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India Debt Collection Business – Scenario and Potential

BACKGROUND AND EMERGENCE OF DEBT COLLECTION BUSINESS IN INDIA

The debt collection business is a relatively new concept in India. Like many modern tools, this business was also introduced to India by foreign businesses who came to India in horde in early 90’s and brought with them myriad modern tools, practices and systems. Like other sectors, banking also witnessed a large scale foreign firms setting up their operations in India. Retail consumer loans became an important product in the portfolio of the banking industry. Easy availability of credit also bought with it the problem of payment defaults, which eventually led to the emergence of debt collection agencies.

In India, debt collection was never treated as a specialized job and was always treated as one of the jobs that legal departments of the banks and financials institutions were required to undertake. Legal department would approach the collection job strictly as a legal issue rather than doing it with the objective of revenue collection. For legal department, the only tool available was litigation and no other non-litigation tool was applied. Long and winding legal processes, the Indian legal system could not help the cause of the legal departments of the banks. On the other hand, foreign banking firms introduced the concept of specialized debt collection services. Debt collection services became one of the many services that began to be outsourced to specialized agencies. These agencies mushroomed in metropolitan cities including Delhi and Mumbai. These agencies were initially supported by the respective banks; they were very small and their staff was uneducated, being not aware of anything about the concept of the debt collection. The agencies usually worked in a specific area of the city for only one client – mostly a bank.

The third-party debt collection industry plays an important role in the Indian economy. The industry employs hundreds of thousands of Indians as collection professionals, who collect on past-due accounts referred to them by various credit grantors, such as credit card issuers, banks, retail stores, hospitals and other health care services, or by government departments. Business purchases of this industry and personal purchases by its owners and workers ripple through the economy, supporting hundreds of thousands more jobs across the country. Further, the industry benefits the economy by recovering billions of dollars in delinquent debt each year that would otherwise go uncollected. The economic benefits of third-party debt collection are significant. Citibank has been the pioneering company in India which started hiring the services of debt collection agencies to collect the debts.

The debt collection industry in India also has grown sharply this year as higher borrowing costs, rising inflation and the general slowdown in the economy force more companies and individuals into difficulties. Underlying debt has gone through the roof and lenders and organizations increasingly want to move any bad debt off their books. Whether it is a high street bank, a credit card lender or a mobile phone company, growing numbers are turning to professional debt collectors in a more difficult environment.

Following have been the services usually outsourced to Indian debt collection agencies, involved in providing the support in debt collection area: Business debt collection. Unsecured debt. Medical debt collection. Credit card debt. Bad cheque collection. Commercial debt. Consumer debt. Nationwide debt. Government debt.

The debt collection industry in India is growing at a faster pace and is surely poised for growth. The credit card outstandings have shot up by a whopping 87% at Rs 26,596 crore, during the January-May this year, from Rs 12,375 in the period year ago. The industry analysts blamed the banks for the current state of affairs. The RBI also encouraged banks to shift bad loans off their books more quickly because they will be required to hold more capital against risky assets that may default.

COLLECTION INDUSTRY – UNREGULATED SCENARIO

The collection agencies suffer from their own shortcomings due to unregulated and primitive nature of this business in this country. The staff is untrained both in soft skills and legal issues. Being unregulated, the procedures are not standardized. The pliable reputation of the judiciary at the lowest level in the country has been used to their advantage by people in collection business. With the patronage of minuscule minority of pliable judges simple civil defaults are registered as criminal cases and the customers are harassed into paying up. Slow and long civil recovery court process has no takers in this age of instant results where revenue targets are the most sacrosanct. Weekly recoveries are monitored and immediately placed in the asset side of the account books of the banks. Under such strict and cut throat environment, there is pressure on the banks to keep their account books healthy therefore such aggressive and extra-legal methods are employed for quick recoveries.

