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A change of thinking and strategy by Indian banks in debt collection methods could result in an increase in profits. With delinquent debt being one of the largest debt collection opportunities for companies in India, full scale improvements in debt recovery processes and practices could see an increase of 10% on the overall sector profits, potentially as much as 15% for more aggressive lenders.
However, this is not going to be a walk in the park for the Indian banks. As the economic boom of 2004 to 2008 snowballed, Indian bank lending was readily available and people who should not have been given loans were given them without question. Indeed, since 2008 non-performing assets of the top 10 banks in India jumped to almost Rs20,000 crore in the fiscal ending March 2009, a 23% increase in just one year, as their profit growth slowed from 40% in 2007-2008 to 29% the following year.
With the economic downturn, however, many of these banks are now tightening their purse strings and trying to prevent loans from being given to the wrong people. Some banks have even gone as far as to stop unsecured lending alltogether!
There are plenty of problems facing the banks as they attempt to put the processes into place of ensuring that the problems they face now does not happen again. For starters there is a severe lack of fixed-line telephones in India, making contacting debtors for the purposes of commercial debt collection and recovery particularly difficult. Also, the lack of a fully functioning credit checks bureau makes tracking debtors more difficult as they change addresses and mobile numbers frequently to avoid paying their debt.
Then there are the legal costs. As the size of loans in India is small—they can be for as low as Rs5,000—pursuing collections through India’s slow legal system can prove prohibitively expensive. When banks do approach the courts, they can recover only 50-60% of defaulted loans. Close to half the cases are settled through a compromise—outcomes that could have been anyway achieved outside the judicial system at less cost. Therefore, Indian banks often find that they have little alternative other than to rely on field operations.
Independent debt-collection agencies who work for banks make direct contact with between 20% and 50% of potential defaulters in India. If we compare this with debt collection agencies in the UK, for instance, we find that less than 5% of delinquent borrowers are contacted directly by field agents. Unfortunately, debt recovery agencies are expensive in Indiatypically charging a 10% cut of what they recover on a loan that is between 90 and 120 days in default. For collecting on a loan that is late by 180 days or more, then the commission that they charge is at least 30%. Reliance on collection agencies can also extract a high price in terms of bad publicity. The agents are often poorly trained and use crude tactics such as endless phone calls and hiring local toughs to harass defaulters.
