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Why Rehabilitation & Recovery is Important for Banks
Every bank faces credit risk while lending. When a borrower fails to meet repayment obligations or delays payments, the account becomes stressed.
A systematic approach towards rehabilitation and recovery ensures that banks can minimize their loss and maximize recovery.
- It protects the financial stability of the bank.
- Reduces provisioning burden and improves profitability.
- Builds a robust credit culture within the institution.
- Ensures compliance with RBI’s prudential norms on stressed assets.
Key Concepts under Rehabilitation & Recovery
Let’s go through the major topics and questions which are frequently asked in CAIIB ABM exams. Each concept is explained along with detailed reasoning.
1. Non-Cooperative Borrower Procedure
A non-cooperative borrower is one who deliberately avoids communication, withholds information, or obstructs recovery. RBI directs banks to identify such borrowers early.
Procedure:
- Send a written notice informing the borrower about their non-cooperative behavior.
- Give reasonable time (normally 30 days) to respond.
- If no cooperation is shown, classify them as “Non-Cooperative Borrower”.
- Such borrowers are reported to credit information companies and barred from fresh facilities.
Exam Tip: This topic connects to Wilful Defaulter & MSME Viability and Credit
2. MSME Wilful Defaulter & Viability
In the case of MSMEs, rehabilitation is preferred over recovery if the unit is viable.
A wilful defaulter is a borrower who has the capacity to pay but intentionally defaults.
Key Points:
- Assessment of viability must be based on projected cash flows and repayment capability.
- If the MSME is non-viable, banks should proceed for recovery under SARFAESI or legal route.
- If viable, the account may be restructured with revised terms.
Answer Concept: Viability means the unit can become profitable after restructuring without additional continuous support. It’s judged through DSCR (Debt Service Coverage Ratio) ≥ 1.25, IRR positive, and realistic assumptions.
3. ICA Approval Criteria
ICA stands for Inter-Creditor Agreement.
When multiple lenders finance a borrower, a unified decision must be taken on rehabilitation or recovery.
Approval Requirements:
- Minimum 75% by value and 60% by number of creditors must approve the resolution plan.
- Once approved, the decision is binding on all lenders.
- Banks must ensure proper documentation and viability assessment before approving ICA.
Answer Concept: ICA helps in avoiding delays and ensures collective recovery strategy. If dissenting creditors disagree, they can sell their exposure to others or exit at an agreed value.
4. Standard Asset Sale to ARC
Banks can sell even standard but stressed assets to Asset Reconstruction Companies (ARCs) to clean their balance sheet.
- The asset must be more than 60 days overdue.
- Sale should be at a fair value as per independent valuation.
- Sale proceeds are recognized as cash inflow and exposure removed.
- ARC issues Security Receipts (SRs) backed by the asset for investor participation.
Answer Concept: The main objective is to transfer recovery responsibility to specialized entities so that banks focus on core operations.
5. DCCO Delay for Infrastructure Projects
DCCO stands for Date of Commencement of Commercial Operations.
For infrastructure projects, delays in DCCO can impact classification of the asset.
- Delay up to 2 years is allowed for infrastructure projects.
- Beyond that, account may be downgraded unless reasons are beyond control.
- Banks must re-evaluate project viability and may restructure the repayment schedule.
Answer Concept: DCCO extensions are treated as restructuring; hence, provisioning must be made as per norms.
6. Siphoning vs Diversion of Funds
Diversion occurs when funds are used for purposes other than sanctioned ones.
Siphoning means funds are withdrawn from the business and not traceable in assets or operations.
Examples:
- Using working capital funds to purchase property = Diversion.
- Transferring loan money to related party account abroad = Siphoning.
Answer Concept: Both are red flags indicating fraudulent intention. RBI requires immediate reporting to CRILC and internal fraud monitoring system.
7. Compromise Settlement Evaluation
A compromise settlement allows banks to recover part of dues by accepting reduced payment.
