrowed funds for other purposes rather
than the specific purpose for which loan is taken. Thus if the bank do not takes proper
inspection of their sanctioned funds, then it may lead to default of their loans.

➢ Labour problems of borrowed firm

Labour problem is very common in India due to very less availability of the skilled labour
force. Thus if the borrowed firm faces any labour related problems and if they cant solve their
issues timely, it equally affects the installment payment by such firms.

➢ Inefficient management
If the bank is unable to identify the efficiency of the management of the firm to whom it is
lending, then it may face defaults due to business failure of such firms.

➢ Obsolete technology
If the borrowing agency is using obsolete technology, then it will be difficult for them to
compete with their competitors which will lead to default in the lending of banks.

➢ Default due to natural calamities:-

A certain proportion of default can be attributed to natural calamities such as floods,
earthquakes, storms, etc. Natural calamities not only affect the loan repayment, but also
directly exert additional burden on the Government in terms of relief measures, waivers etc.

13
4.2 Early symptoms for Recognizing Retail Loan Defaults

Four categories of early symptoms:

a. Financial:
➢ Non-payment of the very first installment in case of term loan.
➢ Bouncing of cheque due to insufficient balance in the accounts.
➢ Irregularity in installment
➢ Irregularity of operations in the accounts.
➢ Payment which does not cover the interest and principal amount of that installment
➢ While monitoring the accounts it is found that partial amount is diverted to sister concern
or parent company.

b. Operational and Physical:

➢ If information is received that the borrower has either initiated the process of winding up
or not doing the business.
➢ Overdue receivables
➢ Stock statement not submitted on time
➢ External non-controllable factor like natural calamities in the city where borrower
conduct his business.
➢ Frequent changes in plan
➢ Non payment of wages

c. Attitudinal Changes:
➢ Use for personal comfort, stocks and shares by borrower
➢ Avoidance of contact with bank
➢ Problem between partners

d. Others:
➢ Changes in Government policies
➢ Death of borrower
➢ Competition in the market

14
 4.3 DEBT RECOVERY PROCESSES:
Debt recovery processes can be typically of following kinds, each involving different
procedure:
4.3.1 Normal Recovery Process of HDFC Bank
This procedure will generally apply to the debtors who are willing to pay the dues with
normal recovery process. The recovery agent has been authorized by the bank to collect the
past due debt from the particular customer.

a. The customer is notified by the bank of the details of the recovery agent for collection
of the past-due debt.
b. Making customer calls
This is the first step in recovery procedure and following rules should be followed generally:
➢ Calls are made from the same number as advised by the bank to the customer.
➢ The agents disclose his identity and authority at the first instance.
➢ The agent contacts the debtor between 0700 hours and 1900 hours, unless the special
circumstance of his/her business or occupation requires the bank to contact of a different
time. Under no circumstances, can the customer be called beyond 2100 hours.
➢ All calls where the customer becomes abusive or threatening should be appropriately
documented.
➢ Customer’s question be answered in full. They should be provided with information
requested and given assistance in making recovery. Minor issues should be resolved.
➢ How often to call customer/ The purpose of a collection call as to bring to the
Customer’s notice the obligation and to seek a commitment to pay on a specified date.
Once a promise is elicited a call may be made to serve as a reminder and for confirmation
of payment.
➢ If the customer is not available during a few calls made by the agent, a message may be
left to an adult family member as follows ”Please leave a message that ABC had called
and request the customer to call ABC back at the given phone number”. The message
should not indicate that the customer ABC has overdue amount , or the call originated
from a Recovery agency.

15
c. Visit to customer (debtor)
This would be the second step in collection process. A customer should be visited for debt
collection only after these conditions are satisfied:

➢ The debtor has not paid the due amount within the days of grace and the dues are still
outstanding against him/her.
➢ The debtor has been notified of the amount due and also of the name of the collection
agent.
➢ The collection agent has taken an appointment from the debtor for the visit.
➢ The agent should respect privacy of the debtor. Privacy policy as discussed above for
calls would apply during visits also.
➢ During the visit, due respect and courtesy should be shown to the customer and the
interactions should be civil and polite as per the principal’s policy.
➢ During interactions with the debtor, the agent must not use threats or intimidation
verbally or by body language. Under no circumstances, any physical violence be used in
debt collection process

4.3.2 Difficult recovery process

It is the recovery process where the debtors are not willing to pay and who intentionally resist
or avoid recovery efforts.

