Debt recovery: Thugs are problematic; Grameen Bank model is more feasible

The Reserve Bank of India (RBI), on September 22, in yet another knee-jerk reaction, barred non-banking financial services company Mahindra & Mahindra Financial Services Ltd (MMFSL) from outsourcing recovery agents (both for recovery and repossession). This came days after a 22-year-old pregnant woman died in Jharkhand’s Hazaribagh while trying to block MMFSL loan recovery agents from taking away her father’s tractor — she was crushed under the vehicle.

This MMFSL-specific order is thoroughly mystifying. There is no reason why the order couldn’t have been passed in rem i.e., against all banks and NBFCs coming under RBI oversight. In fact, last month, the central bank had issued directions to the regulated entities, asking them to ensure that borrowers do not receive phone calls before 8 am and after 7 pm.

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“Regulated entities and their agents must not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude upon the privacy of the debtors’ family members, referees and friends, sending inappropriate messages either on mobile or through social media, making threatening and/ or anonymous calls,” the RBI had said.

Why the pussyfooting?

The RBI pussyfooting on the issue is baffling given the fact the Supreme Court had, as early as September 2017, already cleared the decks in the manner of advance ruling against deployment of musclemen and thugs for recovery of dues and repossession in an ICICI Bank case. The RBI order of September 22 gives the impression that strong-arm tactics adopted by in-house thugs are kosher. Be that as it may.

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It is common knowledge that banks and NBFCs are torn between strong-arm tactics and bad debts. So, instead of doing the hatchet job themselves that would not behove them, they entrust it to thugs passing off as recovery-cum-repossession agents, who one believes are compensated with a sliver of the outstandings if they scalp (repossess or, better still, recover) the defaulter.

Borrowers are instinctively more comfortable with institutions, more so, the one coming under the RBI oversight than with loan sharks, including the latter-day online loan apps.  But quick disbursal and minimal paperwork is the gravitas that takes them to the neighbourhood shark despite knowing the viciousness of his attacks should there be a default and despite knowing that a loan shark practises unconscionable usury.

David vs Goliath

What exactly is reasonable pressure on defaulters has been a subject of debate for eons.  While public sympathy is instinctively in favour of the Davids (read the borrowers), a thought must be spared for the harried Goliaths (lenders other than sharks) too.

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Bank jokes abound. ‘To wit, if you borrow in lacs from a bank, you are in trouble with the bank but if you borrow in crores, the bank is in trouble with you’, is one. A more rib-tickling one is ‘you come to borrow from a bank on your bicycle, but you ride your BMW to tell it that you are unable to service the loan’.

Small borrowers therefore have taken the law in their own hands, so to say, by defiantly emulating the big borrowers. ‘If Vijay Mallya and Mehul Choksi can smirk from distant shores, why can’t we too refuse to pay up’ is their straight-faced refrain. But they forget one difference.  Mallya smirks from a distance. Thugs cannot do a thing to him.

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Choksi was roughed up by unknown persons in the Caribbean a year ago, and the entire tribe of human right activists took up cudgels for him. But small borrowers lend themselves to strong-arm tactics of goons by their sheer availability and vulnerability.

Catch 22 for lenders

So, it is a complex Catch 22 situation – damned if I do, damned if I don’t. A loan shark would have nil bad debts because of his menacing reprisal methods. A bank is seen as wielding an impotent power. We have to do a balancing act.

The SARFAESI Act, 2002 has empowered banks and financial institutions to seize mortgage assets of defaulting borrowers with the help of police sanctioned by the magistrate. Curiously, there aren’t many takers for this seemingly efficient recovery and repossession method after an initial burst of enthusiasm. The reason probably being that banks are not equipped to work the seized assets.

To wit, what will a bank do with sugar machines seized from a defaulting sugar mill? It will have to look for a buyer, which is not an easy task, and they will in any case demand their pound of flesh. It may boil down to this – outstandings are ₹100 crore but the wannabe buyer may be willing to pay only ₹25 crore for a depreciated sugar mill even if its current valuation is ₹50 crore. Distress selling brings the price down is a time-honoured home truth.

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At the individual level, the Grameen Bank model commends itself for emulation. Group lending is its USP. Identify a group of say 10 persons drawn from the same organisation or neighbourhood. The group stands guarantee for the borrowings of its members. Peer pressure not only impels one to excel but also to behave lest his name is besmirched before the biradari.

Muhammed Yunus of Grameen Bank, who was decorated with the Nobel, found out that lending to a group (of women in particular) is more effective than collateral, as people not only care about their good name among their peers but also fear the grim prospect of the entire group being blacklisted by lenders because of the fault of one.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)