Restrictions on agents make loan recoveries difficult NPAs on rise

Since the Reserve Bank of India (RBI) has formulated rules for the recovery agents of the banks, banks have been facing difficulty in recovering from the loan defaulters. And in turn this has led to an increase in their NPAs.

Adhikrut Jabti Evam Vasuli, a Mumbai-based authorized seizure and recovery Agency Company engaged in collection of loans from offending bank customers has been forced to cut down its workforce by half due to restrictions on agents. Whereas mounting defaults should have made it a time to expand rather than reducing the staff. The reason behind this is clear the state-owned commercial lenders have to go soft on defaulting borrowers after the central bank stepped in on the complaints of harassment and threats.

After the restriction the lenders including State Bank of India (SBI), the nations largest have to deal with the bad loans problem in their credits at the time when inflation has moved up to double digits to 13-year high and increasing interest rates have made credit more expensive said, “Most of the public sector banks are going slow on recovery. We have reduced our staff strength from 400 to 200 beginning 2008.” SBI is now running most of its collection activity in – house, and other state-run banks.

“The bank (SBI) has started stress asset resolution centers all over the country. This has definitely taken away some business from us,” Shah said.

In the last fiscal year, his company started employing only women as recovery agents which has resolved stressed assets worth Rs400 crore and has been able to make cash recoveries of Rs110 crore, which he anticipates will more than halve to Rs50 crore this year.

After some customers took banks to courts and filed police complaints against bank employees and agents for alleged use of force RBI disciplined loan collection agents who have been using tactics ranging from ceaseless phone calls to use of eunuchs to embarrass defaulters or thugs to beat them up.

In rules and regulation for recovery agents the apex bank in April made police verification and training of agents mandatory. Banks were also required to inform the customer before handing over a loan recovery case to a collection agent.

Fearing the risk on their reputations several banks shifted the bulk of loan collection work in-house. This has brought down the business of the collection agencies, which earn commissions ranging from 3.5% to 20% of the amounts they recover. In India there are about 146,000 recovery agents engaged by banks across the country.

With credit becoming cheap and abundant, and income level increasing India has seen more than 35% annual growth in retail loans to finance the purchases of apartments, cars and other consumer durables in the past few years. While mortgage costs had fallen to as low as 7.25% and personal loan rates dipped to 8%.

Recently there has been rise in interest rates, so the customers have started defaulting on their equated monthly installments, or EMIs, on unsecured personal loans and credit card payments. Delinquency as a percentage of loans outstanding has gone up to 5.9% from 4.5% last year for banks handled by Omega Alliance Recovery Solutions Pvt. Ltd, a Mumbai-based collection agency.

“We get at least 10 calls a day from consumers who say they do not have the capacity to pay and they want a settlement. This means we have to compromise even on the principal amount. Forget earning interest on loans,” said an executive at a foreign bank in Mumbai who did not want to be named.

According to RBI data personal loan growth has halved. The outstanding personal loans grew by 13.2%, or Rs58,669 crore, in last fiscal year as on 15 February 2008, after expanding by 30.6%, or Rs1.04 trillion, a year earlier.

There are various reasons for defaults. One is the personal loans have been used for investment in a stock market which has slumped after a five-year rally. The benchmark index of the Bombay Stock Exchange, the Sensex, lost some 37% since January; the borrowers who used their personal loan for purchasing shares have been unable to pay back their loans.

The owner of a Mumbai-based collection agency, who did not want to be named, told that “Banks have not ensured the end-use of funds, particularly when they extended a personal loan”. “NPAs are the highest in personal loans,” he added.

Banks are trying out new ways to educate borrowers to pay their loans on time. Banks are launching nationwide campaigns to persuade borrowers to pay their loans on time.

But “the atmosphere is not conducive for recovery (of bank dues)”, says a private bank executive who did not want to be named. “Collection efforts are now largely restricted to making phone calls.”

Pointing to the figures of NPAs he said the percentage of NPAs in personal loans at some banks has increased to 12-15% of total lending from 6-8% earlier.

“The growing number of defaulters has forced us to tighten our lending norms,” said the same bank executive. “Earlier, we were comfortable lending to an individual with an annual income of Rs60, 000 but now we don’t lend unless one has an annual income of Rs1 lakh.”

In the past few years, many borrowers took multiple loans but now they are finding difficult to pay back their loans after banks raised their lending rates. “Customers are prioritizing,” said another banker. “They pay their home loan EMIs on time but they don’t mind defaulting on a personal loan or their credit card dues.”

Although some of the private banks and foreign lenders are still hiring collection agents, such as Alliance, which has 150 employees on its pay roll and wants to OMEGA, expand. In fact its director Pankaj Joshi, wants to start another agency.

Joshi said he is willing to pay well. “A collection agent’s salary has gone up by 20-25% this year and it’s comparable with any sales executive employed with a corporate house.”

But he is finding problem recruiting people: only few want the job of a collection agent.

“There is a level of stigma attached to this job,” Joshi explains.

“Additionally, there are alternate job opportunities available which are socially accepted. People prefer to work as sales representatives with corporate houses.”

He added that recent instances of police complaints brought by defaulters against bank-recruited collection agents have also turned people against the profession.