Lenders are intensifying loan recoveries. How should borrowers respond?

Do your best to avoid a default. But if it happens, and a collection agent comes knocking, remember you, too, have certain rights

Media reports suggest that banks and non-banking financial companies (NBFCs) are set to redouble their efforts in the coming months to ensure that retail loans don’t turn delinquent. Many have moved staff from other departments and asked them to join the collection drive. Pressed by demands from lenders, retail borrowers who are short of funds need to come up with a well-crafted response, instead of getting either intimidated or turning overly aggressive.

Bounce rates—which refer to the proportion of borrowers who don't pay their EMIs on time—of lenders have risen two-three times. A higher bounce rate, banks fear, could translate into higher non-performing assets (NPAs) in the future. Banks are also worried that the six-month long moratorium could lead to moral hazard: Many borrowers may think no action will be taken against them if they default. In response to a petition filed in the Supreme Court requesting a waiver of interest during the moratorium period, the Reserve Bank of India (RBI) has said in an affidavit that it is against a blanket waiver of interest for six months as it would affect lenders’ financial health and jeopardise depositors’ interests.  

Avoid availing the moratorium if you can: According to figures provided by the RBI, about 39 per cent of all loans are so far under moratorium. Those who have not availed of it yet need to weigh its pros and cons carefully. For those facing a severe cash crunch, it will provide a much-needed respite. “With the option to defer loan payments, borrowers will be able to save for paying back later without their credit history getting adversely affected,” says Sujata Ahlawat, vice president and head of direct-to-consumer interactive, TransUnion CIBIL.

Those who have the money should not avail of it. “Borrowers will have to make the payments eventually. This will increase their credit burden because interest will accrue on the outstanding for six months,” says Ahlawat. The impact will be higher on those who are in the early part of their loan tenure. “Interest forms a higher portion of the EMI during the initial period of the loan. Hence, if such borrowers defer their EMIs, the impact on their loan will be larger than in the case of someone whose loan tenure is nearing the end,” adds Ahlawat. Opting for a moratorium on credit card dues will mean a very high rate of interest, and this rate will apply immediately to any new spends.   

Availing the moratorium could even affect borrowers’ ability to get loans in future. “Credit officers will look at whether you were able to keep paying your EMIs during the downturn. Those who could will obviously stand a better chance of getting another loan,” says Arun Ramamurthy, a Mumbai-based expert at repairing borrowers’ credit scores.

Sujata Ahlawat, VP and Head of Direct-to-Consumer interactive, TransUnion CIBIL

If your monthly income has not been affected or if you have savings, it would be prudent to not opt for the moratorium. Interest will continue to accrue on the loan outstanding amount, and this will be payable later. This advice is especially relevant for those who are in the early part of their loan tenure or have credit card dues.

Develop a fallback plan: Many salaried employees who have lost their jobs, or businessmen whose revenues have nosedived, may not be in a position to start paying their EMIs by August-end. “Borrowers need to plan for beyond August since the economic downturn, and hence their earnings-related issues, may not end by then,” says Ramamurthy. 

If you foresee difficulties in servicing your EMI, start discussing your problems with your bank at the earliest. Ramamurthy says that bankers are likely to listen to borrowers, especially if they belong to a deeply troubled sector, like travel, hospitality, airlines, etc. “Banks may agree to restructure your loan so that your EMI reduces,” says Manu Sehgal, business development leader, India & MEA, Equifax. Thus, if a car loan was taken for five years, the tenure may get extended to seven years. Adds Anjan Dasgupta, partner, DSK Legal: “Traditionally banks and NBFCs have been more stringent about restructuring retail loans. However, given the unprecedented times we are in, they might prefer to explore this option for retail loans as well.”

Contacting the lender in advance (before a default) will convey to the former that you are keen to repay and are not trying to run away from the situation.

Tap other sources: If your lender does not provide relief, you may have to fall back on your own resources. “Salaried employees can withdraw from their Employee Provident Fund corpus. Those who have gold jewellery can take a gold loan,” says Sehgal. Mrin Agarwal, financial educator and money mentor, Womantra, suggests that borrowers exit their investments or take help from their family.

Avoid a default at all costs. “A default gets captured in your credit history. It will close down all future loan options for you. Nobody will be prepared to lend to you even 5-10 years down the line,” says Sehgal.

Remember your rights: When EMI remains unpaid for 30 days, a loan gets classified as delinquent and the borrower’s credit score takes a hit. The lender starts calling up the borrower and sending emails to get him to pay. After 90 days the loan gets classified as non-performing. Lenders then send their recovery and collection agents to persuade the borrower to pay through face-to-face interaction. Repossession of asset is undertaken as a last resort and is a longer-drawn process.

The very mention of a recovery agent strikes fears in the hearts of many people. Borrowers must, however, remember that recovery agents are governed by a code of conduct (see table). “Even delinquent borrowers are entitled to certain rights, which they should be aware of,” says Sehgal.

If a collection agent misbehaves, borrowers can complain to the concerned bank. If the bank does not act, the borrower can file a complaint with the banking ombudsman. He can also approach a court of law. “Various courts have, time and again, held forceful recovery by agents to be illegal. Customers should immediately approach a court for an injunction in case any such attempt is made by a bank through recovery agents,” says Sameer Jain, founder and managing partner, PSL Advocates & Solicitors. He adds that courts are expected to be sympathetic towards borrowers in the current circumstances, and it would not take much time to get a stay.

Borrowers’ have rights vis-a-vis collection agents 

• Lender must give the defaulter sufficient time before taking any action 
• Borrower has the right to present his reasons for non-payment to the bank
• The recovery agent must contact the defaulter at a place chosen by the latter
• He must respect the borrower's privacy and visit him at decent hours (7 AM to 7 PM)
• Borrower can request that he should not be called at certain hours or at a particular place
• Agent must be civil and maintain decorum during interaction
• If the borrower feels threatened, humiliated or harassed, he can complain to the bank
• If the bank fails to take action within 30 days, he can contact the banking ombudsman

Source: Banking Codes and Standards Board of India

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