In the last week of August, loan recovery agents of ICICI Bank Ltd, India’s largest commercial bank in terms of market value, demanded an immediate payment of Rs95,000 from 54-year-old Joseph Sequeria, a marketing executive.
Four agents visited his house at Andheri, a Mumbai suburb, while Sequeria was in office, and demanded money from his wife for a credit card default that never was. It was a case of mistaken identity. Apparently, there were two Joseph Sequerias working at the same office and living in the same area!
This incident may be one of mistaken identity, but overzealous collection agents, at times, push borrowers to tragic consequences.
Prakash Sarvankar, 38, again an Andheri resident, early this month committed suicide, leaving behind a note that blames the recovery agents of ICICI Bank. He had taken a Rs50,000 personal loan. When he stopped payments of monthly instalments, recovery agents started visiting his house and abusing him in the presence of his wife and young daughters, states the one-page suicide note, written in Marathi.
A couple speaking to a loan officer at a bank in Mumbai
Four recovery agents, employees of Nishant Associates—an agency that does such work for banks—have already been arrested by the Mumbai police. Following this, city police commissioner D.N. Jadhav has directed banks to check the credentials of recovery agents and keep the police informed about them. Maharashtra deputy chief minister R.R. Patil, who also holds the home portfolio, has gone one step ahead and said the top management of banks will be held responsible and prosecuted for such incidents.
Credit card and personal loans—“clean loans” being given without collateral—have been growing at a phenomenal pace in India as the world’s second fastest growing economy embraces consumerism.
The total outstanding of credit cards was to the tune of Rs14,221 crore in May, growing 45% year-on-year. Outstanding loans given to buy consumer durables, according to the Reserve Bank of India (RBI), were Rs8,831 crore in May, growing more than 23% year-on-year. There is no RBI data available for the overall personal loan portfolio of the industry.
ICICI Bank, a very aggressive player in this segment, had Rs12,461 crore exposure to this sector in March.
Meanwhile, about 28 million credit cards have been issued by the Indian banking industry so far, with ICICI Bank leading the pack with 8.5 million cards followed by the State Bank of India (SBI) and Citibank NA, with 3.5 million credit cards each, HDFC Bank Ltd (2.5 million) and Hongkong and Shanghai Banking Corp. Ltd and Standard Chartered Bank (two million each).
A loan becomes “bad” when a borrower does not pay for one quarter or 90 days. Personal loans are normally paid in equated monthly instalments (EMI). Typically, if a borrower misses one EMI or does not pay part of credit card dues, banks start making phone calls. At the second stage, the case is handed over to a collection agency. There are codified norms that these agencies are expected to follow. But more often than not, they resort to strong-arm tactics as their earnings depend on recovery of such loans. The commission on the money recovered can be as high as 5%.
Senior public sector bankers blame the aggressive “loan on phone” phenomenon for the rising defaults in personal loans and the consequent strong-arm tactics by therecovery agents.
“Some banks and non-banking finance companies (NBFCs) are tapping the employees of the unorganized sector, most of whom do not pay income tax. There is a high default risk in such loans which banks try to cover by charging high interest rates. But even that’s not enough at times,” says a senior executive of a large public sector bank who does not wish to be quoted.
Sanjay Nayar, chief executive of Citibank in India, says: “Recent trends seem to indicate that a few aggressivelenders and new entrants in the market, in pursuit of market share, may have over-extended the customers and will need to take steps to correct the situation.”
Defaults in credit cards and personal loans, according to some bankers, now range between 5% and 10%. No one in the industry wants to comment on this, officially. A foreign NBFC, which has a large personal finance portfolio, charges close to 30% for such loans to cover up a 10% default rate. In reality, about 22% of its loans turn bad but the recovery agents help it bring that down to 10%.
“If the industry targets the subprime borrowers, the loan defaults are bound to go up and we may see more aggressive play by recovery agents. I have a feeling some players are not doing due diligence while choosing the customers. They are not checking their background. The focus is on gaining market share and not the quality of loans,” says a retired central banker who does not wish to be named.
