India Debt Collection Business

Until the emergence of debt collection business,
debt collection in India, was never treated as a specialized job
and was always treated as one of the jobs that legal
departments of the banks and financial institutions
were required to undertake.

A typical legal department of an organization would
approach the collection job strictly as a legal issue
rather than as a revenue collection measure.
Litigation would be the only tool used for recoveries
and no other tool was either known or used by the industry.

Litigation as a recovery measure always had its own limitations
due to long and winding court procedures the Indian legal
system is always criticized for. On the other hand, foreign
banking firms introduced the concept of specialized debt collection
services. Debt collection services became one of the many services
that began to be outsourced to specialized agencies.

The collection business had a very humble beginning and
it barely qualified as a specialized service.

However over a period of time with the emergence of India
as a global outsourcing destination the domestic businesses
also adopted the outsourcing as an efficient business tool.
With the result today, the third-party debt collection industry
plays an important role in the Indian economy.

The industry employs hundreds of thousands of Indians
as collection professionals, who are servicing several industries
ranging from banks, to telecom service providers to insurance companies.

Typically, only small recoveries arising from periodic billing defaults
by the customers are outsourced to the collection agencies.
Not only the collection business has become a direct source
of employment to thousands but its contribution to the
economy is more pronounced because it helps infuse money
back in the economy that otherwise would have remained
uncollected. The economic benefits of third-party debt
collection are significant. Citibank is the pioneer in
introducing third party collection techniques in India.

The debt collection industry in India also has grown sharply
this year as higher borrowing costs; rising inflation and
the general slowdown in the economy force more companies
and individuals into difficulties. Underlying debt has gone
through the roof and lenders and organizations increasingly
want to move any bad debt off their books.

Whether it is a high street bank, a credit card lender
or a mobile phone company, growing numbers are turning
to professional debt collectors in a more difficult environment.

The debt collection industry in India is growing at
faster pace and is surely poised for growth.
The credit card outstanding have shot up by
a whopping 87% at USD 6114 Million during
this year, from USD 2844 Million in the period year ago.

The Reserve Bank of India (RBI) which regulates
the banking industry in the country encourages banks
to shift bad loans off their books more quickly
because they will be required to hold more capital
against risky assets that may default.

COLLECTION INDUSTRY - UNREGULATED SCENARIO

The collection business has its own inherent shortcomings
due to unregulated and primitive nature of this business in this country.
The persons employed in the industry are untrained both in soft
skills and legal skills. Being unregulated, the procedures are not
standardized and there are no industry specific checks and balances.

Still litigation is used as the last resort tool for recoveries.
However the industry has been accused of manipulating the
legal system to their advantage by using courts as their
agents of recovery. It is seen that big corporations with
large volumes of recoveries have unwritten understanding
with the local courts at the lowest level. With the patronage
of minuscule minority of pliable judges simple civil defaults
are registered as criminal cases thus pressurizing the
debtors into paying the dues. Slow and long civil recovery
court process has no takers in this age of instant results
where revenue targets are the most sacrosanct.

Under such strict and cut throat environment,
there is pressure on the banks to keep their account
books healthy therefore such aggressive and extra-legal
methods are employed for quick recoveries.

GOVERNMENT / RBI INTERVENTION

Debt collectors in the past had a lot of leeway and it
wasn’t uncommon for collectors to embarrass, harass
or humiliate debtors by adopting extra-legal measures.
In the absence of any regulatory regime the courts had
step in by laying down guidelines for the industry to follow.
After the intervention of judiciary, the RBI woke up to the
need of regulating the unruly collection agencies and laid
down its own guidelines for the banking industry to follow.

The guidelines prescribed by RBI are enforced against the
banks that have contractually employed collection agencies.
The banks in turn via their contracts with the collection agencies
ensure that the RBI guidelines are followed.

Now, under the RBI guidelines it is illegal to threaten
violence or cause harm to debtor, use obscene language,
or repeatedly use the phone to harass debtors.

In addition, collection agents cannot seize or garnish a
consumer’s property or wages without recourse to court procedure.

The following are few of the core underpinnings of the collection
process. These are the norms formalized by the top bank in India - RBI.

1. DSAs/DMAs/Recovery agents to get minimum 100 hours of training.

2. Recovery agents should call borrowers only from
telephone numbers notified to the borrower.

3. Each bank should have a mechanism whereby
borrowers’ grievances with regard to the recovery process can be addressed.

4. Banks are advised to ensure that contracts with
recovery agents do not induce adoption of uncivilized, unlawful and
questionable behavior or recovery process.

5. Banks are required to strictly abide by the codes
to collection of dues.

RBI in the draft guidelines issued for banks engaging
recovery agents, has asked banks to inform borrowers
the details of recovery agents engaged for the purpose
while forwarding default cases to the recovery agents.

The Reserve Bank of India has also considered imposing
a temporary ban (or even a permanent ban in case of
persistent abusive practices) for engaging recovery agents
on those banks where penalties have been imposed by a
High Court/Supreme Court or against its directors/officers
with regard to the abusive practices followed by their recovery
agents. An operational circular in this regard has been issued
in November 15, 2007.

