Debt Recovery Processes in India
If you are in the mood for some bank bashing, check out this wikipedia link. This page lists a few atrocities committed by ICICI bank in India while trying to recover loans.
And yeah, ICICI bank is not a local operation fronted by thugs but is India’s largest private sector bank and its ADRs are listed in NYSE .
Are the allegations about the bank true?
Some may not be true. But a majority are and such behavior even led to the bank being fined 5 million INR by the Delhi Consumer Commission.
Is this the general state of debt recovery in India?
Yes. Banks routinely employ collection agencies and outsource debt recovery to them. There is no supervision or formal processes involved and the agencies operate on a commision based on the amount recovered.
Since the agencies are interested only in maximizing their commission, they routinely take shortcuts by employing thugs who take to beating up borrowers.
Was this the case in India always? Are all the banks involved in this type of behavior?
A short history lesson…
The largest 14 banks in India were nationalized in the 1960s and the general behavior of banks then was to classify unrecoverable loans as NPAs (Non Performing Assets). Of course, this led to banks with huge bad debts in their balance sheets and the system was a mess.
When India started liberalizing in the 1990s, many private banking licenses were granted - ICICI bank was one among them. These banks learnt quite a few lessons from the experiences of the nationalized banks and from the Indian financial environment:
- Reduce NPAs in balance sheet - ICICI bank is a special case here. The bank was started as a division of ICICI (Industrial Credit and Investment Corporation of India) which was a development finance institution started by the Indian Goverment and the World Bank to fund businesses in India. ICICI itself had a significant amount of NPAs, thanks to giving loans to bad businesses, often under political pressure. I can just imagine all those bankers sitting in a conference room and going - “NEVER AGAIN.”
- Stockmarket pressures - These banks started at the same time that the Indian stock market started booming. And the principal criteria used to value banks was their balance sheet and no bank wanted the albatross of NPAs.
- Pressure to grow - India has the world’s largest middle class - 300 million people. In the 1990s, everyone started talking about this and banks wanted to take advantage of this number. So they started offering loans (secured/unsecured) to anyone they could get their hands on. Yes, even we have stories of dogs and kids getting credit cards
- Good old fashioned greed - For all its flirtations with socialism, Indians are capitalists at heart. And of course, greed is good.
- No Regulation or Enforcement - It took some time for the customers, consumer advocates and courts to wake up to this problem. The Supreme Court of India banned banks from employing recovery agents but enforcement of these rules has been lacking.
The funny thing - only private banks (Citibank, Amex, Standard Chartered, HSBC…) seem to be involved in such sordid stories. When banks were nationalized, you had more stories of bankers being beaten up for trying to collect loans!!!
Guess this is the revenge of the bankers…
Final Note:
The purpose of this post is three fold:
- Name and shame banks like this - If you are an employee of any of these banks, please wake up and realize that you need to help your bank clean up its act.
- Give this information to current and potential customers - Now does this mean I am asking you to stop banking with these people? NO. All I am asking is for you to be aware. And if the banks still haven’t improved their collection practices, take a hard look at your relationship with them.
- Start looking at systemic changes - Many of these banks have started improving their collection practices and there has been more enforcement of existing laws. We also need more consumer oriented laws like in the USA.
