Loan Recovery System Analysis

Introduction:

When a bank or other financial institutions distribute a loan to other organization or people, then after regaining from loan it is called loan recovery, Rajshahi Krishi Unnayan Bank distributed loan to loan and recovers this money. Rajshahi Krishi Unnayan Bank recover loan under two basis-

1. Unclassified loan, and
2. Classified loan.
3. Unclassified loan: When half or more than half of the total loan is repaid within the due dates by the borrowers then that is called unclassified loan. The duration of time in which the loan will be treated as unclassified is less than 12 months from sanctioning loan.
4. Classified loan: When more than half of the total loan or total is unpaid / due over the due date then that loan is called classified loan. Classified loans can be sub standard, Doubtful and bad. The criteria of these classification of classified loans are as follows:

1.   For short term loan: Short term loan are classified by Rajshahi Krishi Unnayan Bank in three categories-

i) Crop loan and micro credit:

Age of over due, 12 months Irregular.

Age of over due 13-36 months Substandard

Age of over due 36-60 months Doubtful.

Age of over due: Above 60 months Bad.

ii) Cash credit-and working capital

          From 6 months but less than 9 months- Substandard.

            From 9 mouths but less than 12 months-Doubtful.

            From 12 mouths above Bad.

iii) Demand Loan

          From 6 months but less than 9 months- Substandard.

            From 9 months but less than 12 months- Doubtful.

            From 12 months above- Bad.

2.   Medium loan (Up to 5 years):

          From 0 months but less than 6 months- Substandard.

            From 6 months but less than 12 months- Doubtful.

            From 12 months but less than 18 months – Bad.

3. Long term loan (Above 5 years)

          From 0 months but less than 12 months-Substandard.

            From 12 months but less than 18 mounts – Doubtful.

            From 18 months but less than 24 months-Bad.

Procedure of loan recovery:

The main responsibility of bank manager and loan officer is to recovery the outstanding loan in Rajshahi Krishi Unnayan Bank. Two-recovery procedures are-

a)     Usual procedure.

b)     Legal procedure.

a)      Usual procedure:  The usual loan recovery procedure is divided into several steps. They are as follows:

1.       Issue of demand notice: Demand notice is issue before on month being due of out standing loan or installment. It is sent to the borrower.

2.       Legal notice: It the borrower does not repay their respective loans and interest after maturity being received the demeaned notice under registered with acknowledgement by post to the borrowers the bank should send lower notice to him.

3.       Special notice: Beside the above to notice a special notice signature by DC, TNO is sent to the respective borrower to keep mental pressure on him for repaying the loan.

4.       Field recovery: Loan officer recover the recovered loan through I.O. receipt by visiting the spot and source of the borrower.

5.       Personal Communication: If the borrower fails to repay his loan installment, the loan officer communicates with the respected persons of that area to give mental pressure to the borrower so that he repays his respective loan.

6.       Loan Recovery Camp: Rajshahi Krishi Unnayan Bank made camp in various areas for the recovery of his loan, in this issue; the manager and other officer were present in the camp and communicated with borrowers. They gave them moral persuasion and tried to encourage them, so that they could repay their loan.

7.    Loan recovery with the help of interest exemption the loan amount which becomes more than double in principle and interest and which is not possible to recover with the help of legal action then those loan can be recovered by exempting interest. By this way bad loan can be recovered.

b)      Legal procedure: When legal action for recovering loan becomes failed a case in filed against the borrowers. The case is generally filed in the following ways:

i.          Unwilling to repay loan although he is financially solvent.

1. Every effort of loan recovery becomes failure.

Rules of Recovery:

Rajshahi Krishi Unnayan Bank loan recoveries from loan in installment system are as follows:

i)                   Weekly

ii)                Fortnightly

iii)              Monthly.

 Causes of defaulter:

 The loan can not loan payment in due time in various causes:

i)                   Natural calamity destroy the crops, for this reason the loan unable to pay loan in due time.

ii)                Rajshahi Krishi Unnayan Bank cannot take proper step against the loan for influential man.

iii)              The loan cannot use the loan in proper.

iv)              The loan do not pay loan in more time.

v)                 Lack of loan supervision.

Causes of low recovery:

i)       Negative attitudes of the local elites to repay loan- In most of the cases, the influential persons due to their political and social power are not interested to repay the loan. Because to their political influence, credit officers cannot take any effective measure for loan recovery from them. Sometimes, loan received by them for a specific purpose is also diverted to other purposes.

ii)      Damage of crops due to flood- Sometimes, the farmers have some valid reasons for non-repayment of loan in spites of their willingness of repayment of loan. In the case of crop failure due to natural disaster like flood, drought, etc., it becomes really difficult for the farmers to repay loan in time.

iii)     Unproductive use of loan- The time involved in processing loan is such that the farmers usually receive credit at the end of the specific crop season even after harvesting of the crop. For that matter, credit does not help in increasing production rather it is actually spent for non-farm expenses.

iv)     Shortage of credit personnel- The branch has shortage of manpower to evaluate credit worthiness of the borrowers, identification of real borrowers, and supervision and recovery of loan.

v)      Lack of legal action by the banks against defaulters- Neither the Bank Manager nor the supervisor has any authority and power to take effective measures or administrative action against defaulters. For that reason, the defaulters do not bother for requests of loan repayment by them. Moreover, legal action against defaulters has rarely been taken.

