Risk Mitigation Strategies in Suit Filing for Banking Institutions
Once loan restructuring and asset reconstruction attempts fail to provide the desired results, lenders are left with few options except to start legal proceedings. Lenders can either file their claim before the debt recovery tribunal (DRT) or the national company law tribunal (NCLT) depending on the particulars of the matter.
In such circumstances, it is essential for lenders to piece together an effective strategy that ensures the lowest risk and maximizes the chances for the lender to recover as much of the dues as is possible under law.
There are several risk mitigation strategies that need to be followed by banks and other lenders that can help them achieve a positive outcome when debt recovery matters reach the suit filing stage.
Comprehensive Due Diligence
In case the borrower is a company, it is non-negotiable for the lender to conduct a comprehensive due diligence before extending any credit.
This due diligence needs to take into account the balance sheet of the company, the taxes that are filed, and the overall financial and business health of the company. A documented brief needs to be prepared that lays down the facts of the company without bias and without omission.
A proper due diligence ensures that a lender extends credit to the borrower with its eyes open. In judging credit-worthiness it is imperative to judge the entire picture and not rely unduly on one or two metrics.
Robust Documentation and Agreements
When a lender has done its due diligence and is satisfied that the borrower meets the required criteria and has proved to be creditworthy, then the lender can begin the task of preparing robust documentation and agreements that lays out the terms of the loan in a legally binding manner.
While this may seem like a formality at the time of disbursing the loan, it can have far-reaching consequences in the future. The reason for having contracts in place is to prepare for a worst-case scenario.
All the terms and conditions that are laid down in loan contracts are put in place so that the lender’s rights are covered in all situations and especially in situations when there are events of default.
Adherence to Regulatory Requirements
There are many regulations that lenders need to follow that have been in place by the RBI and other regulatory bodies as well as statutes. It is important for lenders to understand that these regulations have been put in force for good reason and it is in the best interest of the lender to follow all the regulations to the letter and in spirit.
Lenders need to come to court with clean hands. This means that when a lender approaches a court of law seeking assistance in recovering its dues, then the lender must prove to the court that all regulatory requirements have been followed in relation to the matter at hand.
In case the borrower can show that any regulatory requirement has been broken or not followed, then the court will be reluctant to help the lender receive its claims after filing a civil suit.
Effective Risk Management Policies
The main job of a bank or lender is to manage risk. This risk can be financial, regulatory, systemic, or of any other nature. The lender needs to place the right frameworks so that the way it operates reduces risk as much as possible. It is important to note that while risk can never be eliminated completely, it can definitely be managed to reduce its negative impact and help the filing process.
That’s why the RBI provides that banks have credit assessment teams, legal support teams, collateral management systems, and early warning mechanisms for potential defaults. This helps lenders stay on top of their assets and take action as necessary and before the situation spirals into a bigger issue.
Timely and Proactive Communication
It’s helpful for lenders to maintain open and direct communication channels with their borrowers.
This can help lenders identify issues faster and also help them to negotiate and restructure loans that have the best chance of helping both the lender and the borrower. A timely and proactive communication sets the tone for the relationship and its important that the tone is not adversarial unless there is no alternative and there is no alternative to suit filing.
It is advisable that all attempts should be made by lenders to resolve issues through mediation and negotiation rather than through legal means since it can be more effective, quicker, and much less costly.
Training and Education
Lenders should spend resources on training and educating their employees on the best means to be more effective in their respective roles. The bank, as a whole, has more experience than individual employees on the best way to tackle issues associated with each role.
That’s why the bank needs to provide documented ways and means to employees to help them address the potholes that arise when performing their duties. This helps to ensure that all lender’s operations are performed within regulatory guidelines and maximizes the chances for the lender to reduce their non-performing assets and also recover more of their dues should the matter go to court.
How Can Legodesk Help?
Legodesk offers a software platform that can help lenders with a variety of debt collection needs.
The platform has features that are built from the ground up keeping the needs of lenders in mind. Just some of the innovative features include legal notice automation, case management, and contact management. These features can also help with the suit filing procedure since many data points can be collected and organized within our tool.
We are trusted by banks, NBFCs, and enterprises to provide an effective tool that helps make the debt collection process more efficient and less costly.
Wrapping Up
A non-performing asset matter reaching court is the final step in the lifecycle of a loan which is filing a suit. In such a situation, all other avenues have been explored and no alternative has been found by the lender.
While the legal approach can be costly in terms of both time and money, if handled well, it can help the lender recover at least a part of their dues. That’s why lenders should be careful of using the right strategies and planning their operations in a way that maximizes the chances of a positive outcome.