Protection against goons

Protection against goons

Some banks have overextended themselves in lending, without systems in place. The problem is worse when there is no collateral. But why should consumers suffer from goon squads as a result?

Bibek Debroy
Bibek Debroy

Polonius in Shakespeare’s Hamlet said: “Neither a borrower nor a lender be.” We probably need a lenders’ liability law.

True, banks and financial institutions have a lot of bad debt, which represents locked up capital that can have better productive use. That’s why the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act was passed in 2002, making life easier for lenders by allowing repossession of securities without court intervention.

Banks will tell you that their debt collection and security repossession policy follows the law (respect of privacy, identity proof for bank representatives, timing of contact, proper notice, transparent repossession and valuation of property) and the Indian Banks’ Association’s (IBA) Fair Practices Code. What they don’t say is that following IBA’s code is voluntary.

Several cases have shown that banks (and non-banking financial companies) don’t adhere to norms. Debt recovery is outsourced to private agents. There have been instances of physical violence against borrowers, suicides, intimidation, and even mistaken identity.

Consumer courts have imposed punitive fines on banks, since the argument that banks are not culpable for action taken by recovery agents doesn’t hold. For instance, the Delhi Consumer Commission imposed a Rs 50 lakh fine on ICICI Bank, noting its “audacity and impunity” in violating the Supreme Court’s guidelines.

Some banks have over-extended themselves in lending, without systems in place. The problem is compounded when there is no immediate collateral. But why should consumers suffer from goon squads? If on 1 November, ICICI’s CEO announced that the bank will henceforth follow Reserve Bank of India’s guidelines, this suggests these guidelines weren’t followed earlier.

How many consumers read the fine print when signing loan papers? How many are aware of documents retained by banks? How many have the perseverance to approach banking ombudsmen, RBI or courts? How many know how to get their names off defaulter databases? The US has a Fair Debt Collection Practices Act to protect borrowers from harassment.

We need something like that, since IBA norms aren’t mandatory and the Sarfaesi Act has improved the rights of lenders without addressing the rights of borrowers. Till that happens, borrowers should probably take out insurance cover against loan recovery.