A man sits in a car outside a club. Hired hoodlums pull him out and attack him with iron rods. It’s a case of mistaken identity. The thugs have been hired by ICICI Bank to recover Rs3.4 lakh that the owner of the car has borrowed from the bank to buy the vehicle. The man who is beaten up is not the borrower, but a friend.
It’s no wonder that a consumer court has come down heavily on ICICI Bank, saying its recovery agents have behaved “like robbers”. The court also imposed a fine of Rs55 lakh. The court’s strictures have come just a few days after the Reserve Bank of India ticked off banks for letting loose recovery agents.
These headline-grabbing events point to a deeper malaise in India’s booming market for retail credit. Indian banks have traditionally lent money for production rather than consumption. But the severe industrial slowdown in the mid-1990s left them nursing piles of bad loans. Banks started looking at retail lending, partly because they offered a to-die-for combination of higher interest rates and lower default rates. The decline in interest rates after 1998 added further fuel to the retail-lending fire.
Now there are some early signs of trouble in credit land, with reports of rising default rates on car loans and climbing credit card receivables. Higher interest rates are one reason. The gross numbers are still modest. And the biggest vessel for these loans to individuals—mortgages— shows no signs of cracks because of the continuing rise in real estate prices.
But the fact that there are increasing incidents involving thuggish recovery agents shows that the underlying reality has changed—borrowers are defaulting more readily than before and banks are getting a bit desperate.
The deeper problem is that India does not have a proper institutional structure to deal with such cases; perhaps, it has not yet had the time to put one in place. Banks have erred in dishing out loans without doing proper due diligence. But to be fair to them, they do not have access to credit histories that can help them assess risks in a more rational manner.
On the other hand, the right to foreclose retail loans and take possession of collateral is not as easy as it looks in the rulebook. It is worth a bank’s time and money to go after corporate defaulters who owe it crores of rupees. To do the same with a small borrower who hasn’t repaid a lakh or two is a different matter.
The regulators and lawmakers need to put in place a far better mechanism to oversee cases of retail default, and as soon as possible. The growing public resentment, which is against the thugs who come knocking on the doors of middle-class India, could very likely be used by politicians to whip up passions against banks. From there, the road to unthinking curbs on banks is not hard to contemplate.
There is no doubt in our mind that banks that use strong-arm tactics to browbeat defaulters don’t deserve public support of any sort. But we should also be careful not to use individual cases as a cover to bind banks in red tape or scare them off lending to individuals. Recent reports suggest that the latter possibility is very real, with banks holding back on retail lending after the recent controversies. (Something similar happened in industrial loans a decade ago. Bank officers stopped lending because they feared the Central Bureau of Investigation would raid them in case the loan went bad, as it had some well-publicized cases at the time.)
That’s not what we need right now. Indian households borrow too little, which restricts their ability to buy homes, cars and generally improve their standard of living. We need more retail loans, not less.
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