A loan/debt is said to be recovered either in whole or in part after it has been charged off or in other words, after becoming an off-balance sheet item. Loan recovery is defined as the process of regaining and saving a loan in danger of becoming expenditure.
Banks are experiencing considerable difficulties in recovering loans and enforcement of securities charged to them. The existing procedures for recovery of loans due to banks have blocked a significant portion of their funds in unproductive assets, the value of which deteriorates as time goes on.
Most banks have loan policies in place, but probably very few have loan recovery policies though they may have recovery units.
The difference in responsibilities of the credit staff and loan recovery staff may call for two distinct guiding procedures in the day-to-day discharge of their duties
Most loan policies cover the whole process from the moment a loan application is received by a bank until such a time when the loan is fully recovered as agreed between the bank and the borrower, but do not go beyond that.
The loan recovery policy must be very clear on the following issues: loans classified for recovery, approving authority and their limits and recovery strategies/techniques. All recovery practices adopted by the bank for loan recovery must be in accordance with the laws of the country.
The bank must develop appropriate policy which will guide its loan recovery staff in their loan recovery responsibilities.
Banks are not to follow policies which are unduly coercive in recovery of loans. The policy must be built around dignity, courtesy, fair treatment, persuasion and respect to customers/borrowers.
The policy must recognize fairness and transparency in repossession, valuation and realization of collaterals. It is believed that following of fair practices with regard to loan recovery from borrowers and taking possession of collaterals fosters customer confidence and long-term relationship.
The policy must be very explicit on: loans classified as bad loans, recovery strategies/techniques and approving authorities and their limits.
In spite of the fact the lender may have powers through the charge created to take certain actions upon default by the borrower it is advised that the lender obtain a court order to that effect. The purpose of this is to ensure the court to give an order to the borrower to pay the debt and not to sell the charged property. There are two reasons which favour this notion.
First of all, if the lender decides to exercise its right over the charge created to cover the loan, and the amount realised is not enough, it cannot go to other properties of the borrower which are not charged to it.
For example, if a mortgage has been created to secure a debt, and the borrower does not pay in accordance with the loan agreement, the lender may opt to sell the property so mortgaged to recover the borrower’s liabilities. The lender has exercised its right over the mortgage. However, if the amount recovered fails to cover the outstanding liabilities, the banker cannot go for other properties of the borrower.
It is also possible that the borrower can go to court and obtain an injunction and delay the whole process of recovery of the loan.
Secondly, if the lender goes to the court and sues for the outstanding liabilities and the court gives an order for payment, the borrower is required to pay the whole amount outstanding. If the borrower does not satisfy the court order, the lender may request the court to attach NOT only the mortgaged property, but any property of the borrower and sell until the whole debt is fully paid. Once a Court order is obtained, no injunction can be obtained, unless the borrower files an appeal case.
The right place for banks to file their cases for recovery of loans is the commercial court which was established specifically to deal with commercial disputes; however, cases can be filed to any court of jurisdiction.
Of course one can rightly argue that recovery of loans through the court system is time- consuming, costly and the outcome is not certain. But if the bank can substantiate its claim by concrete evidence, summary judgements can be obtained in a short time by filling a Summary Suit.
A summary suit is intended to speed up disposal of cases and to guard against delay tactics by the defendant who may have no genuine defence. In summary suit, the defendant is not automatically given with the right to defend. The defendant has to apply to the court and only if/when the court is convinced as to the validity of the claims, will the court then grant the defendant permission to defend.
The bank will need to prove to the court the existence of the debt by showing that:
- The borrower applied for the loan and there is an application letter duly signed by an authorised person. In case of companies, board resolution by board of directors, or to have minutes of members’ meeting, as evidence.
- The bank agreed to the request and granted the customer the loan which the latter accepted and signed a Credit/Loan Agreement. The loan agreement is a very important document as it contains terms and conditions between the bank and the borrower and it should be signed by people who can commit the bank on one hand and the borrower on the other hand.
- The borrower tendered his property as collateral to secure the debt therefore securities documents must be submitted. Securities documents must be properly executed and registered with appropriate authorities and have to be accurate in all aspects. However, it should be noted that having documents in custody is one thing and the existence of the property/ properties is another thing.
- The borrower failed either to pay or to comply with the terms and conditions of the loan. Bank statements have to be submitted as evidence.
- The lender demanded payment of the loan, but the borrower has failed, refused or neglected to pay. The bank will need to show Demand Notices sent to the borrower.
However, there are many loose ends either during loan processing or when taking securities and even when prosecuting the cases. Knowing their weaknesses, most banks opt for invoking their rights over the charges created in their favour some of which may have also flaws.
By Shaaban H.Ngalupia
Shaaban H.Ngalupia was a Director of Loan Recovery and later a Director of Litigations and Claims of the now defunct Consolidated Holding Corporation. He is also a member partner of The Tanzania Institute of Bankers (TIOB).