Their main strategy for debt collection is by filing the criminal case, repeatedly calling the customers at even odd hours as well as the personal visit to the customers. These debt collection agencies are also used by the banks for repossessing the financed vehicles from the defaulters. Initially, these agencies were highly successful in collecting the debt and they also take the advantage of the situation where there is no law, guidelines for debt collection as well as for operating the debt collection agency. People are not aware of their rights and remedies available to them and also hesitant to initiate the action against these agencies or banks because the amount involved is not huge. 

In this background, the debt collection agencies feel encouraged adopting more unethical means for recovery. There have been numerous cases whereby the agencies used unethical norms. One of them is - a debt collection agency repossessed the vehicle of an advocate from the premises of the district court at Delhi by use of force and without following the due course, the said advocate pursued the matter with the court and order is passed against the agency. This case got much publicity in the newspapers in India. Similarly, in the year of 2007, collection agency of ICICI Bank repossessed the car by use of force while the person was driving back to home. He filed the case for damages before the State Consumer Forum and the Consumer Forum awarded adequate compensation to the person.

GOVERNMENT / RBI INTERVENTION

Debt collectors in the past had a lot of leeway and it wasn't uncommon for collectors to embarrass, harass or humiliate debtors. The courts came to the rescue of harried public and guidelines were laid down for the Banks to follow who engage the services of collection agencies. After the intervention of judiciary, the Reserve Bank of India (RBI) which is the super regulator of the banking industry, wore up to the need of regulating the unruly collection agencies. RBI stepped in and laid down its own guidelines for the banking industry to follow.

The guidelines prescribed by RBI are enforced against the banks that have contractually employed collection agencies. The banks in turn via their contracts with the collection agencies ensure that the RBI guidelines are followed. Now, under the norms passed out by RBI, it is illegal for third-party collectors to threaten violence or harm to a debtor, use obscene language, or repeatedly use the phone to harass a consumer. In addition, third-party collectors cannot threaten to arrest a consumer for an unpaid debt or threaten to seize or garnish a consumer's property or wages unless the collector intends to do so and it is a legal cause of action. Failure to comply will result in disciplinary action and may result in permanent termination of employment and / or business with the particular bank.

The following are few of the core underpinnings of the collection process. These are the norms formalized by the top bank in India – RBI.

1. DSAs/DMAs/Recovery agents to get minimum 100 hours of training.
2. Recovery agents should call borrowers only from telephone numbers notified to the borrower.
3. Each bank should have a mechanism whereby borrowers' grievances with regard to the recovery process can be addressed.

4. Banks are advised to ensure that contracts with recovery agents do not
induce adoption of uncivilized, unlawful and questionable behavior or recovery process.
5. Banks are required to strictly abide by the codes pertaining to collection of dues.

RBI in the draft guidelines issued for banks engaging recovery agents, has asked banks to inform borrowers the details of recovery agents engaged for the purpose while forwarding default cases to the recovery agents.

The RBI has also considered imposing a temporary ban (or even a permanent ban in case of persistent abusive practices) for engaging recovery agents on those banks where penalties have been imposed by a High Court/Supreme Court or against its directors/officers with regard to the abusive practices followed by their recovery agents. An operational circular in this regard has been issued in November 15, 2007.

Other Laws

Still the collection business is not directly regulated by the Reserve Bank of India. There are no licenses or registrations to be obtained from any regulator to pursue collection business in India. The extant guidelines are found inadequate as they address only the problem of debtors’ community harassment due to extra-legal methods adopted by the collection agencies. The guidelines do not regulate the industry as such. The Government is well aware of the need of having a specialized legal mechanism for recovery of institutional debts which has become a huge problem for the entire banking industry.

Every bank is grappling with the non-paying accounts, known as Non Performing Accounts (NPA) in the Indian banking parlance. The problem has taken enormous proportion and threatened the economy. Creation of Debt Recovery Tribunal in the year 1993 was a step in this direction. The intention behind creation of such Tribunal was to ensure that banking industry was provided with its own recovery mechanism that was part of the legal system but at the same time exclusive to the banking industry. Debts above Rs 10 Lacs could be recovered through the Tribunals. Tribunals are only open to the banking institutions.

