Banks may cut credit on recovery discredit
Some bankers are considering a freeze on lending to segments that throw up maximum defaults following the ban on dubious loan recovery methods.
By TNN |
NEW DELHI: Taking bankers to task on dubious loan recovery methods might just prove counter-productive, with some bankers considering a freeze on lending to segments that throw up maximum defaults.
Should the bankers be penalised for recovery, they would have to make a trade-off between discontinuing their services to some segments against bearing the risk of wilful defaulters who could misuse a legislation to their advantage. Banks factor in a certain minimum number of defaults despite stringent recovery procedures. They fear the defaults could go up in case recovery processes are not tight any more.
“There are 10 million calls made everyday. A small portion of this is constituted by physical visits, of which a few may turn out to be troublesome cases. But in general, banks would factor in at least a 1% default on a portfolio. Any loosening in the recovery process may lead to a doubling in the defaults. Having said that, banks must no doubt ensure a fair recovery process, but the regulator must balance the interests of the banks and borrowers,” a banker handling a large retail portfolio said. The banking system should develop a resilience to counter defaults, he added.
Bankers feel it may be near-impossible to eliminate defaults by streamlining recovery processes. “We fear taking action against banks might lead to a freeze on lending to certain segments. Why take the trouble of lending to a particular segment if it is anticipated that recovery might be a problem,” another banker said.
“There are checks and balances within the framework. Most of the calls are recorded to detect irregularities retrospectively,” he said. To counter defaults, banks including ICICI Bank and HDFC Bank have begun cutting interest rates on small-ticket personal loans ranging from Rs 10,000 to Rs 50,000 to 18% from the high of 40%. The rate of defaults is running up to 10% for some banks.
Around 1.5 lakh such loans are disbursed every month by ICICI Bank, which include two-wheeler loans as well. It is understood there are 3 million such accounts with a portfolio size of Rs 2,000 crore. The bank is adopting credit-scoring methods for appraising borrowers. The smallest ticket size of personal loan offered is Rs 10,000.
Apart from the Supreme Court, even the Monopolies & Restrictive Trade Practices Commission had taken cognisance of the use of strong arm tactics for loan recoveries.
Most banks, private as well as public sector, outsource recovery of bad loans to third parties. The investigation is expected to throw light on the extent of banks’ liability in using people with a criminal record for debt recovery. Already, the Commission has sent notices to some of the banks in question.
Should the bankers be penalised for recovery, they would have to make a trade-off between discontinuing their services to some segments against bearing the risk of wilful defaulters who could misuse a legislation to their advantage. Banks factor in a certain minimum number of defaults despite stringent recovery procedures. They fear the defaults could go up in case recovery processes are not tight any more.
“There are 10 million calls made everyday. A small portion of this is constituted by physical visits, of which a few may turn out to be troublesome cases. But in general, banks would factor in at least a 1% default on a portfolio. Any loosening in the recovery process may lead to a doubling in the defaults. Having said that, banks must no doubt ensure a fair recovery process, but the regulator must balance the interests of the banks and borrowers,” a banker handling a large retail portfolio said. The banking system should develop a resilience to counter defaults, he added.
Bankers feel it may be near-impossible to eliminate defaults by streamlining recovery processes. “We fear taking action against banks might lead to a freeze on lending to certain segments. Why take the trouble of lending to a particular segment if it is anticipated that recovery might be a problem,” another banker said.
“There are checks and balances within the framework. Most of the calls are recorded to detect irregularities retrospectively,” he said. To counter defaults, banks including ICICI Bank and HDFC Bank have begun cutting interest rates on small-ticket personal loans ranging from Rs 10,000 to Rs 50,000 to 18% from the high of 40%. The rate of defaults is running up to 10% for some banks.
Around 1.5 lakh such loans are disbursed every month by ICICI Bank, which include two-wheeler loans as well. It is understood there are 3 million such accounts with a portfolio size of Rs 2,000 crore. The bank is adopting credit-scoring methods for appraising borrowers. The smallest ticket size of personal loan offered is Rs 10,000.
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Apart from the Supreme Court, even the Monopolies & Restrictive Trade Practices Commission had taken cognisance of the use of strong arm tactics for loan recoveries.
Most banks, private as well as public sector, outsource recovery of bad loans to third parties. The investigation is expected to throw light on the extent of banks’ liability in using people with a criminal record for debt recovery. Already, the Commission has sent notices to some of the banks in question.
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