➢ Demand Notice
When a defaulter does not repays loan a demand notice is issued to him that he has to repay
his loan with a stipulate time period.

➢ Legal Notice
When a defaulter does not respond to the demand notice a direct notice is issued to him that if
he does not repay the loan action would be taken against him legally and the court notice is
issued against him.

➢ Transfer to NPA Account

16
When a defaulter does not respond to respond to any legal notice or he becomes bankrupt the
Whole account is transferred to NPA account.

4.3.3 Assets possession process

If the borrower do not eventually pay the dues, the movable assets charged to the bank by
way of hypothecation or pledge, can be possessed by the bank or the recovery agent and
thereafter auctioned or otherwise sold to recover the dues.

4.3.4 Legal recovery process through DRT

The intervention of the court is required to possess mortgaged immovable property by the
bank or its recovery agent. Also if the charged assets do not exist, or the debt is unsecured,
the debtor will have to be sued for recovery of the dues by the bank/recovery agent.

Debts Recovery Tribunal

To help the financial institutions to recover their bad Debt quickly and efficiently, the
Government of India has established 33 Debt Recovery Tribunal and 5 Debt Recovery
Appellate Tribunal across the country. The Debt Recovery Tribunals are governed by
provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, also
popularly called as the RDB Act. Rules have been framed and notified under the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993.

Each Debt Recovery Tribunal has two Recovery Officers. The work amongst the Recovery
Officers is allocated by the Presiding Officer. Though a Recovery Officer need not be a
judicial Officer, but the orders passed by a Recovery Officer are judicial in nature, and are
appealable before the Presiding Officer of the Tribunal.

The Debt Recovery Tribunals are fully empowered to pass comprehensive orders like in Civil
Courts. The Tribunal can hear cross suits, counter claims and allow set offs. However, they
cannot hear claims of damages or deficiency of services or breach of contract or criminal
negligence on the part of the lenders.

17
 PROCEDURE OF TRIBUNALS:

a) Application to the Tribunal:

➢ Under this process, the bank would file application before the tribunal seeking interim
order for recovery of it’s due.
➢ The DRT sends notice to the bank’s borrower to show cause with in 30 days whether why
action should not be taken against them to recover the bank dues.
➢ If notice could not be served to the borrower for any reason, the DRT would publish the
notice against defendants in the newspaper
➢ The DRT would pass ex-parte order if the defendants do not appear before the tribunal at
the time and date mentioned to them on the notice.
➢ If defendants appear before the tribunal and file the reply through their advocate, an
interim order will be passed by DRT.

b. Passing of orders by DRT

The procedure of passing of order by DRT is similar to proceedings taking place in any court
of law. There will be cross examination of Bank Manager and defendant and defendant’s
witness. The written arguments will also be submitted by both bank and the defendant. After
the perusal of arguments from both the parties the DRT will pass an order on the merit of the
case.

c. Application for recovery certificate and appointment of recovery officer

Once the bank receives order in it’s favour, it will file an application for recovery certificate.
The DRT issues recovery certificate and endorses the same to the recovery officer.

d. Action by recovery officer

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 The recovery officer will issue notice to the defaulters and demands them to clear the dues as
per the recovery certificate issued by DRT, within 15 days of the notice. The recovery officer
attach property of the defaulter on default of payment within notice period.

The attached property would be auctioned after due notice and publication in two newspapers
and banks dues are recovered from the sale proceeds of attached property.

e. Action for recovery of balance amount

If there is any shortfall in recovery, the bank may identify any other property of the defendant
for the recovery of balance amount. The recovery officer would proceed against such
identified property on the basis of request made by the bank.

f. Closing of DRT application

The application made by bank for recovery will be closed by recovery officer after the full
recovery of the bank’s dues.

4.5 Preventive Measures For defaults in Retail Lending

➢ Early Recognition of the Problem

The early recognition of the problem can be done by looking after the loan account of the
borrower, whether his EMI are timely serviced or not. If the very first installment is due,
there is probability that account may become NPA and borrower should be timely informed
about his fixed obligations towards bank.