Other Laws

Still the non banking debts collection business is
outside the purview of any regulator. There are
no licenses or registrations to be obtained from any
regulator to pursue collection business in India.

The extant guidelines applicable to banking industry
are found inadequate as they address only the problem
of debtors’ harassment and the guidelines do not
regulate the industry as such.

The Government is well aware of the need
of having a specialized legal mechanism for recovery
of institutional debts which has become a huge
problem for the entire banking industry.

Every bank is grappling with the non-paying accounts,
known as Non Performing Accounts (NPA) in the Indian
banking parlance. The problem has taken enormous
proportion and threatened the economy.

Creation of Debt Recovery Tribunals in the year 1993
was a step in the direction of facilitating fast recoveries
by the banks . The intention behind creation of such Tribunal
was to ensure that banking industry was provided with its own
recovery mechanism that was part of the legal system
but at the same time exclusive to the banking industry.

Bank debts above USD 22,727 could be recovered through
the Tribunals.

However, over a period of time it was realized that
this new mechanism did not yield the desired result
since the recoveries were still slow and due to shear
volume of work, the Tribunal became like any other court.

The whole objective of having a fast track and efficient
recovery mechanism was therefore defeated.

Bank debts still remained a major problem to be
solved since it affected the entire economy of the country.
The Government felt the need of having a mechanism
that was minimally dependent on the courts for effecting
recoveries since the legal system could not be reformed overnight.

Therefore instead of reforming the court procedure the government
did some clever thinking and came up with a legislation that
minimized the intervention of court and empowered the banks
with special powers using which the recoveries could be affected.

The government thus came up with a new law
Scrutinization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act) where under the banks are allowed to
liquidate security given by the borrower for recovery of
their dues.

law also paved the way for creation
of asset reconstruction companies that
take over the security interest of the debtors.
These agencies are thus another form of debt
agencies that have been institutionalized.

The need to share credit information among
the banking industry was also felt in order
for the industry to benefit from each other.
Thus Credit Information Companies (Regulation)
Act was enacted in the year 2005.

INDIAN LEGAL SYSTEM AND COLLECTION PROCESSES

The Indian legal system is absolutely fair and assures
justice to the party involved. There are remedies available
under the law to collect the debt, if the debtor does not agree
to pay under normal circumstances. The creditor may file a
suit for his recovery. Debts based on written contracts could
be recovered by following fast track procedure.

If the debtor is a company, creditor / his lawyers may apply
in the ‘Company Court’ for winding up of the company due
to non-payment of substantial amount of debt.

Summary trial is another way. The process may
take time-1 to 2 years. Evidences are recorded
appropriately and produced in the court of law,
whenever required. There is also the arrangement
of appeal to be filed at later stage.

US OUTSOURCING SCENARIO

India has attracted many technology jobs in recent
years from Western nations, particularly the United States.
Now, it is on its way to becoming a hub in another offshore
outsourcing area - debt collection. According to the industry report,
units of General Electric, Citigroup, HSBC Holdings and
American Express have used their India-based staff to pursue
credit card debt and mortgage payment by calling defaulters.

US debt collection agencies are the newest to start outsourcing
their work to India and are satisfied with the results produced
by the polite but persistent Indian experts. After insurance claims
and credit card sales, debt collection is a growing business for
outsourcing companies at a time of downturn in the US economy
when consumers struggle to pay for their purchases.

Debt collection is a vital and growing component of US economy.
There is more than $2.5 trillion in outstanding consumer debt.
As a result, the third-party collection industry makes more than
one billion contacts with consumers each year. Recently this year,
more than $39.3 billion in debt was returned to creditors.

Indians have the advantage of lower salaries and other expenses,
which cut drastically costs of collecting debts. Debt collectors in India
cost as little as one-quarter the price of their US and European
counterparts and are often better at the job. Many such Indian
firms run 24-hour services. Indian debt-collection companies comply
strict regulations on operations in the American and / or European markets.

SUMMARY

India has a long way to go in establishing a mature
collection services industry. The collection business
needs to be regulated and empowered with legal powers
to become an effective tool. Already, there is a realization
in the country that court dependant recovery is an inefficient
way of way of debt collection. Creation of Assets Reconstruction
and Securitization Companies under the SARFARESI Act is a step
in the right direction of recognizing debt collection as an independent
and specialized business function.

While some progress is made for the bank debts
but still for a large volume of unrealized non bank debt
there are no professionally managed and regulated third party
collection service providers. Non bank debts are largely
unsecured that makes it even more difficult to realize.

No big corporations and business houses are interested in
acting as collection agents without there being an attraction
of valuable security asset. Lawyers can fill this gap by providing
collection services for non bank debts. Indian law does not permit
contingency fee that makes the business less lucrative.

India is therefore ready to benefit from foreign experience,
expertise and ideas to create an efficient debt collection industry
of its own at par with global status.

This need is more felt now by India due to its global ambitions
wherein India must adopt globally recognized practices and models.
Transnational businesses need a uniform operating system for seamless
transactions. Efficient debt collection industry will only instill confidence
in companies doing business with Indian companies.

Collection professionals have this challenge facing them
of creating an efficient system that reduces people’s dependence
on court supported recoveries.

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