M J Antony: A rough guide to debt recovery

OUT OF COURT

The Supreme Court emphasises that social responsibility is more important than banks' profit and growth ratio.

While hire purchase agreements are on the rise, there is no comprehensive law to regulate them and the one legislation passed by parliament over three decades ago has not been notified for enforcement. The financiers have, therefore, become hawkish and the courts have given contrary decisions on the right to repossess the goods bought on hire purchase.

The Monopolies and Restrictive Trade Practices Commission, in Jawahar Lal Jain vs Citibank (2001) stated that forcible repossession of vehicles was beyond the terms of the agreement. The Delhi State Consumer Commission stated in Citicorp Maruti Finance Ltd vs Vijayalaxmi (2005) that "no finance company or bank, having financed a vehicle, has the right to take possession of the vehicle forcibly using musclemen as a recovery squad." A number of high courts have also spoken in the same vein.

However, the Supreme Court virtually silenced all these strident voices by a judgement last year in Orix Auto Finance Ltd vs Jagmander Singh. It said: "If agreements permit the financier to take possession of the financed vehicles, there is no legal impediment on such possession being taken." It went further and remarked that "it would not be proper for the high courts to lay down any guideline which would in essence amount to variation of the agreed terms of the agreement."

Now the Supreme Court has delivered another judgement which takes a sympathetic view of the hirer's plight in certain circumstances, especially while dealing with multinational or mighty financiers. The judgement delivered last week in the case of ICICI Bank Ltd vs Prakash Kaur describes their techniques of recovery as "modernised version of Shylock's pound of flesh". Among the reasons cited by the court for the present state of affairs are: entry of multinational banks spreading the credit card culture, inadequate information given by banks to customers, and employment of recovery agents after abdicating any responsibility for their conduct.

The Reserve Bank of India guidelines issued on November 21, 2005 have elaborately dealt with the problem and remedies, but the Supreme Court regretted that they "still remain only on paper and are not being followed." Though a regulatory mechanism was established late in 2005, not many are aware of it and, therefore, "the banks continue to be safe", according to the court. This ombudsman looks after several aspects of the problem, like the right to privacy, confidentiality, the practice of debt collection and redressal of grievances. Further, the court suggested that when a lending bank consistently violate the rules in this regard, strictures should be imposed on them to curb their tendency to employ "high-handed" practices and to make them answerable to the general public.

Some of the suggestions made by the court should be noted by the banking industry and the government. According to it, the banks should be made vicariously liable for the acts of the agents (who are also variously described in the judgement as thugs, hooligans or gangsters). If the agency system is inescapable, it must be coupled with a licence issued after conducting tests. Appropriate training should be given to the agents who should have requisite qualification and maturity to handle delicate situations. Merely because the agency system is convenient to the banks, it should not lead to lawlessness resulting in challenge to the rule of law.

Every statement sent by the bank should disclose clearly the rate of interest, the default interest and penalty charges. At the start itself, the customer should be explained the terms of the contract in simple terms and the consequences of default. This is a valuable suggestion as most customers cannot understand the legal jargons contained in hundreds of clauses of the contracts and their implications. Most often even the copy of the agreement is not given to the customer, to which he has a right. It is in this context that the court says that "the social responsibility is larger than the banks' profit and growth ratio."

The trouble with all these well-meant suggestions is first, they are mere suggestions; second, there is no awareness of the rights on the part of the hirers; third, there is no grievance redressal machinery with easy access; and fourth, the courts are slow and expensive. On top of that is the high pressure marketing which takes its toll on the staff of the banks. The judgement recommends that a special committee should look into the disparities in the working conditions of the bank staff. The recent judgements of the high courts, and now the Supreme Court itself, have not helped much to clear the air. They show contrasting attitudes towards this problem.

A lasting solution could be made by first heeding to the recommendations made in the latest judgement.