➢ Transparency in the system

The next most vital step to be taken by the public sector bank is to maintain the proper
transparency of the lending activities. Previously, these banks hide their non- performing
assets from their book of accounts with a fear of losing their market share and price volatility
in stock market. So this greatly impacted the position of these bank as RBI has laid norms to
maintain proper transparency of all the defaults made.
This will help the bank to identify the borrowers with genuine intent and will reflect the
credibility of the borrower to identify the purpose behind taking the loan.

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➢ Identifying Borrowers with Genuine Intent
The next method to prevent the default includes identifying borrowers with genuine intent. In
this regard banks may consider having special investigation of all financial transaction or
business transaction, books of account in order to ascertain real factors that contributed to
sickness of the borrower.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route the
additional funding through the controlling offices in deserving cases, and help avert many
accounts slipping into NPA category.

➢ Proper valuation of primary security and collateral

The banker should always take tangible assets as security to safe guard its interests. When
accepting securities banks should consider the following factors:
1. The security should be Marketable
2. Easy to ascertain it’s title, value, quantity, and quality
3. Stability of value
4. Transferability of value
5. The security should be durable.
6. There should be absence of contingent liability ie, bank may not have to spend more
money on the security to make it marketable or even to maintain it.
7. The security should provide any ongoing income to the brrower/bank to cover interest or
partial payments.

➢ Proper Credit appraisal System

The main problem that the banking system lacking is the proper appraisal system. There
should be proper appraisal system for sanctioning the loan proposal to the prospective
borrower:

a. Borrower’s appraisal
• Character
• Capacity
• Capital
• Collateral
• Condition

b. Technical Appraisal

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 It involves:
• Availability of basic infrastructure
• Licensing/ regulatory requirement
• Selection of technology

c. Management Appraisal
There should be proper appraisal of management to know their efficiency in business.

• Financial Appraisal
• Determination of cost of project
• Profitability estimates
• Breakeven analysis
• Cash flow projection
• Projected balance sheet

d. Economic appraisal
Detailed appraisal of the project in terms of return it generates to investor

e. Market appraisal
• While appraising the project, it is not only important to find out whether it is technically
feasible and financially viable, it is equally important to ascertain the marketability of the
product manufactured or sold.
• General market prospect for the product
• Position of the product vis-à-vis the competitiors
• Size of the market
• Raw material
• Marketing strategy

f. Environment appraisal
• Borrower should have obtained all necessary clearances from the pollution control board
of the state.
• Permission and license to run the business.

➢ Diversification of investment
The banker should follow the principle of diversification of risk based on the famous maxim
“do not keep all the eggs in one basket” like it did in previous decade by providing majority
of loan to corporate sector. If a new big customer meets misfortune or certain traders or
industries affected adversely, the overall position of the bank will not be affected.

➢ Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to sickness and
NPAs. But this may not be the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that affects a borrowing unit’s
fortunes. A bank may commit additional finance to an aling unit only after basic viability of
the enterprise also in the context of quality of management is examined and confirmed.Where
the default is due to deeper malady, viability study or investigative audit should be done – it
will be useful to have consultant appointed as early as possible to examine this aspect. A

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proper techno- economic viability study must thus become the basis on which any future
action can be considered.

4.6 Steps taken by government for minimizing defaults

Here are five ways the government and Reserve Bank of India can speed up recovery of non-

performing assets (NPAs).

4.6.1. Amendment in banking Regulation Bill 2017 to give RBI more powers

Our honourable finance minister Arun Jaitely introduced a bill in parliament to replace the

non-performing assets ordinance which came earlier this year.

The Banking Regulation (Ammendment) Bill 2017 will amend the Banking Regulation Act

1949, giving the government power to authorize the Reserve Bank of India to initiate

insolvency resolution in case of default.

The RBI in June has identified 12 corporate accounts all over the country who owes more

than 5000 crores to banks and accounts for 25% of all bad loans in the banking system and is

currently focusing on resolving their cases. Some cases like that of Essar Steel and Bhushan

steel have already been reffered to the Isolvency and Bankruptcy Board and action has

already been taken.

