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This is the sort of report that convinces me the global credit boom is far from over, and outside the USA may not even pause for long...;)
(From THE WALL STREET JOURNAL ASIA)
By Tariq Engineer
MUMBAI -- 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.
By Tariq Engineer
MUMBAI -- 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-card debt as never before -- with many becoming borrowers for the first time. Retail loans have almost tripled over the past three years, according to the Reserve Bank of India, reaching $124 billion for the fiscal year ended March 31, 2007.
The lending has helped drive a surge in consumption. But it also 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 in a country with more than a billion people. As a result, banks haven't evolved standard procedures for recouping bad debts.
In another recent case, an HDFC Bank Ltd. manager and two recovery agents were charged with criminal intimidation, extortion and "outraging the modesty" of a woman in Mumbai. A customer claimed to have already paid back the loan, while his wife told the police the agents had "misbehaved" with her. The case has yet to come to trial, and the manager still works for the bank. HDFC declined to comment.
Ruling on Mr. Kumar's case in November, the Delhi State Consumer
Commission fined ICICI Bank Ltd., India's largest privately owned bank by market value, almost $140,000 for what a judge called "the grossest kind of deficiency in service and unfair trade practice." ICICI Bank has appealed the decision to the Delhi High Court, arguing that 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. It also has fired the collection agency responsible for the attack.
While India's overall percentage of nonperforming loans is low --
about 2.5% of all outstanding loans -- the absolute number of bad retail loans is growing with increased lending. ICICI Bank, for example, grants about 150,000 small-ticket loans -- those as high as $1,270 -- each month. So even a default rate of 2.5% means an additional 3,750 bad loans.
ICICI Bank has been India's most aggressive in the retail market,
using the Internet, phone banking and automated-teller machines to target the increasingly affluent middle class. As of March 31, 2007, retail loans accounted for 65% of the bank's total amount of money lent.
But the change has come at a cost. The bank's gross nonperforming loans in the retail segment more than doubled during the financial year ended March 31, 2007, rising to $790 million, and they accounted for almost 74% of all its bad loans by value. And defaults are expected to keep rising, according to a Fitch Ratings report on Indian banks released in December.
The report cited rising interest rates as the major factor affecting
borrowers' ability to repay, especially on consumer loans. "The glorious run of an ever-improving gross NPL ratio that began in the late 1990s (when the ratio was over 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 to help recover the bad debts.
"The [legal] system is not attuned to dealing with a large number of retail-banking cases where you need a quick remedy," says Indian Banks' Association Chief Executive H.N. Sinor.
The collection agents are paid a basic fee plus a percentage of the
amount recovered. Unlike in the U.S., the bank retains ownership of the loan instead of transferring it to the collection agents. That is where the trouble starts.
Increasingly, critics say, loan recovery has involved the use of
strong-arm tactics by goondas, a Hindi term for gangsters who indulge in intimidation and violence to recover debts.
Mr. Kumar got a brutal taste of the goondas' methods. He was waiting for his friend Tapan Bose in the parking lot of a cricket stadium in New Delhi when he was confronted by a man saying he was from ICICI Bank and was looking for Mr. Bose, whose last three car-loan repayment checks had bounced.
Mr. Kumar attempted to call Mr. Bose on his cellphone, but "before the phone rang once" he found himself being dragged out of the car. He tried to resist but the man, who never identified himself by name, began to beat him. In the scuffle, Mr. Kumar's gold chain was snatched from around his neck, and the next thing he remembers he was being hit on the back of his skull with an iron rod.
By this time, Mr. Bose had noticed the missed call on his cellphone,
and, when Mr. Kumar failed to answer his phone, he went looking for him. He found Mr. Kumar lying in the parking lot bleeding, and his car missing.
While allegations of strong-arm tactics aren't new in India, the
practice has grown more prevalent with the boom in retail lending. Increasing incidents of violence associated with loan collections have spurred India's central bank to crack down.
In November, the central bank released draft guidelines for using
collection agents. The guidelines warn banks that in cases of persistent abusive practices, the central bank could impose a temporary or even a permanent ban on hiring outside agents, who so far haven't 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 talks between litigants, to settle default cases.
The Indian Supreme Court also has weighed in on the matter, ruling that banks can't engage goondas. Because the thugs often have criminal records, banks are being told by the police to have their collection agents vetted by them.
Meanwhile, New Delhi police have begun an ad campaign to urge citizens to report incidents of harassment, and consumer groups are up in arms against the banks.
On the defensive, banks have maintained they were unaware of, or not responsible for, the strong-arm tactics of collection agents they hire.
Still, some banks are rethinking how they make loans and collect debts. ICICI Bank, for one, is re-evaluating its credit requirements for the small-ticket personal-loan business. "The lower-income segment is very important to us and to Indian banks. It is important that they get credit so that wealth cycles can be initiated," says V. Vaidyanathan, executive director at ICICI Bank. "However, we feel credit norms need to be tightened to avoid overleveraging of the customer."
