Off the tough route to loan recovery

A sordid viral video of reportedly loan recovery agents roughing up a delinquent borrower in Pune may remind many of the spiralling thriftlessness in Indian households. But it masks a deeper malaise in our banks. It's a story of a dog-eat-dog chase among high-street lenders to grab customers, skewed incentives to private firms to whom the nasty job is outsourced, a shoddy and hasty process to assess the creditworthiness of potential customers, and a growing temptation, particularly among the young, to borrow, spend and roll over credit card dues.

RBI rules prohibit banks and recovery agents from using coercive tactics. But strong-arm methods are common. The Pune case is not the first such instance. It certainly won't be the last. Driven by the urge to diversify into retail loans that can generate more profits, banks charge steep interest on unsecured advances like personal loans and credit card outstanding to partly absorb losses from higher defaults and absence of collaterals. Like armies hired to salvage sunk loans, the task of originating loans is left to direct selling agents working on commission. Banks are barred from hiring agents to raise deposits. Slapping a similar ban on engaging outsiders to spot borrowers and go after them when payments are overdue may curb harassment of borrowers. But it would make banks' operating costs unsustainable.

A saner, though unpalatable, option would be regulating the fees offered to recovery agents and instilling bank managements of the urgency to follow a realistic credit appraisal method and pick borrowers carefully. Changing a culture, buoyed by targets and bonuses, isn't easy. But questioning and penalising banks whose agents misbehave could be the first step in treading a long road.