Mumbai: Adhikrut Jabti Evam Vasuli, a Mumbai-based authorized seizure and recovery agency company that collects loans from delinquent bank customers, has cut its workforce by half although mounting defaults should have made it a time to expand rather than lay off staff.
The reason: state-owned commercial lenders are going soft on defaulting borrowers after the central bank stepped in to tackle complaints of harassment and intimidation.
Lenders including State Bank of India (SBI), the nation’s largest, are piling up bad loans in an economy where inflation has surged past double digits to a 13-year high and increasing interest rates have made credit more expensive.
Following mandate: State Bank of India is now running most of its loan collection activity in-house.
“Most of the public sector banks are going slow on recovery. We have reduced our staff strength from 400 to 200 beginning 2008,” said Adhikrut Jabti managing director Parag Shah, whose firm collects sticky loans for SBI, which is now running most of its loan collection activity in-house, and other state-run banks.
“The bank (SBI) has started stress asset resolution centres all over the country. This has definitely taken away some business from us,” Shah said.
In the last fiscal year, his agency employing only women as recovery agents resolved stressed assets worth Rs400 crore and made cash recoveries of Rs110 crore, which he expects will more than halve to Rs50 crore this year.
The Reserve Bank of India (RBI) tamed loan collection agents, who have previously used tactics ranging from ceaseless phone calls to use of eunuchs to embarrass defaulters or thugs to beat them up, after some customers dragged banks to courts and filed police complaints against bank employees and agents for alleged use of force.
In April, the regulator made police verification and training of agents mandatory. Banks are also required to inform the customer before handing over a loan recovery case to a collection agent.
Such restrictions have made loan recoveries difficult for banks and led to an increase in non-performing assets, or NPAs, of banks.
Reputation at risk
Fear of risk to their reputations has prompted several banks to shift the bulk of loan collection work in-house. That means slow business for collection agencies, which earn commissions ranging from 3.5% to 20% of the amounts they recover. India has about 146,000 recovery agents engaged by banks across the country.
With credit becoming cheap and abundant, India has seen more than 35% annual growth in retail loans to finance the purchases of apartments, cars and other consumer durables in the past few years. Mortgage costs had fallen to as low as 7.25% and personal loan rates dipped to 8%.
Now, with the rise in interest rates, customers have started defaulting on their equated monthly instalments, or EMIs, on unsecured personal loans and credit card payments. Delinquency as a percentage of loans outstanding has gone up to 5.9% from 4.5% last year for banks handled by Omega Alliance Recovery Solutions Pvt. Ltd, a Mumbai-based collection agency.
“We get at least 10 calls a day from consumers who say they do not have the capacity to pay and they want a settlement. This means we have to compromise even on the principal amount. Forget earning interest on loans,” said an executive at a foreign bank in Mumbai who did not want to be named.
Personal loan growth has halved. According to RBI data, outstanding personal loans grew by 13.2%, or Rs58,669 crore, in last fiscal year as on 15 February 2008, after expanding by 30.6%, or Rs1.04 trillion, a year earlier.
Diversion of funds
The reasons for defaults vary. One is the diversion of personal loans to investment in a stock market that has slumped after a five-year rally. With the benchmark index of the Bombay Stock Exchange, the Sensex, losing some 37% since January, those borrowers are unable to pay back their loans.
“Banks have not ensured the end-use of funds, particularly when they extended a personal loan,”said the owner of a Mumbai-based collection agency, who did not want to be named. “NPAs are the highest in personal loans,” he added.
Meanwhile, banks are launching nationwide campaigns to educate borrowers to pay their loans on time.
But “the atmosphere is not conducive for recovery (of bank dues)”, says a private bank executive who did not want to be named. “Collection efforts are now largely restricted to making phone calls.”
According to him, the percentage of NPAs in personal loans at some banks has increased to 12-15% of total lending from 6-8% earlier.
“The growing number of defaulters has forced us to tighten our lending norms,” said the same bank executive. “Earlier, we were comfortable lending to an individual with an annual income of Rs60,000 but now we don’t lend unless one has an annual income of Rs1 lakh.”
In the past few years, many borrowers had taken multiple loans that they are now finding difficult to service after banks raised their lending rates. “Customers are prioritizing,” said another banker. “They pay their home loan EMIs on time but they don’t mind defaulting on a personal loan or their credit card dues.”
Private banks and foreign lenders are still hiring collection agents, such as OMEGA Alliance, which has 150 employees on its pay roll and wants to expand. Its director Pankaj Joshi, in fact, wants to start another agency.
Joshi says he is willing to pay well. “A collection agent’s salary has gone up by 20-25% this year and it’s comparable with any sales executive employed with a corporate house,” Joshi said, but he has a problem recruiting people: few want the job of a collection agent.
“There is a level of stigma attached to this job,” Joshi explains.
“Additionally, there are alternate job opportunities available which are socially accepted. People prefer to work as sales representatives with corporate houses.”
Recent instances of police complaints brought by defaulters against bank-recruited collection agents had also turned people against the profession, he added.