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-card debt as never before -- with many becoming borrowers for the first time. Retail loans have almost tripled over the past three years, according to the Reserve Bank of India, reaching $124 billion for the fiscal year ended March 31, 2007.
The lending has helped drive a surge in consumption. But it also 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 in a country with more than a billion people. As a result, banks haven't evolved standard procedures for recouping bad debts.
In another recent case, an HDFC Bank Ltd. manager and two recovery agents were charged with criminal intimidation, extortion and "outraging the modesty" of a woman in Mumbai. A customer claimed to have already paid back the loan, while his wife told the police the agents had "misbehaved" with her. The case has yet to come to trial, and the manager still works for the bank. HDFC declined to comment.
Ruling on Mr. Kumar's case in November, the Delhi State Consumer
Commission fined ICICI Bank Ltd., India's largest privately owned bank by market value, almost $140,000 for what a judge called "the grossest kind of deficiency in service and unfair trade practice." ICICI Bank has appealed the decision to the Delhi High Court, arguing that 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. It also has fired the collection agency responsible for the attack.
While India's overall percentage of nonperforming loans is low --
about 2.5% of all outstanding loans -- the absolute number of bad retail loans is growing with increased lending. ICICI Bank, for example, grants about 150,000 small-ticket loans -- those as high as $1,270 -- each month. So even a default rate of 2.5% means an additional 3,750 bad loans.
ICICI Bank has been India's most aggressive in the retail market,
using the Internet, phone banking and automated-teller machines to target the increasingly affluent middle class. As of March 31, 2007, retail loans accounted for 65% of the bank's total amount of money lent.
But the change has come at a cost. The bank's gross nonperforming loans in the retail segment more than doubled during the financial year ended March 31, 2007, rising to $790 million, and they accounted for almost 74% of all its bad loans by value. And defaults are expected to keep rising, according to a Fitch Ratings report on Indian banks released in December.
The report cited rising interest rates as the major factor affecting
borrowers' ability to repay, especially on consumer loans. "The glorious run of an ever-improving gross NPL ratio that began in the late 1990s (when the ratio was over 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 to help recover the bad debts.
"The [legal] system is not attuned to dealing with a large number of retail-banking cases where you need a quick remedy," says Indian Banks' Association Chief Executive H.N. Sinor.
The collection agents are paid a basic fee plus a percentage of the
amount recovered. Unlike in the U.S., the bank retains ownership of the loan instead of transferring it to the collection agents. That is where the trouble starts.
Increasingly, critics say, loan recovery has involved the use of
strong-arm tactics by goondas, a Hindi term for gangsters who indulge in intimidation and violence to recover debts.
Mr. Kumar got a brutal taste of the goondas' methods. He was waiting for his friend Tapan Bose in the parking lot of a cricket stadium in New Delhi when he was confronted by a man saying he was from ICICI Bank and was looking for Mr. Bose, whose last three car-loan repayment checks had bounced.
Mr. Kumar attempted to call Mr. Bose on his cellphone, but "before the phone rang once" he found himself being dragged out of the car. He tried to resist but the man, who never identified himself by name, began to beat him. In the scuffle, Mr. Kumar's gold chain was snatched from around his neck, and the next thing he remembers he was being hit on the back of his skull with an iron rod.
By this time, Mr. Bose had noticed the missed call on his cellphone,
and, when Mr. Kumar failed to answer his phone, he went looking for him. He found Mr. Kumar lying in the parking lot bleeding, and his car missing.
While allegations of strong-arm tactics aren't new in India, the
practice has grown more prevalent with the boom in retail lending. Increasing incidents of violence associated with loan collections have spurred India's central bank to crack down.
In November, the central bank released draft guidelines for using
collection agents. The guidelines warn banks that in cases of persistent abusive practices, the central bank could impose a temporary or even a permanent ban on hiring outside agents, who so far haven't 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 talks between litigants, to settle default cases.
The Indian Supreme Court also has weighed in on the matter, ruling that banks can't engage goondas. Because the thugs often have criminal records, banks are being told by the police to have their collection agents vetted by them.
Meanwhile, New Delhi police have begun an ad campaign to urge citizens to report incidents of harassment, and consumer groups are up in arms against the banks.
On the defensive, banks have maintained they were unaware of, or not responsible for, the strong-arm tactics of collection agents they hire.
Still, some banks are rethinking how they make loans and collect debts. ICICI Bank, for one, is re-evaluating its credit requirements for the small-ticket personal-loan business. "The lower-income segment is very important to us and to Indian banks. It is important that they get credit so that wealth cycles can be initiated," says V. Vaidyanathan, executive director at ICICI Bank. "However, we feel credit norms need to be tightened to avoid overleveraging of the customer."