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India Debt Collection Business – Scenario and Potential

Description: BACKGROUND AND EMERGENCE OF DEBT COLLECTION BUSINESS IN INDIA

The debt collection business is a relatively new concept in India. Like many modern tools, this business was also introduced to India by foreign businesses who came to India in horde in early 90’s and brought with them myriad modern tools, practices and systems. Like other sectors, banking also witnessed a large scale foreign firms setting up their operations in India. Retail consumer loans became an important product in the portfolio of the banking industry. Easy availability of credit also bought with it the problem of payment defaults, which eventually led to the emergence of debt collection agencies.

In India, debt collection was never treated as a specialized job and was always treated as one of the jobs that legal departments of the banks and financials institutions were required to undertake. Legal department would approach the collection job strictly as a legal issue rather than doing it with the objective of revenue collection. For legal department, the only tool available was litigation and no other non-litigation tool was applied. Long and winding legal processes, the Indian legal system could not help the cause of the legal departments of the banks. On the other hand, foreign banking firms introduced the concept of specialized debt collection services. Debt collection services became one of the many services that began to be outsourced to specialized agencies. These agencies mushroomed in metropolitan cities including Delhi and Mumbai. These agencies were initially supported by the respective banks; they were very small and their staff was uneducated, being not aware of anything about the concept of the debt collection. The agencies usually worked in a specific area of the city for only one client – mostly a bank.

The third-party debt collection industry plays an important role in the Indian economy. The industry employs hundreds of thousands of Indians as collection professionals, who collect on past-due accounts referred to them by various credit grantors, such as credit card issuers, banks, retail stores, hospitals and other health care services, or by government departments. Business purchases of this industry and personal purchases by its owners and workers ripple through the economy, supporting hundreds of thousands more jobs across the country. Further, the industry benefits the economy by recovering billions of dollars in delinquent debt each year that would otherwise go uncollected. The economic benefits of third-party debt collection are significant. Citibank has been the pioneering company in India which started hiring the services of debt collection agencies to collect the debts.

The debt collection industry in India also has grown sharply this year as higher borrowing costs, rising inflation and the general slowdown in the economy force more companies and individuals into difficulties. Underlying debt has gone through the roof and lenders and organizations increasingly want to move any bad debt off their books. Whether it is a high street bank, a credit card lender or a mobile phone company, growing numbers are turning to professional debt collectors in a more difficult environment.

Following have been the services usually outsourced to Indian debt collection agencies, involved in providing the support in debt collection area: Business debt collection. Unsecured debt. Medical debt collection. Credit card debt. Bad cheque collection. Commercial debt. Consumer debt. Nationwide debt. Government debt.

The debt collection industry in India is growing at a faster pace and is surely poised for growth. The credit card outstandings have shot up by a whopping 87% at Rs 26,596 crore, during the January-May this year, from Rs 12,375 in the period year ago. The industry analysts blamed the banks for the current state of affairs. The RBI also encouraged banks to shift bad loans off their books more quickly because they will be required to hold more capital against risky assets that may default.

COLLECTION INDUSTRY – UNREGULATED SCENARIO

The collection agencies suffer from their own shortcomings due to unregulated and primitive nature of this business in this country. The staff is untrained both in soft skills and legal issues. Being unregulated, the procedures are not standardized. The pliable reputation of the judiciary at the lowest level in the country has been used to their advantage by people in collection business. With the patronage of minuscule minority of pliable judges simple civil defaults are registered as criminal cases and the customers are harassed into paying up. Slow and long civil recovery court process has no takers in this age of instant results where revenue targets are the most sacrosanct. Weekly recoveries are monitored and immediately placed in the asset side of the account books of the banks. Under such strict and cut throat environment, there is pressure on the banks to keep their account books healthy therefore such aggressive and extra-legal methods are employed for quick recoveries.

Their main strategy for debt collection is by filing the criminal case, repeatedly calling the customers at even odd hours as well as the personal visit to the customers. These debt collection agencies are also used by the banks for repossessing the financed vehicles from the defaulters. Initially, these agencies were highly successful in collecting the debt and they also take the advantage of the situation where there is no law, guidelines for debt collection as well as for operating the debt collection agency. People are not aware of their rights and remedies available to them and also hesitant to initiate the action against these agencies or banks because the amount involved is not huge.

In this background, the debt collection agencies feel encouraged adopting more unethical means for recovery. There have been numerous cases whereby the agencies used unethical norms. One of them is - a debt collection agency repossessed the vehicle of an advocate from the premises of the district court at Delhi by use of force and without following the due course, the said advocate pursued the matter with the court and order is passed against the agency. This case got much publicity in the newspapers in India. Similarly, in the year of 2007, collection agency of ICICI Bank repossessed the car by use of force while the person was driving back to home. He filed the case for damages before the State Consumer Forum and the Consumer Forum awarded adequate compensation to the person.

GOVERNMENT / RBI INTERVENTION

Debt collectors in the past had a lot of leeway and it wasn't uncommon for collectors to embarrass, harass or humiliate debtors. The courts came to the rescue of harried public and guidelines were laid down for the Banks to follow who engage the services of collection agencies. After the intervention of judiciary, the Reserve Bank of India (RBI) which is the super regulator of the banking industry, wore up to the need of regulating the unruly collection agencies. RBI stepped in and laid down its own guidelines for the banking industry to follow.

The guidelines prescribed by RBI are enforced against the banks that have contractually employed collection agencies. The banks in turn via their contracts with the collection agencies ensure that the RBI guidelines are followed. Now, under the norms passed out by RBI, it is illegal for third-party collectors to threaten violence or harm to a debtor, use obscene language, or repeatedly use the phone to harass a consumer. In addition, third-party collectors cannot threaten to arrest a consumer for an unpaid debt or threaten to seize or garnish a consumer's property or wages unless the collector intends to do so and it is a legal cause of action. Failure to comply will result in disciplinary action and may result in permanent termination of employment and / or business with the particular bank.

The following are few of the core underpinnings of the collection process. These are the norms formalized by the top bank in India – RBI.

1. DSAs/DMAs/Recovery agents to get minimum 100 hours of training. 2. Recovery agents should call borrowers only from telephone numbers notified to the borrower. 3. Each bank should have a mechanism whereby borrowers' grievances with regard to the recovery process can be addressed.

4. Banks are advised to ensure that contracts with recovery agents do not induce adoption of uncivilized, unlawful and questionable behavior or recovery process. 5. Banks are required to strictly abide by the codes pertaining to collection of dues.

RBI in the draft guidelines issued for banks engaging recovery agents, has asked banks to inform borrowers the details of recovery agents engaged for the purpose while forwarding default cases to the recovery agents.

The RBI has also considered imposing a temporary ban (or even a permanent ban in case of persistent abusive practices) for engaging recovery agents on those banks where penalties have been imposed by a High Court/Supreme Court or against its directors/officers with regard to the abusive practices followed by their recovery agents. An operational circular in this regard has been issued in November 15, 2007.
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