4.6.2 Capitalization of Public Sector Banks

In order to solve the burning problem of NPA, government has decided to capitalize the

public sector banks from the crore 60000 funds that it is receiving in the form of dividend

from RBI. However, as per government, the capitalization of bank has to be linked with their

performance.

Similarly, the strategy needs to be completely reworked since the scale of NPAs is much

larger than was then expected.

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i) Will the additional capital now needed be provided by additional budgetary funds? If
sufficient budgetary funds cannot be provided, is the old idea of falling back on the RBI’s
reserves going to be activated?

(ii) Whether government is willing to lower the it’s equity stake below 51% in order to allow
public sector banks to raise capital on favourable terms? If so, it may be possible to attract
one or more strategic investors into some of the public sector banks. They need not be given
any direct role in management, but could be given a seat on the board, as China has done.
(iii) Should budgetary funds for recapitalization continue to be distributed across public
sector banks in the traditional way, with the weaker banks getting proportionally more in
order to achieve a reasonable growth in lending, or should we allocate them in a manner
which favours the better-performing banks?

4.6.3 Establishment of Bad Bank(ARC)

The best solution is to create a new government institution called bad bank so that public
sector banks transfer their large problem assets at a realistic price, leaving it to the new entity
to handle recovery.

The new entity would have to be funded by the government, by government guaranteed
bonds which are exchanged for NPAs offloaded from banks. It could work in partnership
with private asset management companies specializing in particular areas to bring in new
investors. It could experiment with both approaches—a change in management in some
cases, and retaining existing managements in others.

4.6.4 Amendment in SARFAESI Act, 2002 and Debt Recovery Tribunal Laws
The Parliament passed a bill to amend debt recovery laws and make them more time-bound
and effective in yet another step to address the problem of rising bad loans. It will help banks
and financial institutions recover loans more effectively, encourage more asset reconstruction
companies (ARCs) to set up business in India and revamp debt recovery tribunals (DRTs).
Under the amended law, RBI will get more powers to audit and inspect any ARC as well as
the freedom to remove the chairman or any director and appoint central bank officials to its
board.
The bill will pave the way for the sponsor of an ARC to hold up to 100% stake. It will also
enable non-institutional investors to invest in security receipts issued by ARCs and mandate a
timeline for possession of secured assets.

The Bill seeks to amend four laws:

➢ Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act, 2002
➢ Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI), 1993
➢ Depositories Act, 1996
➢ Indian Stamp Act, 1899.

Amendments to SARFAESI Act

➢ It allows District Magistrate (DM) to take possession over collateral within 30 days for
securing the creditors.
➢ It empowers DM to assist banks to take over the management of a company, in case the
company is unable to repay loans.

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➢ It creates a central database to integrate records of property registered under various
registration systems with central registry meant for maintaining records of transactions
related to secured assets.
➢ Unless collateral is registered with the central registry, secured creditors will not be able
to take possession over it.
➢ Empowers the RBI to carry out audit and inspection of Asset Reconstruction Companies
(ARCs) and penalize them if they fail to comply with any directions issued by it.
➢ Stamp duty will not be charged on transactions undertaken for transfer of financial assets
(loans and collaterals) in favour of asset reconstruction companies.

Amendments to the RDDBFI Act

➢ Increases the retirement age of Presiding Officers (PO) of Debt Recovery Tribunals
(DRTs) to 65 years from 62 years.
➢ Increases the retirement age of Chairpersons of Appellate Tribunals to 67 years from 65
years.
➢ Allows PO and Chairpersons eligible for reappointment to their positions.
➢ Allows banks to file cases in tribunals having jurisdiction over the area of bank branch
where the debt is pending.

4.6.5 The Strategic Debt Restructuring Scheme

It allows banks to convert the debt into equity, take control of the project, remove the existing

management, and induct new management. The difference between the amount paid for the

equity and the value of the debt converted, is a market-determined debt write-off. The scheme

has not worked for a variety of reasons. These includes

➢ Problems of coordination among the different banks involved
➢ Regulatory uncertainties (especially for infrastructure projects) which deter new
investors,
➢ the unwillingness of bankers to accept a sufficient write-down of the outstanding debt.
There is also the practical problem of running the projects taken over until a new
management comes in. Banks are ill-equipped to do this.