Another person, close to RBI, says banks should appoint the same set of people for originating loans as well as for recovery of bad loans.
“If this happens, the direct sales agents outsourced by banks will be more careful about the profile of the borrowers. They will not lend indiscriminately. Now, they lend to anybody and everybody as they are not responsible for the quality of loans. At the next stage, the recovery agents go aggressive as they get commission on the money recovered,” this person points out.
Rajiv Sabharwal, senior general manager and head of retail assets, ICICI Bank, does not agree. He denies any “indiscriminate” lending and says there is a moral hazard if the same set of people originate loans and recover if the loans go bad. “Globally, this does not happen... if we do this, we will run more risk as there is a clear conflict of interest,” he says.
ICICI Bank employs about 7,000 agencies for loan origination as well as bad loan recovery, but there are not too many agents, as on an average each agency has very few employees on its payroll.
“We need to outsource this as, on our own, we cannot reach out to all borrowers,” he says. “We have a very strict selection process for employing these agencies, including police verification.”
Kalpana Morparia, managing director and chief executive of ICICI Bank’s proposed holding company that will own its insurance venture and asset management firm, points out that the bank gives loans only after interviewing borrowers and meticulously checking their credit history.
“We also take into account the fixed obligation to income ratio. We don’t give loans to those whose debt obligation is more than 50% of their net income,” she says.
If that’s the case, what went wrong with Sarvankar?
According to ICICI Bank executives, he was overleveraged. In fact, he had taken loans from two other NBFCs—one run by a foreign bank and another by a brokerage. And he concealed these facts while taking loan from ICICI Bank. “We even checked about his credentials at the Credit Information Bureau (India) Ltd,” says Sabharwal.
India’s first credit bureau and set up in May 2004, it collects, collates and disseminates credit information of both commercial and consumer borrowers for a closed user group of members. Banks, financial institutions, NBFCs, housing finance companies and credit card firms use the bureau’s services.
“We have data of 100 million consumers. But this is not the entire universe. There could be around 300 million consumers of loans,” says Arun Thukral, managing director of the Credit Information Bureau.
“Credit information bureaus cannot provide a magic solution to the problem,” says Satish Mehta, managing director and chief executive officer, Highmark Credit Information Services Pvt. Ltd, a firm that has sought RBI licence to open a credit bureau.
“They offer a snapshot of the past record of borrowers. People will default and there could be incidents of frauds. The issue of how recovery agents should work is different. There are norms codified by RBI as well as the Indian Banks’ Association (IBA), and banks must follow them. If they do not, the regulator should give them exemplary punishment. Self-regulation is the best way to tackle this,” Mehta adds.
ICICI Bank has sacked the agency that handled Sarvankar’s case.
According to Sabharwal, the bank has all along been focusing on training the recovery agencies and strengthening the internal processes and credit appraisal system. This will bring down both incidents of defaults and improve recovery of bad loans.
K.C. Chakraborty, chairman of Punjab National Bank (PNB), says the situation is very “delicate” as the lenders are “aggressive” while the existing laws are “passive”.
Tarashankar Bhattacharya, managing director of SBI, the country’s largest commercial bank, also does not say what could be the solution.
Neither SBI nor PNB is present in the personal loan segment in a big way.
“We offer personal loans only to the employees of those corporations with whom we have an existing relationship or those individuals who have already taken home loan or auto loan from us,” Bhattacharya says.
Nayar of Citibank says his bank’s collection policy is built on courtesy, fair treatment and persuasion and says defaults occur for either of two reasons—a customer’s lack of ability to pay or a customer’s lack of willingness to pay.
Morparia of ICICI Bank says the solution lies in better debt management by individuals. “Some people are overleveraging themselves. That is the root of the problem and the best way to address this is credit counselling,” she says.
ICICI Bank has already started this by opening Disha, a financial counselling outfit that now operates in six cities with seven more planned. The bank will also keep a dedicated phone line for borrowers to seek 24-hour counselling. Bank of India last year started Abhay Credit Counselling Centre at Dadar in central Mumbai and Union Bank of India too has recently opened Union Mitra,?a?credit-counselling centre.