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Dial 'R' for restraint Cases of coercion and violence are forcing banks to soften their approach towards debt recovery. ANITA BHOIR reports In September, Kunal Pandey (name changed), a bank manager employed with HDFC Bank, along with two recovery agents was arrested on charges of threatening and attempting to extort money from a person who had failed to repay a loan. The bank is willing to vouch for the innocence of the employee, but the police are in no mood to relent. They have told the young executive's family that it would take at least five years for the charges against the employee to be dropped by a court. Pandey isn’t an isolated example. Suddenly, banks are finding themselves in a Catch 22 situation. On one hand, active consumerism has meant a rising demand for loans. And the banks have tried to fulfil this demand by doling out loans to earn high interest income. On the other hand, in some cases, when recovery agents have tried to use coercion tactics, consumers have cried foul and approached the courts. The result: with both courts and police on the side of the customer, banks are finding it increasingly difficult to recover money from chronic defaulters. The Reserve Bank of India (RBI) has also rapped them on the knuckles and came out with guidelines that seek to regulate banks and their recovery agents (see RBI’s Seven Commandments). No wonder, banks are unhappy. Says the head of collection in a private sector bank,“Today, nobody is willing to join a bank's collection department. What is so wrong in asking people to pay up? The recent cases of abuse by collection agents are unfortunate. But while there could have been some excesses, it is not right to generalise all collection officials as goons.” However, the severe backlash following instances of use of abusive methods for recovery has forced banks, especially private sector banks, to take steps to prevent any recurrence of such episodes and make systemic changes in the whole process. Typically, the recovery agency pockets anywhere between 3.5 and 20 per cent of the amount recovered as its commission, depending on whether the borrower had defaulted only on a single instalment or the loan had been written off. Also, banks set agencies stiff targets for recovery which leads to unwanted aggression. Says Pankaj S Joshi, an engineer and ex-banker who heads a Mumbai-based recovery agency, Omega Alliance Recovery Solutions, “My suggestion to banks was that giving a target is fine. But also give us some incentive on maintaining a clean collection trail. If there has been no complaint against the agency or its employee, the bank could give an incentive.” The banks seem to be rethinking this strategy. Explains a collection head of a large private sector bank, “It is true that we have a target-oriented approach. But now we are telling the agency that if there is a problem you should get back to us, first.”
Business Standard • December 2007 |