Part 06 — Collections & Recovery

Repossession Asset Sale

Repossession is a high-risk collections action because it combines law, field conduct, valuation, customer reputation and accounting. In SME lending it appears in three forms: hypothecated movable assets such as machinery or vehicles, pledged/charged receivables or inventory, and immovable collateral under Loan Against Property (LAP). The operating principle is simple: take only the action the documents and law permit, preserve the asset, sell transparently and account for surplus or shortfall.

Before Repossession

The lender should verify four things before any field action:

Check	Why it matters
Security document	Hypothecation, mortgage, pledge, guarantee and power clauses must support action.
Perfection	CERSAI filing, ROC charge for companies, RTO hypothecation or other registry should be checked.
Default and notice	Contractual default, recall notice and statutory notices where applicable must be complete.
Asset trace	Location, possession, condition, insurance and third-party claims must be known.

For a CNC machine financed at ₹38 lakh, the lender needs the invoice, serial number, hypothecation deed, insurance, site verification, Udyam/GST borrower identity and a repossession plan. For a LAP account, repossession normally means possession under SARFAESI, not a private field visit to “take keys”. For inventory and receivables, practical recovery may be by stock audit, controlled cash-flow arrangement or receivable assignment notice, not physical seizure.

SARFAESI Possession And Sale

For secured creditors using SARFAESI, the statutory path begins with NPA classification and a 60-day demand notice under section 13(2) of the SARFAESI Act, 2002. If the borrower does not discharge liability, section 13(4) measures can follow. The borrower can challenge section 13(4) measures before DRT within 45 days (SARFAESI section 17, India Code).

For immovable secured assets, Rule 8 of the Security Interest (Enforcement) Rules, 2002 requires a possession notice to the borrower and affixture on the property, publication in two leading newspapers including one vernacular newspaper, preservation/protection of the asset and valuation by an approved valuer before sale. The authorised officer fixes reserve price in consultation with the secured creditor and can sell by quotations, tender, public auction/e-auction or private treaty (Rule 8).

Rule 9 says first sale of immovable property cannot take place before expiry of 30 days from newspaper public notice or sale notice served on borrower; subsequent failed-sale attempts can use a shorter 15-day notice. Auction purchaser must pay 25% of sale price immediately or by next working day, and balance within 15 days of confirmation or extended agreed period not exceeding three months (Rule 9).

Operationally, a LAP sale file should contain: NPA memo, 13(2) notice and proof of service, reply and 13(3A) response, possession notice, newspaper publications, valuation report, reserve-price approval, auction notice, bid records, sale confirmation, sale certificate, appropriation statement and surplus refund record if any.

Movable Asset Repossession

For movable assets outside SARFAESI or before sale, the lender should rely on contractual repossession clauses, court/arbitration orders where needed and RBI conduct rules. Repossession agents should carry authorisation, ID, loan details, inventory sheet and receipt forms. They should not use force, trespass, intimidation or public humiliation. RBI’s NBFC Fair Practices Code requires recovery agents to follow the lender’s code for collection and repossession, maintain confidentiality and avoid intimidation or harassment (NBFC Fair Practices Code directions).

For machinery, the physical process should include borrower/representative presence where possible, photographs, serial-number match, condition note, missing-parts note, transport receipt, yard receipt, insurance check and valuation. The asset should be stored securely and insured if material. A machine that produces ₹3 lakh per month in business cash flow may be better kept operating under a monitored settlement than removed and sold for ₹9 lakh; repossession should be a recovery strategy, not punishment.

Auction And Sale Economics

Sale price is rarely equal to valuation. Distress discounts are severe for specialised SME assets:

Asset	Practical recovery issue
General-purpose vehicle	Liquid market, but condition and RTO transfer matter.
CNC/VMC machine	Buyer pool exists but wants inspection, service history and accessories.
Printing/textile equipment	Value depends on age, make, spares and installation cost.
Restaurant/kitchen equipment	High depreciation, fragmented resale.
LAP collateral	Better value, but title, tenancy, local demand and litigation dominate.

A transparent sale memo should compare forced-sale value, reserve price, auction result, expenses and net recovery. If sale proceeds exceed dues and costs, surplus belongs to borrower/security provider. If proceeds are short, the lender retains residual claim against borrower/guarantors unless compromised.

ARC And Portfolio Sale

Asset Reconstruction Companies (ARCs) buy stressed loans from lenders, usually at a discount, and recover through restructuring, settlement, enforcement or asset sale. In India, ARCs are registered with RBI under SARFAESI. The RBI Transfer of Loan Exposures Directions, September 24, 2021, updated December 28, 2023 govern sale of stressed loans by banks, NBFCs and HFCs.

Important mechanics:

Requirement	Practical meaning
Assignment/novation	Stressed loans must be transferred through assignment or novation; participation is not permitted for stressed loans.
Board policy	Transferor needs Board-approved policy on identification, valuation and sale.
Valuation	For credit exposure of ₹100 crore or more, two external valuation reports are required.
Swiss challenge	Bilateral negotiated sale of stressed loans of borrower exposure ₹100 crore or more must be followed by Swiss Challenge; mandatory in certain ICA resolution-plan exits.
Risk transfer	Seller should not retain operational/legal risk or give further funding commitments after transfer, except as permitted.

For SME lenders, ARC sale is common in pools: unsecured business loans 180+ DPD, written-off merchant loans, or small LAP NPAs where internal legal bandwidth is poor. Pricing may range from low single-digit percentages of principal outstanding for old unsecured write-off pools to much higher for secured granular pools, depending on vintage, documentation, collateral and prior recoveries. Those ranges are market practice and not regulatory thresholds.

After assignment, borrower communication must be clean: who owns the debt, who services it, payment account, grievance channel and documents relied on. The original lender should reconcile sale consideration, remove/transfer exposure as per accounting policy and continue to honour data-sharing and complaint obligations.

Write-Off Versus Waive-Off

Write-off is accounting. Waive-off is a legal/economic concession to the borrower. A lender can technically write off a loan and still pursue recovery; recoveries after write-off are booked as recovery income or provision write-back per accounting policy. A waiver or settlement extinguishes specified borrower liability to the extent agreed.

Action	Borrower still owes?	Accounting impact
Technical write-off	Yes, unless separately waived	Asset removed from books; recovery continues.
Prudential write-off	Usually yes unless settlement	Provision/utilisation and P&L effect.
OTS waiver	No, for waived portion after conditions met	Shortfall adjusted against provision/P&L.
ARC sale	Borrower owes transferee/ARC	Seller derecognises/transfers exposure as per rules.

This distinction matters in customer service. A borrower may see “written off” on a credit report and assume the debt is gone. It is not necessarily gone. Conversely, if an OTS letter says payment of ₹18 lakh is full and final against ₹31 lakh dues, the lender cannot continue to chase the waived portion after settlement conditions are met.

Controls

Repossession and sale should be managed through a case file with milestones: default, notice, possession, valuation, sale approval, auction, proceeds, closure. The collections system should block auction if statutory notice dates, valuation, reserve price approval or litigation hold are missing. For co-lending, both REs need visibility because the Co-Lending Arrangements Directions, 2025 require individual books, escrow appropriation and mutual consent for subsequent third-party transfer of co-lent loan exposures.

The best recovery teams are conservative on process because process defects destroy recoveries. A botched possession notice or unauthorised field seizure can turn a recoverable secured loan into litigation, regulatory complaint and reputational loss.