Banks approach firms for loan default by employees

If you have defaulted on a loan taken in your personal capacity, there is a chance that you might hear from the human resources department of the company you work for.

This is because private sector banks are opting for soft-touch loan collection strategies, after having faced public censure a few years ago for using heavy-handed tactics to recover loans. One of these includes approaching the employer of a customer who has defaulted on a retail loan to act as an intermediary between the bank and the client.

Private sector banks such as the country’s second largest lender ICICI Bank and the third largest private sector lender Axis Bank have adopted this practice which enables them to simultaneously touch all defaulters who share an employer. “This is a wholesale method of collecting retail loans. You don’t need a large army for such collections,” said a senior executive from a private sector bank.

“Some employers do take cognisance of employee defaults. However, this is a limited-purpose strategy for us because most defaulters are either self-employed or are employed with less reputed companies,” said a senior Axis Bank official who declined to be named. “This strategy is usually used by large credit card issuers where the ticket sizes of defaults are small but the number of defaulters is large.”

Often, the banks do not need to actually approach the company of the defaulting customer. The mere prospect of the employer knowing about his or her loan delinquency is enough to persuade an employee to pay up. This soft-touch practice harks back to the days when public sectors used to adopt tactics such as sending staff to chant slogans and hold banners outside shops owned by defaulting clients to compel them to clear their dues.

More recently, private and foreign banks faced public rebuke for the aggressive recovery strategies of collection agents hired by the lenders. In September 2007, ICICI Bank had to compensate the families of two customers who allegedly died due to harassment by the bank’s recovery agents.

However, not all companies are willing to play ball with banks on this matter. “We don’t entertain such requests. Unless the employee has been referred by his company for a loan, what he or she does in his personal capacity is not the company’s business,” said Y V Verma, Director of Human Resources and Management Support, LG Electronics.

“Some banks go to extreme extents. A year ago, a private sector bank’s legal team came to me asking us to clear the personal dues of an employee who had left us six years ago. I went to the bank’s management and complained but I suppose it is tougher for smaller companies to resist the pressure,” Verma added.

When contacted, a spokesperson for Infosys Technologies said, “As a practice, Infosys does not intervene in personal financial transactions made by its employees. However, when the said dealing could also involve a violation of the company’s code of conduct, we would examine such situation on a case-to-case basis and take necessary action.”