Friday, June 6, 2008

Banks and muscle power: Editorial

Banks and muscle power

It is not the first time that the Supreme Court has come down heavily on commercial banks and financial institutions that employ musclemen to recover their debts. In February 2007, it passed severe strictures against some banks whose loan recovery agents with their high-handed ways allegedly drove a few of their clients to desperation and, in certain instances, even to suicide.

In the latest case before the Supreme Court, a borrower of a leading private bank was allegedly driven to take his life, unable to stand the harassment and humiliation meted out to him by the bank’s agents; he had taken a loan for buying a motorbike and, on his falling behind in repayment, the bank took possession of the vehicle through its agents. The court emphasised that on no account should the banks or their recovery agents use coercive methods or resort to muscle power to recover the dues.

In April this year, in the wake of a spate of complaints, the Reserve Bank of India came up with a set of guidelines for the banks and other financial institutions in respect of debt recovery operations and overseeing the collection agents employed for the purpose. Significantly, under a landmark legislation – the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – banks have been empowered to deal with recalcitrant borrowers. The Supreme Court has urged banks to comply with the law in letter and spirit.

Such exhortations are necessary because the lenders are under pressure to go for recovery processes that are faster than what are provided under the law. Many of them feel that even the new enactments and rules have not helped much in cutting down the delay. By appointing recovery agents to carry out tasks that are part of their normal work, banks are in effect outsourcing one of their key functions.

In the reform era, mainline banks have reposed faith in the outsourcing model to absorb technology and to improve profitability. Their faith has not been wholly unjustified. It would not have been possible for, say, the public sector banks to adopt core banking solutions without the active participation of outside contractors. Outsourcing might have also become inevitable when most banks saw their business grow exponentially in the newer areas of retail and home loans.

Yet as the recent experience of banks and some of their customers with recovery agents shows, there are limits to outsourcing. There is no way banks can disown the actions of their agents. The Supreme Court verdict reinforces the point that for narrow, short-term gains some banks are risking their reputation. The image of the banking industry is at stake.

© Copyright 2000 - 2008 The Hindu

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http://www.thehindu.com


Also read the related stories:

Complaints: SBI Cards tops, ICICI is second

Don’t use goons for loan recovery: SC

ICICI fined Rs 50 lakh for employing goons


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