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.
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 our 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 to 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 pertaining 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 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. This 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 collection 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. Thecreditor 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 .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 .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 with 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.
Monday, October 18, 2010
Tuesday, October 12, 2010
Business Standard Article on Bank Auctions and Foreclosureindia.com
| Masoom Gupte / Mumbai October 12, 2010, 0:49 IST |
Carefully check title and outstanding dues.
An auction conjures up two images — an exclusive, one-of-its-kind product going under the hammer or a family on the verge of bankruptcy being stripped of its assets. The latter can be heart-rending drama material. But for a vigilant buyer, it may be an excellent opportunity.
Banks auction properties when borrowers fail to repay their loans. This auction takes place under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act. If a borrower defaults on repayment of his/her home loan for six months, banks give him/her a 60-day period to regularise the repayment. On his/her failure, banks declare the loan a non-performing asset and auction it to recover the debt.
Foreclosureindia.com, a portal that lists properties up for auction, has 32,066 listings. Out of this, 11,381 are on-auction properties and 20,685 attached properties or ones for which auction dates are yet to be declared. The three metros, Bangalore (6,078), Mumbai (4,352) and Delhi (1,813), have the highest number of listings.
Buyers can purchase such properties at 20-30 per cent discount, though the banks determine the reserve price, or the minimum bidding price, based on the market valuation. “Banks enlist services of professional valuers and the final reserve price is an average of the two valuations. However, valuations tend to be on the conservative side, which may be perceived as a discounted price,” says V N Hegde, AGM, credit recovery, Corporation Bank.
The bidding process
According to the Act, banks must advertise such sales in at least one English language and one local regional language newspaper 30 days prior to the auction date. Mostly, general interest and local language newspapers are used to advertise these auctions.
Those interested can submit their bids in a sealed envelope to the bank before the auction date. Along with the bid, they must also deposit a certain percentage of the reserve price as earnest money to participate in the auction. The amount may differ depending on the bank and is refundable if one withdraws from the process or do not win the bid.
On the auction date, the bank’s officials open the sealed envelopes in front of all the bidders, and the highest bid is announced. You may then get another chance to revise your bid. If you win, you have to pay an initial amount of up to 25 per cent of the price to confirm the purchase. The bank may give you an extension of 10-15 days to arrange for the remaining payment.
Verification
When banks advertise a property on auction, they state clearly that it is being sold on an ‘as is-where is’ basis. That is, the bank is not responsible for any other claim against the property.
As Rajesh Narain Gupta, managing partner, S N Gupta & Co, a law firm, explains, “There may be other litigation attached to the property. For example, if the owner has not paid income tax (I-T) and the I-T department has issued a notice to attach all his assets, including the house. Although the bank may have a greater say, the prospective buyer can get stuck in such litigation. Necessary due diligence must be done to avoid such situations.”
You must also check if there is any pending litigation between the bank and the borrower. “Also, if there exists any restraint order on the bank for selling the property,” adds Gupta.
Besides litigation, some other areas that prospective buyers must check on are:
- Is the bank auctioning the property the sole creditor? Or there is a consortium of creditors, in which case are all the creditors involved in the sale?
- Are there any outstanding costs like society dues or workmen dues on the property
- Is the title of the property clear?
Buying a house up for auction does not always guarantee a good deal. In a rising real estate prices’ market, properties may even fetch a premium. Hidden charges, if any, could also make the property more expensive than the acquisition cost.
Saturday, October 9, 2010
Statistics of first three quarters of Foreclosureindia.com
Foreclosureindia.com was started in early in January 2010 and these are the statistics for the last 9 months on the data which has been collected by us and is freely available to all users.
| FORECLOSUREINDIA.COM | |||||
| ( A unit of M/s 4 CLOSURE, Plot No.20, Mothinagar, Hyderabad.) | |||||
| Name of the city & State | No of properties for Auction / Possessions. | ||||
| First Quarter Jan - March 2010 | Second Quarter April-June 2010 | Third Quarter July-Sept 2010 | First nine months of Year, From Jan-Sept 2010 | ||
| Delhi, DELHI | 742 | 449 | 622 | 1813 | |
| Bangalore, KARNATAKA | 2770 | 1602 | 1703 | 6075 | |
| Mumbai, MAHARASHTRA | 2344 | 928 | 1078 | 4350 | |
| Chennai, TAMIL NADU | 331 | 147 | 398 | 876 | |
| Hyderabad, ANDHRA PRADESH | 1569 | 790 | 858 | 3217 | |
| Kolkata, WEST BENGAL | 873 | 637 | 993 | 2503 | |
| Pune, MAHARASHTRA ; | 188 | 37 | 216 | 441 | |
| Chandigarh, CHANDIGARH | 960 | 457 | 392 | 1809 | |
| Jaipur, RAJASTHAN | 49 | 36 | 75 | 160 | |
| Lucknow, UTTAR PRADESH | 45 | 130 | 185 | 360 | |
| Ludhiana, PUNJAB | 601 | 470 | 531 | 1602 | |
| Ahmedabad, GUJARAT | 222 | 56 | 82 | 360 | |
| Goa, GOA | 32 | 25 | 47 | 104 | |
| Indore, MADHYA PRADESH | 309 | 170 | 211 | 690 | |
| Nagpur, MAHARASHTRA | 120 | 30 | 109 | 259 | |
| Nashik, MAHARASHTRA | 346 | 127 | 186 | 659 | |
| Surat, GUJARAT | 195 | 76 | 162 | 433 | |
| Vadodara, GUJARAT | 191 | 49 | 72 | 312 | |
| Bhubaneshwar, ORISSA | 241 | 207 | 346 | 794 | |
| Coimbatore, TAMIL NADU | 289 | 223 | 240 | 752 | |
| Kochi, KERALA | 228 | 163 | 184 | 575 | |
| Mangalore, KARNATAKA | 197 | 183 | 152 | 532 | |
| Mysore, KARNATAKA | 213 | 132 | 206 | 551 | |
| Thiruvananthapuram,KERALA | 521 | 307 | 331 | 1159 | |
| Vijayawada, ANDHRA PRADESH | 455 | 143 | 164 | 762 | |
| Vizag, ANDHRA PRADESH | 387 | 223 | 281 | 891 | |
| Total no of properties under possessions / Auction by Banks & financial institutions across 26 cities in India. | 14418 | 7797 | 9824 | 32039 | |
And these are the user statistics for the last nine months up to Oct 9th
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