Saturday, December 8, 2007

Borrower’s boldness making banks change their recovery methods

Before the employee of a bank, a tele-caller used to call the customer for reminding him to repay his loan. Slowly they changed their method and started threatening the borrowers on the phone about the dire consequences they will do not repay their loan installment on time.

Now the borrowers have become bold after the RBI has become strict against the banks. Now banks fear that the boldness of some defaulters exposes their and also their recovery agencies’ employees to the risk of getting embroiled in a criminal case that takes upwards of four to five years to be disposed of.

Recently, a new recruit at a large private sector bank was called to a police station and made to sit there the whole night on a complaint made by the borrower. The borrower had filed an FIR (first information report) alleging that he was threatened with dire consequences by the bank employee.

A few days into the job, he had just done his duty of calling up a borrower urging him to clear the overdue amounts but found himself in the police station.

The intentionally contemptuous attitude of some borrowers has forced banks to become cautious about pursuing their normal recovery efforts.

The focus on instances of excesses by banks in their attempts to recover money has had the unintended effect of encouraging some borrowers to dare banks to take steps to recover loans.

The first step the bank would normally have to take possession of a car it has financed after the borrower defaults on payments. That’s not the case any longer. Repossession of car has become the last option now.

According to senior HDFC Bank official, “The entire process of repossession of vehicles has become difficult and tedious after the recent incidents of abuse of recovery agents. But we have not stopped the process. If we stop we will have to shut the business.”

The watchfulness following a reaction against reported instances of abuse by recovery agents and the threat of regulatory action by the Reserve Bank of India (RBI) has acted as a dampener on collections, with a 10 to 15 per cent dip across personal loans and auto loans.

According to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, banks can approach debt recovery tribunals only for asset-backed loans of Rs 10 lakh and above. For loans less than Rs 10 lakh, banks can send advance notice to the defaulter and take possession of the asset.

If banks were to take recourse to courts, the process of a court receiver taking possession of a vehicle and auctioning it would take really long.

The collection head of a private sector bank said, “The legal process would take at least six months. By then, the resale value of the car would have fallen significantly making it an unviable option.”

On the scrutiny of the borrower profile with a Mumbai-based recovery agency reveals that defaults are higher among over-leveraged borrowers.

Almost half of the defaulting borrowers have taken loans from more than one lender and one in every four of such borrower’s defaults on multiple loans at the same time. Around fifteen per cent of the personal loan defaulters are from the age group who less than 25 years old.

“Two years back we saw a trend of rising defaults among 23-24-year-olds on mobile phone bills. These individuals used credit cards to pay cell phone bills and then to pay credit card dues, availed of personal loans. Defaults are now surfacing on these (personal) loans too,” said Pankaj Joshi, director of Omega Alliance Recovery Solutions, and a former banker.

According to the collections head of another large private sector bank, “One trend that is common to all defaulters is of over-leveraging even up to 120 per cent (of total monthly income). An equated monthly installment of 40 per cent of monthly income is a serviceable ratio. However, some lenders consider even 60 per cent indebtedness acceptable.”

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