However, over a period of time it was realized that this new mechanism did not yield the desired result since the recoveries were still slow and due to shear volume of work, the Tribunal became like any other court. The whole objective of having a fast track and efficient recovery mechanism was therefore defeated. Institutional debts still remained a major problem to be solved since it affected the entire economy of the country. The Government felt the need of having a mechanism that was minimally dependent on the courts for effecting recoveries since the legal system was found having inherent problems that could not be reformed overnight.

India has come up with laws relating to the credit rating and maintenance of list of the defaulters of both customer as well as commercial loans. The banks have also started to share the data of their customers for credit rating.

In a recent case which came up before the Honourable Supreme Court, the Honourable Court observed that we are governed by rule of law in the country and the recovery of loans or seizure of vehicles could be done only through legal means. In this connection, it may be mentioned that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002 framed thereunder have laid down well defined procedures not only for enforcing security interest but also for auctioning the movable and immovable property after enforcing the security interest. It is, therefore, desirable that banks rely only on legal remedies available under the relevant statutes which allow the banks to enforce the security interest without intervention of the Court.

INDIAN LEGAL SYSTEM AND COLLECTION PROCESSES

The Indian legal system is absolutely fair and assures justice to the party involved. There are remedies available under the law to collect the debt, if the debtor does not agree to pay under normal circumstances. The creditor may file a suit for his recovery. If the debtor is a company, creditor / his lawyers may apply in the ‘Company Law Board’ for winding up of the company due to non-payment of substantial amount of debt. Summary trial is another way. The process may take time–1 to 2 years. Evidences are recorded appropriately and produced in the court of law, whenever required. There is also the arrangement of appeal to be filed at later stage. 

US OUTSOURCING SCENARIO

India has attracted many technology jobs in recent years from Western nations, particularly the United States. Now, it is on its way to becoming a hub in another offshore outsourcing area - debt collection. According to the industry report, units of General Electric, Citigroup, HSBC Holdings and American Express have used their India-based staff to pursue credit card debt and mortgage payment by calling defaulters.

US debt collection agencies are the newest to start outsourcing their work to India and are satisfied with the results produced by the polite but persistent Indian experts. After insurance claims and credit card sales, debt collection is a growing business for outsourcing companies at a time of downturn in the US economy when consumers struggle to pay for their purchases.

Debt collection is a vital and growing component of US economy. There is more than $2.5 trillion in outstanding consumer debt. As a result, the third-party collection industry makes more than one billion contacts with consumers each year. Recently this year, more than $39.3 billion in debt was returned to creditors.

Indians have the advantage of lower salaries and other expenses, which cut drastically costs of collecting debts. Debt collectors in India cost as little as one-quarter the price of their US and European counterparts and are often better at the job. Many such Indian firms run 24-hour services. Indian debt-collection companies comply with strict regulations on operations in the American and / or European markets.

SUMMARY

India has a long way to go in establishing a mature collection services industry. The collection business needs to be regulated and empowered with legal powers to become an effective tool.  Already, there is a realization in the country that court dependant recovery is an inefficient way of way of debt collection. Creation of Assets Reconstruction and Securitization Companies under the SARFARESI Act is a step in the right direction of recognizing debt collection as an independent and specialized business function.  While some progress is made for the bank debts but still for a large volume of unrealized non bank debt there are no professionally managed and regulated third party collection service providers. Non bank debts are largely unsecured that makes it even more difficult to realize. No big corporations and business houses are interested in acting as collection agents without there being an attraction of valuable security asset. Lawyers can fill this gap by providing collection services for non bank debts. Indian law does not permit contingency fee that makes the business less lucrative. India is therefore ready to benefit from foreign experience, expertise and ideas to create an efficient debt collection industry of its own at par with global status. This need is more felt now by India due to its global ambitions wherein India must adopt globally recognized practices and models. Transnational businesses need a uniform operating system for seamless transactions. Efficient debt collection industry will only instill confidence in companies doing business with Indian companies. Collection professionals have this challenge facing them of creating an efficient system that reduces people’s dependence on court supported recoveries.