Bad loans: Name and shame wilful defaulters

Banks want to name and shame both loan defaulters and guarantors. This is, at best, an incremental step to put pressure on defaulters, but not enough to ensure loan recovery. Bad loans are a cost to the economy and banks can, rightly, resort to every possible legal means to recover loans disbursed from public deposits. However, the recovery process of bad debt is protracted in India, despite enabling laws such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act. Defaulters often misuse the Sarfaesi Act, filing frivolous petitions before the Debt Recovery Tribunal (DRT) to delay the process against them. Tribunals also do not adhere to the time-frames set for disposal of disputes under the Act. All this must change. Appoint more judges to cut delays in DRTs and overhaul the judicial process. However, the practice of seeking personal guarantees for loans to limited liability companies must go, as it vitiates limited liability and entrepreneurship.

Today, opinion is divided in the judiciary over naming and shaming loan defaulters. The Madras and Madhya Pradesh High Courts have upheld the action of banks, saying publication of photographs of defaulting borrowers is not prohibited under the Sarfaesi Act. However, the Calcutta High Court has ruled otherwise. Even so, banks should only name and shame wilful defaulters. And credit scores should become more robust and accessible.

In the US, its consumer protection agency, Federal Trade Commission (FTC), enforces the Fair Debt Collection Practices Act that prohibits debt collectors from using abusive, unfair or deceptive practices. We also need strong consumer protection laws to prevent any unfair practices and institutional arrangements to enforce these regulations.