vi)     Corruption of the bank employees- In some cases, the bank officers take bribe from the defaulters and avoid responsibilities of realization of loan from the borrowers.

vii)    Inability of the farmers to repay loan- Farmers need credit not only for agricultural production but also for consumption for their survival, particularly by marginal farmers. This sometimes compels them to divert agricultural credit to consumption and other unproductive purposes which ultimately lead to their low repayment capacity.

viii)   ‘Benami’ loan received particularly by U.P. chairman/Member- Sometimes the rural influential, particularly Union Parishad Chairman and Members receive ‘Benami’ loan. It happens particularly due to shortage of credit personnel who have to disburse credit in a short notice and do not have enough time to identify genuine borrowers.

ix)     Accessibility to alternative credit institutions- There are a number of credit institutions which are working independently. So non-repayment of loan to one institution does not affect in receiving loan from another institution.

x)      Evaluation of banker’s efficiency- Performance of bank personnel is judged on the basis of amount deposited by him, not on the amount of loan recovered. Further, there is practically no incentive for him to increase recovery amount.

xi)     Inadequate training facilities for credit officers and their qualifications- The persons involved in agricultural credit operations in rural bank branches have poor educational background with inadequate training. Banking training programmer has hardly anything regarding an agricultural credit operation which affects loan recovery performances of the Banks.

Loan Recovery scenario Rajshahi Krishi Unnayan Bank:

a) Last four years Loan Recovery. (Amount in Lac Taka)

Source: Paba Brach of Rajshahi Krishi Unnayan Bank

^* Recovery rate = ´ 100

Comment: It is evident from the above table that 2000-2001 to 2003-2004 Loan Recovery Target and achievement are increased by amount gradually. But its Achievement performance is fluctuated. Highest Achievement in 2000-2001 financial years which is 175% and lowest in 2003-2004 Loan financial year which is 112%  

b) Loan Recovery for 2000-2001

Loan Recovery target was TK 59.57Lac and Loan recovery achievement was TK 104.37 Lac (175 percent of target)

Major items wise loan recovery position 01-07-2000 to 30-06-2001

Source: Rajshahi Krishi Unnayan Bank

Comment: From the above table it is shown that Poverty alleviation loans is the highest achievement amount of TK 45.68 Lac which is 43.76% of the total achievement and fishery is the lowest achievement which is 0.26% of the total achievement. Others recovery items is not considered here.

d) Loan Recovery for 200-2002

Loan recovery target was TK 102.50 Lac and Achievement was 134.89 Lac (131.60 percent of the target)

Major items wise position of Loan Recovery 01-07-2001 to 30-6.2002

Source: Rajshahi Krishi Unnayan Bank

Comment: From the above table it is shown that Crops loans recovery is the highest achievement amount of TK 45.94 Lac which 34% of total achievement and Fishery is the lowest achievement which is 0.36% of the total achievement and there is no target and achievement in the irrigation equipment and firm machinery sector. Others recovery items are not consider here.

c) Loan Recovery for 2002-2003

Loan recovery target was TK 90.28 Lac and Achievement was 108.76 Lac (120.46 percent of the target)

Major items wise position of Loan Recovery 01-07-2002 to 30-6.2003

Source: Rajshahi Krishi Unnayan Bank

Comment: From the above table it is shown that Crop loans recovery is the highest achievement amount of TK 38.42 Lac which 35.52% of total achievement and Fishery is the lowest achievement, which is 1.25% of the total achievement. Others recovery items are not consider here.

Pie diagram Presentation of loan recover 2003-2004 financial year (Sector wise)

Recommendation

Since Rajshahi Krishi Unnayan Bank is the nationalized bank of Bangladesh. It must have to remove its limitation in banking service. In my study, I have recognized several weaknesses in Banking services and my recommendation are given below:

i)                   Process and procedures of lending should be liberalized keeping in view the problems and constraints faced by the borrower.

ii)                Better publicity, Seminar and workshop on loan and advance may brighten the situation highlighting the needs, and problems of the borrowers.

iii)              Virtually for the interest of the borrower and intending borrower, more funds should be shifted to this branch considering the needs and requirement of that branch.

iv)              Steps should be taken to solve the problems of the borrower.

v)                 Efficient and motivated man power for sanctioning loan

vi)              Selection of genuine borrower through fair investigation

vii)            Spot investigation for loan allotment.

viii)         Prompt services are given to the borrower.

ix)              Strong monitoring should be ensured for proper utilization of loan.

x)                 To remove the limitation of managerial activities.

xi)              To take proper legal action against defaulter loan.

xii)            To reduce political pressure.

xiii)         To increase awareness of loan about refunds the loan.

Conclusion

Credit Management is the principal function of a bank and large portion of bank income generated from loan disbursement and recovery. Bank should always remember that his dealing loan by money collected from others bank and depositors should always not only be attractive to higher yielding loan proposal but also bank should seriously think about whether the granted loan will be recovered timely or not. If bank once fail to recover loan will fail to meet depositors demand.

This branch has not yet produced better performance in recovering those loans given to small borrowers. The major causes behind this low recovery are poor implementation of loan procedures and policy by the bank. The branch should take care of this very important aspect to baking for its smooth survival in the coming days.

So, we can say, that the overall efficiency of credit management system is not highly satisfactory position. But another hopeful news is to us that the Rajshahi Krishi Unnayan Bank has begun to earn profit.