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Banks and their recovery agents

Recent reports of borrowers of banks and financial institutions being harassed — a few of them being driven to commit suicides — by loan recovery agents have brought into sharp focus the dark underside of the finance business that could do with a much higher level of transparency and supervision. Courts in many States are seized of the matter. In February, the Supreme Court passed strictures on some private banks for employing “goondas” to recover t heir dues. States such as Maharashtra, Tamil Nadu, and West Bengal having a huge urban population accounted for the largest number of cases. Yet the problem is hardly confined to urban India. More importantly, the issues involved are complex and ought to be viewed in a larger context than that of the serious law and order questions they have thrown up. In several ways, the emergence of aggressive recovery techniques that often breach the law is an unfortunate outcome of a seminal transformation that has taken place in Indian banks and institutions. Traditionally bank loans in India have been “need-based” and, barring a small portion lent on “clean terms,” were backed by security. From the early 1990s with the growth of consumerism and financial sector liberalisation, banks — especially the new private banks, foreign banks and non-bank finance companies — perceiving a very big opportunity to make profits, pushed retail loans and credit cards to consumers. Invariably, these were made after a very cursory and doubtful assessment of their future incomes. Very often the only “security” insisted upon are blank, signed cheque leaves.

Driven again by profit considerations, banks went beyond merely relaxing lending norms. The great wave of outsourcing in the financial sector has now encompassed even such traditional activities as loan processing and deposit mobilisation. It was inevitable that loan recoveries would be outsourced; it became very expensive to undertake such activities within the four walls of a bank branch. It is strange that the institutions failed to realise that strong arm methods and thuggery used in such work contracted out would bring them into disrepute. That the legal route is still time-consuming, despite the setting up of debt recovery tribunals and lok adalats, is no excuse for violating the law blatantly. The RBI, which has circulated draft guidelines on outsourcing of financial services, has suggested a code of conduct for recovery agents. The Supreme Court’s suggestion that banks be held compulsorily liable for acts of its agents, if implemented, will go far in tackling the abuse of the recovery process.

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