17 April 2014

Talk of Many Things

Ketharaman Swaminathan - GTM360 Marketing Solutions

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Let Banks Chase Their Defaulters Instead Of Seeking Bailouts

02 January 2014  |  1956 views  |  0

The old saying “Don’t do the crime if you can’t do the time” crossed my mind when I recently read this article in which loan defaulters protest against the aggressive procedures adopted by banks to recover their loans.

The typical refrain of almost every defaulter profiled in this article seems to be “I couldn’t keep up with my repayments after losing my job. Since I’ve already informed my bank about this, it should put a stop to its constant follow up.”

Well tried, Charlie. That’s not how it works.

When the borrower took a loan, he or she signed a contract with the bank to adhere to a certain repayment schedule. While doing so, they might have assumed total stability in their career, but that’s not the bank’s problem. Any default in repayments is a breach of contract and the bank has every right to take steps to collect. While borrowers can seek extra time to pay back their loans, they’ve no right to expect their banks to accept their requests.

The article is right in urging banks to seek legal recourse in the event of a default. However, as anyone who has filed a lawsuit to recover their payments can tell you, the courts have a huge backlog of cases. Under the situation, banks can’t be blamed for resorting to some supplementary action to expedite recovery and keep their delinquent outstandings under control.

Citing the US Fair Debt Collection Practices Act (FDCPA), the article suggests a similar law to regulate the banking industry’s collection activities. This is very naïve and displays total ignorance of how the American judicial system works: Once a court sets a date for a hearing, the defendant (loan defaulter) must attend it. Failure to do so inevitably leads to a suo moto award of the case in favor of the plaintiff (creditor). Unfortunately, there’s no similar provision in the Indian judicial system. No-shows by defendants result in postponement of hearings, which is a major reason why court dockets keep mounting in India.

Just as banks must follow the law about when to call, whom to call and how to talk while seeking recovery of their overdue loans, borrowers must be equally circumspect about the amount, tenor and repayment schedule of the loans they take. Irresponsible loans set the stage for defaults when borrowers go through adverse life events such as a job loss. Besides, they cause hardship for everyone by creating bubbles in shares, gold, real estate and other assets.

As long as friends and family members stand guarantee for a loan, there’s nothing wrong in banks following up with them when the loan goes bad, especially when banks are unable to reach the defaulting borrower in question.

Let banks chase their defaulters aggressively and recover their dues. That’s better than going soft on them and then pleading for a public, taxpayer-funded bailout when their existence is threatened by skyrocketing Non Productive Assets. India escaped that fate during the Great Financial Crisis but, as we all know because banks keep reminding us, past performance is no guarantee of future results.

TagsRisk & regulationRetail banking

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Ketharaman Swaminathan

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