Recovery of Retail Loans and Related Processes

---

1. Repayment in Retail Loans

Repayment in retail loans refers to the scheduled payment of principal and interest by the borrower. It is typically done through Equated Monthly Installments (EMIs).

2. Default and Rescheduling in Retail Loans

Default occurs when a borrower fails to repay on the due date. Rescheduling involves altering repayment terms to ease borrower’s burden due to financial stress.

3. Monitoring of Loan Accounts

Banks regularly monitor loan accounts through system-generated alerts, overdue reports, and account performance reviews to ensure timely repayments.

4. Classification of Irregular Loan Accounts

Accounts are classified as SMA (Special Mention Accounts) or NPAs based on the number of days past due:

• SMA-0: 1–30 days
• SMA-1: 31–60 days
• SMA-2: 61–90 days
• NPA: >90 days

5. Recovery Policy of Banks

Banks follow a structured recovery policy involving reminders, restructuring, legal recourse, and third-party agents to recover dues while maintaining customer relationship.

6. SARFAESI Act, 2002

This Act allows banks to seize and sell secured assets of the defaulting borrower without court intervention. It applies only to secured loans above ₹1 lakh and not on agricultural land.

7. Debt Recovery Tribunal (DRT)

DRTs are special courts for faster resolution of loan recovery above ₹20 lakhs. Appeals go to DRAT (Debt Recovery Appellate Tribunal).

8. Recovery through Lok Adalat

Lok Adalats provide a compromise settlement route through a public forum under Legal Services Authority, especially for small or disputed retail loans.

9. Engaging Direct Recovery Agents

Banks may engage certified and RBI-compliant recovery agents for doorstep recovery in defaulted accounts. Ethical practices and borrower rights are mandatory.

Mathematical Examples

1. EMI Calculation:
   Loan: ₹5,00,000, Rate: 10%, Term: 5 years
   EMI = ₹10,623.02 (using EMI formula: P×r×(1+r)^n / [(1+r)^n – 1])
2. Outstanding Balance:
   After 2 years of ₹10,623 EMI, outstanding = ₹3,29,754 (approx)
3. SARFAESI Eligibility:
   Loan Amount = ₹90,000 → Not eligible under SARFAESI as it’s below ₹1 lakh
4. NPA Classification:
   Loan overdue for 93 days → Classified as NPA
5. Interest Accrual:
   ₹3,00,000 loan at 12% simple interest for 2 years
   Interest = ₹3,00,000 × 12% × 2 = ₹72,000

Multiple Choice Questions (MCQs)

1. What is the minimum loan amount covered under SARFAESI Act?
   a) ₹50,000
   b) ₹75,000
   c) ₹1,00,000
   d) ₹2,00,000
2. What does SMA stand for?
   a) Structured Monitoring Account
   b) Special Mention Account
   c) Simple Monetary Account
   d) Secured Market Asset
3. What is the overdue period for a loan to be classified as SMA-2?
   a) 1–30 days
   b) 31–60 days
   c) 61–90 days
   d) 90–120 days
4. Who can file a case with the Debt Recovery Tribunal?
   a) Borrowers
   b) RBI
   c) Banks
   d) Insurance Companies
5. Which of the following is not eligible under SARFAESI Act?
   a) Industrial Land
   b) Agricultural Land
   c) Residential Property
   d) Commercial Property
6. What is the threshold limit for DRT jurisdiction?
   a) ₹5 lakhs
   b) ₹10 lakhs
   c) ₹20 lakhs
   d) ₹25 lakhs
7. Which forum is used for amicable settlement of retail loan disputes?
   a) DRT
   b) NCLT
   c) Lok Adalat
   d) Civil Court
8. Who regulates the functioning of recovery agents?
   a) RBI
   b) SEBI
   c) NABARD
   d) NHB
9. Which of the following is NOT a recovery method?
   a) Lok Adalat
   b) DRT
   c) RTGS
   d) SARFAESI
10. What happens after 90 days of non-payment on a loan account?
    a) Restructuring
    b) SMA-3 classification
    c) NPA classification
    d) No change