Friday, November 23, 2007

Banks might adopt self-regulatory loan recovery practices

Recently there have been cases of harassment by recovery agents of the banks. An increase in the infiltration of personal loans in their collection has resulted in banks employing agents for recovering bad debts. The complaints are increasing in number and Reserve Bank of India and courts have raised questions over the practices of banks employing recovery agents after the case of a borrower being driven to suicide by these agents.

The Reserve Bank of India is making new guidelines to keep check on the methods of the banks in view of which the banks are responding by going slow on small-ticket personal loans. Before giving loans banks are checking the financial status of the people and their loan pay back ability due to which the middle class people are facing problem.

The IBA working group studied the recovery practices in the UK and the US. In US and UK, where the lender can take back the security (say a car) if the borrower has defaulted over three times. The only situation the lenders are barred from doing so is when it is in the customers’ own premises.

The Indian Banks’ Association (IBA) have been looking for the fast- track remedial approach and a legal method for the recovery of loan as the legal route takes a very long time years to settle disputes specially in the cases of small loans. The IBA is in favor of self-regulation by banks with respect to practices adopted by lenders for recovering personal loans.

In India, there is no proper law to deal with the recoveries of small-ticket loans. Even under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI) that gave some flexibility to recover securities, there is a provision of recovery of securities of only over Rs 1 lakh.

RBI, in its recent monetary and credit policy review, had asked the banks to urged their policies, practices and procedures used in engaging recovery agents by them because the litigations against banks for engaging recovery agents, is getting them adverse publicity which could lead to reputation risk for the banking sector as a whole.

BOB, IBA will be hosting this year’s annual bankers’ conference in Mumbai on 26th November. It will be a two-day event, in which there will be five sessions revolving around the theme, ‘Indian Banking: Towards global best practices’.

The discussions are expected to tackle various issues concerning all the stakeholders in the banking system, including employees, shareholders and bank customers with presentations also from academia, other industries as well as banks.

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