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The other side of loans

The other side of loans

Loan recovery agents and their strong-arm tactics are bad news, but banks usually use them as a last resort. And there are rules regarding this too.

They ripped my shirt, shaved my moustache, cut my hair and used electric shock on my chest and even spat on my face.” No, Hyderabad-based scientist CLN Murthy is not talking of the Khmer Rouge or Guantanamo. This is what happened to him in his house. His crime? Murthy defaulted on a bank loan payment.

It might be cold comfort to him, but Murthy is not alone. In Delhi, loan recovery agents landed up at Rajesh Choudhary’s home and threatened him with dire consequences if he did not pay his loan. “I was scared, upset and confused,” says Choudhary.

Rajesh Choudhary
RAJESH CHOUDHARY, DELHI
Graphic Designer
THE CASE: ICICI Bank froze his account because of a delay in paying a credit card bill
THE RESULT: Missed paying two instalments of a car loan linked to the same bank account
"The bank sent recovery agents instead of resolving my loan repayment with them. I was made to look a habitual defaulter when I have a proven credit card history and car loan repayment which was clean till this episode"

Banks have been receiving plenty of bad press over the past few months, with papers carrying news like this with increasing regularity. The bad news is that since loans work on the basis of hypothecation, lenders generally have the upper hand in cases of default.

The good news is that investors have been taking legal action, courts have been slamming banks for unfair practices and debt recovery agents have been told to exercise restraint.

Finance Minister P Chidambaram has also spoken against strong-arm methods of recovering loans, saying: “I will advise strictest action to be taken against those who are indulging in this.”

As a borrower, you can appeal to the banking ombudsman against intimidation by recovery agents. Or you can take this up in court. Ideally, approach the consumer court, since the civil court takes forever to settle such issues. You can also get police protection; in September this year, the anti-extortion cell of the Mumbai Crime Branch arrested the manager (loans) of HDFC Bank and two recovery agents on charges of extortion and criminal intimidation. They had threatened a borrower who shared the name of a loan defaulter.

In the case of private lenders (unregulated by the Reserve Bank of India), you can get redress only through the police or civil courts; the ombudsman and consumer courts cannot help.

The other side. To be fair, banks and recovery agents are not always the bad guys. When you take a loan, the bank agrees to give you a specified sum of money and you agree to return the amount over a specified period. Loans are typically sanctioned after the bank studies your repaying abilities.

However, even after thorough checks, there could be cases when you are unable to repay on time. Ideally, inform the bank about the problem. Banks rarely use strong-arm tactics at this stage. “Calling customers to remind them of payments due is done by banks across the world,” says Murali M Natrajan, regional head, consumer banking, Standard Chartered Bank. It is when you become a habitual defaulter that banks panic.

Even then, the accepted method of recovery is not sending out goons. Says Kamlesh Rao, executive vice-president, personal and home finance, Kotak Mahindra Bank: “Coercive acts to recover loans cannot be the way.” In most cases, after the bank sends a reminder, the borrower pays up. Often, delays occur due to insufficient balance; if cheques are reprocessed, they are cleared.

All of this seems perfectly civilised. So where do the goons come in? Banks step up their recovery methods when they find that borrowers make false claims, abscond and avoid reminders. Some even provide incorrect contact details by which they choose to remain unreachable.

“Many times we are foxed by the kind of excuses even well-to-do and able customers give when it comes to repayments,” says Rao. He recounts an instance when a borrower moved cities, transferred his bank account and billing statement address, but did not do so for his loan account.

Before banks call in the recovery agents, they try to work with the defaulter to restructure the loan or repayment. “For us, retaining a customer who will repay even with restructured tenure and amounts is better than getting in external agencies, which we have to pay,” says an ICICI Bank spokesperson.

But if this does not work, banks call in recovery agents. “Taking the courts’ assistance for collections is inconvenient and expensive and may overburden the legal system if all banks were to file legal cases for every small default,” says Natrajan. It is to circumvent this delay that banks employ recovery agents. This is where there’s a grey area, since banks do not directly control the agents. And most cases of harassment and intimidation are when the agents are given free rein.

Bankers claim that a few stray cases of harassment are being blown out of proportion. In fact, says Natrajan, “Due to recently reported incidents in the media, we have come across situations where customers are misusing the situation to avoid paying legitimate dues claiming harassment.” The Indian Banks’ Association along with the Reserve Bank of India are working on a set of guidelines to make loan recovery a smooth process.

WHEN AGENTS STEP IN...

Recovery agents are usually the last resort for banks. This is what happens when you default:

1. INSUFFICIENT FUNDS could lead to a cheque not being cleared. The bank allows extra time to pay

2. IF CHEQUES BOUNCE banks allow one default if you have a good credit history

3. TWO CONSECUTIVE DEFAULTS and the bank asks the borrower, through the bank branch, if and when the outstanding amount can be repaid

4. IGNORING THE REQUEST leads to the bank sending a registered letter with a deadline to respond and repay

5. NO ACKNOWLEDGEMENT of the letter means that the bank will get in touch with the recovery agents

...AND HOW YOU CAN KEEP THEM AWAY

1. AVOID giving post-dated cheques. If a cheque bounces, it is a legal offence and can lead to a two-year jail term. This gives the lender even greater leverage. Instead, work out an ECS arrangement with the bank

2. BE OPEN with the bank if you have a problem in repaying. Institutions find it easier to restructure loans than manage defaults

3. SELL ASSETS if necessary. But remember, if you default and you have mortgaged your property, you may lose even items inside your home

4. RESETTLE If the bank is convinced that the problem is temporary, it could agree to re-structure the instalments, or accept lower EMIs for a specific period

5. IF YOU are still being harassed by agents, seek police protection. Keep all notices and reminders, because these specify a period after which the bank can take action against you

THE RULES OF RECOVERY

Recovery agents are not above the law. The RBI and the Indian Banks’ Association have put in place guidelines that agents must follow during the recovery process.

1. THE DEFAULTER should be contacted at his home or office, only between 7 am and 7 pm

2. AGENTS should avoid inappropriate occasions, like bereavement in the family, while making visits to collect dues

3. THE BANK should ensure that all communication with borrowers is in simple language

4. THE BANK will give a written notice about any recovery measures, including repossession

RBI RULES

1. BANKS SHOULD provide details of the recovery agents, including phone numbers

2. A TRAINING course must be developed for recovery agents, in association with Indian Institute of Banking and Finance

3. RECOVERY of loans of less than Rs 10 lakh should be through lok adalats, especially in case of personal loans, credit card loans and home loans