- Each case must be evaluated based on NPV (Net Present Value) of expected recovery.
- Approval from higher credit committee or board is mandatory.
- Write-offs or sacrifices must be justified with cost-benefit analysis.
Answer Concept: If recovery through legal route is costlier or time-consuming, compromise may yield better value.
8. Technical Write-Off Explained
A technical write-off means the loan is written off from books but recovery process continues.
- Useful for accounting and tax adjustment.
- Recovery continues through legal or compromise methods.
- No waiver of borrower liability.
Answer Concept: It improves balance sheet appearance without sacrificing recovery rights.
9. COVID Restructuring Ratio Breach
Under COVID restructuring framework, certain financial ratios (DSCR, Current Ratio, Total Debt/EBITDA) were mandatory.
If breached, the account may lose standard classification and attract provisioning.
Answer Concept: Banks must conduct annual monitoring and submit deviation reports to ensure compliance.
[FREE EPDF] Rehabilitation and Recovery | Module C Chapter 24 Part 3
10. MSME Rectification Plan Deadline
For MSME accounts showing early signs of stress, the first step is rectification.
The borrower must regularize the account within 30 days of identification.
Answer Concept: If rectification fails, the bank must move to restructuring or recovery stage immediately.
11. Loan to Related Entity of Defaulter
Lending to entities related to defaulters poses serious risk. RBI prohibits extending facilities to companies having common directors or ownership links with defaulters.
Answer Concept: Banks must perform group-level due diligence and declare connected exposures during sanction.
12. Delay in RP Implementation & Penalty
RP stands for Resolution Plan.
If the plan approved by lenders is not implemented within the stipulated time, additional provisioning applies.
- Delay beyond 180 days attracts 20% additional provision.
- Further delay beyond 365 days adds another 15% provision.
Answer Concept: This penal structure ensures timely action by lenders and borrowers both.
13. MSME Committee Composition
RBI mandates a committee approach for MSME rehabilitation cases.
- Chairperson: Regional Head of the Bank.
- Members: Senior Credit Officer, State Government Representative, Industry Association Representative.
Answer Concept: The committee ensures fair evaluation and unbiased viability judgment for MSME revival.
14. Reversal of Additional Provisions
When an NPA account is upgraded to standard after successful restructuring or recovery, banks can reverse the extra provisions.
Answer Concept: Provision reversal is allowed only after one year of satisfactory performance under the new repayment schedule.
15. Early Exit Strategy under Rectification
Early exit refers to upgrading an account to standard before the end of the monitoring period due to strong performance.
Answer Concept: This shows borrower discipline and helps reduce NPA ratio, improving asset quality of the bank.
16. Unsecured Loan as Equity – Red Flag
When promoters convert unsecured loans into equity, it may look positive but could signal capital erosion or fund diversion.
Answer Concept: Banks must assess if such equity infusion is genuine or merely balance sheet window dressing.
17. Provisioning in IBC Admitted Account
Once a case is admitted under the Insolvency and Bankruptcy Code (IBC), lenders must immediately make 50% provision. If resolution fails and liquidation is ordered, total 100% provision is required.
Answer Concept: This ensures conservative accounting and realistic recovery estimation in insolvency cases.
18. CIC Membership Fee for Cooperative Banks
Cooperative banks must be members of at least one Credit Information Company (CIC) to share borrower data. The membership fee is a mandatory compliance cost but enhances credit discipline.
Answer Concept: Information sharing reduces repeat defaults and improves transparency in the lending ecosystem.
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Conclusion
The process of Rehabilitation & Recovery is the backbone of credit management in banking. It ensures that banks handle stressed assets systematically — identifying viable units for restructuring and recovering dues from non-viable ones. As a CAIIB aspirant, you must understand every step: from early warning signals to restructuring frameworks, ICA approvals, provisioning, and recovery channels.
Consistent revision of these topics will help you score higher and apply this knowledge practically in your banking career.
Best of Luck for your CAIIB ABM Exam Preparation!
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