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 CHAPTER 5

Major Findings , Conclusion Recommendations, Limitations

Major Findings
• Project findings reveal that HDFC Bank is sanctioning more credit in housing sector,
mortgage loan, and education loan as a prioritized retail loan sector.

• Banks is expanding its Retail Credit in the following focus areas:

➢ Housing Loan
➢ Automobile Loan
➢ Educational Loan
➢ Mortgage Loan
➢ Education Loan
➢ Traders Loan
➢ Personal Loan
➢
• The interest rate charged by the bank in the home loan,that is, 8.80% and automobile
loan, that is, 8.70% is lowest in the industry.

• There is no any defaults in the retail lending of HDFC Bank, Camp branch Pune for the
fiscal year 2018-19. There is only one case of default in SME Loans through out the year
of Rs 7 crore as the account has been transferred to NPA. It’s not a willful default of the
borrower and probability of collection of loan amount is there in future.

• The total NPA of the Pune Pimple saudagar Branch till now is Rs 9 crore.

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• Banks is granting credit in all sectors in an Equated Monthly Installments so that any
body can borrow money easily.
• Credit risk management process of HDFC Bank is very effective as compared with other
banks.
• There is proper pre-sanction inspection and post disbursal timely visit in order to make
sure the proper use of fund.

CONCLUSION

The project entitled “Retail Loan Lending: Rise In Defaults, Reasons and Suggested
Measures For Recovery” has helped me a lot in gaining knowledge of the retail lending
sector with the special reference to HDFC Bank.

Credit Policy and Credit Risk Policy of the Bank has become very vital in the smooth
operation of the banking activities. Credit Policy of the Bank provides the framework to
determine:

(a) whether or not to extend credit to a customer and

(b) how much credit to extend.

The Summer Internship Project has helped me to provide knowledge about the effective
management of defaults in retail lending, reasons behind it, and measures to recover those
defaults. It has helped me to understand the various types of loans involved in retail sector,
rising defaults in this sector and measures for recovering those defaults.

The concerted efforts put in by the management and staff of bank has helped the bank in
achieving remarkable progress in minimizing the level of defaults in retail lending and the
branch is using retail sector as the most profitable sector to generate income. The Bank is

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marching ahead in the direction of achieving the Number- 2 position in the Banking
Industry.

RECOMMENDATIONS

• Bank is really good in it’s lending process as there is very good appraisal system, pre-
sanction inspection, and even timely post disbursal visit. However, sometime accounts
may turn into non- performing in certain circumstances or events happening with
customers where the borrower may not have intention to make willfull defaults.
Therefore bank should consider factual circumstances happening with the customer
before undergoing any SARFAESI proceedings.

• The bank should concern on lending more to retail sector rather than SME sector as the
bank is really doing well in this sector and earning huge amount of profit to overcome it’s
past non-performing assets.

• The Bank should keep on revising its Credit Policy which will help Bank’s effort to
correct the course of the policies and make it up to date with the existing changes in the
market.

• Bank should provide necessary support to the customers and attract various new
customers by improving relationship with it’s existing customer

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 LIMITATIONS

1. The time constraint was a limiting factor, as more in depth analysis could not be carried.
Due to this I was able to study only surfacely the each aspects of retail lending.

2. Some of the information is of confidential in nature that could not be divulged for the
study.

3. There were many ammendments by government to manage the existing level of non-
performing assets in credit sector by government, so this really affects the lending
strategies in this sector. Therefore, report cannot cover each strategies in detail.

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 BIBLOGRAPHY

Websites

1. www.bankofbaroda.co.in
2. www.moneycontrol.com/news
3. http://www.livemint.com/Opinion/alslAIxpkUKAW25wIpR7NK/Urgent-next-steps-
in-banking-sector-reforms.html
4. www.google.com

Banks Internal Record

1. Annual Reports of HDFC Bank (2017-18)

2. Internal Circulars sent to all Branches, Regional Offices and all the Departments of
Corporate Offices.
3. Retail Loan e-guide
4. Hand book on credit

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