On the face of it, fining ICICI Bank Rs 55 lakh for using goons to recover a car loan was entirely the correct thing to do; banks will think twice now before repeating the tactic against defaulting customers. In the ICICI case, the goons who used iron rods even beat up the wrong person, not the defaulting customer "" echoing similar such instances involving one or two other banks. The lesson is clear: instead of taking the law into their own hands, banks should do their due diligence before lending money to retail customers, and also when hiring recovery agents. | |
| That obvious point having been made, it may be a good idea to step back a bit. Nearly two-thirds of the country's population is unbanked and has to rely on money lenders and other channels of informal finance. After the outcry over the use of recovery agents, banks like ICICI Bank and Citibank which were making a beginning in lending to this unbanked segment, have decided to go slow. So, while it is to be welcomed that banks will no longer feel free to use toughs to rough up problem customers, the flip side is what it will do to credit flow to the country's sub-prime customers. |
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| An underlying problem is almost certainly the existing laws on re-possession of hypothecated assets "" which may be why banks began using the logic that the police do when resorting to third degree methods of interrogation, namely that nothing else works. If banks could fairly easily repossess the houses/cars/consumer goods against which such loans are given, they would not need to use goons. The problem, however, is that legitimate ways of repossession are time-consuming and in many circumstances far from easy. |
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| One solution that suggests itself emanates from the successful experiment with kisan (or farmer) credit cards. This is a simple scheme in which farmers get a revolving credit limit based on their land holdings, cropping patterns and so on, and part of the money can be used for personal consumption needs as well. The levels of default on such cards are reported to be very low, and the likely reason for this is that those farmers who default will not be able to avail of such loans the next time round, so they make sure that there is no default. While potentially mobile urban people looking for episodic two-wheeler loans are different from farmers who are rooted to their village and looking for an ongoing credit cycle, and therefore a continuing relationship with their bank, the sharing of credit information could serve the gap between the two kinds of risks. |
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| If the common database on defaulters is fully functional, those taking car loans will think twice before defaulting since this will ensure that they cannot get loans of any kind in the future. The solution is not foolproof in the absence of one single national identity, which therefore means that faking identities is possible. So, a person taking a loan using his driving licence for identity proof and then defaulting on it, can apply for another loan using an election card as the identity proof the next time round. However, a full-scale credit information-sharing platform cannot function as a stand-alone system. Ultimately, if what are today considered un-bankable customers are to be brought into the ambit of the formal banking system, and without the use of strong arm tactics to recover loans, there is no getting away from the need to make repossession easier. It would even make retail loans cheaper than they are today, as the level of risk drops off. |
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