18   The Art of Banking in India

The Wall Street Journal (08/01, "In the Shadows of India’s Loan Boom" by Tariq Engineer) writes of strange aspects assumed by India’s banking boom. These are at quite the opposite pole from the humane concerns of the micro-banking that received so much attention a few years ago.

"Vinod Kumar was sitting in a friend’s car listening to the radio one evening last January when a stranger appeared, yanked him from the vehicle and beat him with an iron bar. While the 21-year-old college student lay bleeding in the parking lot, the assailant sped off with the tiny silver hatchback. But this was no ordinary mugging. Mr. Kumar’s attacker was a goonda – a thug – working on behalf of one of India’s largest banks.

"Incidents like the one that left Mr. Kumar with 12 stitches in his scalp and a 10-day hospital stay reflect a dark side of India’s economic boom. As consumer lending soars to record levels, India’s banks face mounting criticism and government sanctions for their aggressive loan recovery tactics, which sometimes include using hired thugs. With the economy growing at more than 8.5% a year for the past four years. Indians are taking on home, car and credit debt as never before. Retail loans have almost tripled over the past three years. According to the Reserve Bank of India, or RBI, they reached $124 billion for the fiscal year ended March 31, 2007.

"That has created new headaches for Indian banks, which have limited experience recovering loans from defaulting borrowers. Traditionally most Indians have avoided debt. Even now only 30 million credit cards have been issued nationwide, an exceedingly small number for a nation of over a billion people. In another recent case, an HDFC Bank manager and two recovery agents were charged with criminal intimidation, extortion ‘outraging modesty’ of a woman in Mumbai. The customer claimed to have already paid back the loan, while his wife said that the agents had ‘misbehaved’ with her. The manager still works for the bank, which declined to comment.

"Ruling on Mr. Kumar’s case in November, January 9, 2008, Delhi State Consumer Commission fined ICICI Bank, India’s largest privately owned bank by market value for what a judge called ‘the grossest kind of deficiency in service: unfair trade practice. ICICI Bank has appealed the decision to the Delhi High Court arguing the consumer court doesn’t have the authority to impose such a large fine and that the collection agency should be held responsible for the attack, not the bank.

"While India’s overall percentage of nonperforming loans is low – about 2.5% of all outstanding loans – the absolute number of all outstanding bad retail loans is growing with increased lending."

"ICICI Bank has been India’s most aggressive bank in the retail market, using the internet, phone banking and automated teller machines to target the increasingly affluent middle class. The report cited rising interest rates as the major factor affecting borrowers’ ability to repay.

"The glorious run of an ever-improving NPL (non-paying loan) ratio that began in the late 1990s when the ratio was more than 15%, before falling to 2.5% in 2007, may just be over, the report says. Loans are typically classified as nonperforming if a customer fails to make payments for 90 days. At that point banks are supposed to issue legal notices to those in default. But because it can take years to pursue a debtor through India’s turgid legal system, many banks hire outside collection agents.

"That’s where the trouble starts. Increasingly, critics say, loan recovery has involved the use of strong arm tactics by goondas methods. While allegations of strong-arm tactics are not new in India – collection agents working for Citibank faced similar accusations in the 1990s – the practice has grown more prevalent with the boom in retail lending. Increasing violence associated with loan collections has spurred India’s central bank to crack down.

Draft guideline issued by the central bank in November on the matter of using collection agents warn banks that in cases of persistent abusive practices, the RBI could impose a temporary or even permanent ban on hiring outside agents, who so far have not been subject to regulation. The guidelines also call for a minimum of 100 hours of training for recovery agents as well as recommending the use of Lok Adalats, a sort of people’s court where disputes are solved by direct talk between litigants to settle defaults. The Supreme Court has also weighed in, ruling that banks cannot engage goondas. Since the thugs have criminal records, banks are told by the police to have their collection agents vetted by them.

– from Economic Reform, February 2008


"The earth, in its natural, uncultivated state was, and ever would have continued to be, the common property of the human race." As the land gets cultivated, "it is the value of the improvement, only, and not the earth itself, that is in individual property. Every proprietor, therefore, of cultivated lands, owes to the community a every person, rich or poor...because it is in lieu of the natural inheritance, which, as a right, belongs to every man, over and above the property he may have created, or inherited from those who did."

Thomas Paine 1796, p. 611; 612-613