Banks fear wilful defaults after anti-recovery activism

He is a worried man now. As the head of recoveries at a bank that's among the active players in the small personal loans business, he is scared that organised activism against recovery of overdue loans could cripple his recovery function.

The Mumbai-based recovery chief does not want to be identified but says his greater concern is not that non-performing loans (NPLs) would rise from the already elevated levels. Coordinated opposition to recovery efforts could lead to banks withdrawing altogether from lending to this sub-prime segment in India that otherwise depends on informal money lenders, he feels.

This feeling is shared by many bankers, particularly after an organised platform sprang up in Mumbai, which is urging defaulters to get in touch with them for help if they are being "harassed" by banks for recovery of overdue loans. At stake is about Rs 45,000 crore of loans, the estimated exposure banks and non-bank finance companies (NBFCs) have to India's own sub-prime borrowers. The loan amounts per borrower are around Rs 10,000 in most cases but could range up to Rs 50,000.

The activism against recovery of loans by a group of politicians followed the suicide by a low-income group borrower, who left a note behind blaming the overindulgence of recovery agents for his act.

Bank officials sense that a number of opportunistic borrowers, who would have normally paid their equated monthly instalments (EMIs) regularly, would suddenly find the politicians acting as a shield against any recovery attempts by lenders and would decide not to pay.

This would increase NPLs, which in this sub-prime segment are already above tolerable levels. Banks have seen defaults in this segment rising to 15 per cent from less than 10 per cent till the last quarter of 2006-07.

The recovery chief of another private sector bank said, "The current situation has acted as a dampener on normal on-filed recovery efforts. There has been a 10-15 per cent fall in collections."

The uncertainty in the recovery function at banks, particularly private and foreign, could be temporary as the system of recovery agents is here to stay. The fallout of activism against recovery could be banks stopping fresh lending to this segment and if they do continue, good borrowers would have to bear the brunt in terms of higher interest rates, which have already risen above 40 per cent.

"The rate of interest that banks charge customers inter alia take into account the rate of delinquencies. If banks are not able to recover their dues and defaults increase, the interest rates would only go up, and this would impact the good customers as well," said Naina Lal Kidwai, Group General Manager & CEO, HSBC India.

A few days after ICICI Bank took the unprecedented step of paying Rs 15.5 lakh in the form of fixed deposit and insurance covers to the family members of a Mumbai borrower who committed suicide, there was a case of recovery agents being beaten up when they approached a borrower to ask for payment against overdue amounts.

K J Udeshi, chairman of the Banking Codes and Standards Board of India (BCSBI) has said that "recovery through agents, as a system, is here to stay and trying to regulate them would in no way attack the problem or provide the solution. What consumers need is protection from irresponsible, 'predatory' lending by banks."

She was speaking at the International Forum on Financial Consumer Protection and Education organised by the Hungarian Financial Supervisory Authority in Budapest recently.

Bankers are looking up to the Reserve Bank of India (RBI) for help. The head of credit risk of a bank said, "There is a very high risk of rise in wilful defaults. You have banners running across the city (Mumbai) offering to protect defaulters from recovery processes.

This and the recent cases of ill-treatment of recovery agents spoil the ethic of repayment. It is high time the banking regulator or the government or the industry as a whole do something about it."

"Loans to customers from the underbanked sections of the society bring them into the organised lending system, creating a credit profile for them. This would enable them to avail of future loans more easily. If banks were to stop lending, these customers would again have to go back to money lenders who would charge their usurious rates of interest," said HSBC's Kidwai.

Apart from NBFCs like Citifinancial, the banks which have exposure to this segment are ICICI Bank and HDFC Bank. Banks increased their lending to low-income borrowers during the last few years of the retail credit boom. These lenders are in a much better position to bear a higher rate of default as the interest rates were several times the rate at which a prime customer would get a personal loan.

"Ultimately good customers will have to pay for defaulters. Banks will price in the risk premium on the loans. We have decided to go slow on our low ticket size loans,'' said another banker.

T S Narayanasami, chairman and managing director of Bank of India, said "There are two ways of looking at it. If you are convinced that the man is pushed to the wall and he has no means to pay, banks which indulge in massive lending in consumer loans should call it a day and write it off "� this is one way of looking at it. But if you do it, this can become a strategy amongst some of the bad elements in the borrower lot. So we will have to see how to counter that. If there is a genuine problem, then your pricing is there which takes care of even a write-off. But then you will have to do it selectively so that this does not spread like a disease within all borrowers."