Banks use ‘negative list' gambit to make defaulters pay up

K. Ram Kumar - Business Line

To recover dues, bankers are trying to put the fear of God into obstinate defaulters to pay up. And how? By making it plain that they could get reported to the Credit Information Bureau, bankers have been able to achieve a modicum of success in recoveries.

Some defaulting borrowers do see the writing on the wall when they are sensitised about the deleterious consequences of finding their names on the bureau's negative list, say bankers.

By delivering the simple key message that the doors of other banks will be shut for the defaulters once they are on the negative list, banks are gradually making headway in recoveries.

Before knocking on the doors of the debt recovery tribunal or resorting to recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, bank recovery officers are trying to warn headstrong loan defaulters that they could end up in the credit bureau's negative list. The prospect of future banking relationship getting jeopardised convinces some defaulters to repay loans.

The ‘negative list' gambit is apparently working for banks. According to a senior Union Bank of India official, the bank's staff at Rohtak (Haryana) branch employed this tactic successfully when a young entrepreneur did not repay his education loan despite having the wherewithal. Impressing upon this entrepreneur the adverse fallout of getting reported to the credit bureau did the trick for the bank.

According to the Credit Information Companies (Regulation) Act, 2005, every credit institution has to become member of at least one credit information company. Credit institutions, including banks and housing finance companies, have to provide credit data (positive as well as negative) to the credit information company. By tapping into a credit information bureau, credit grantors get complete picture of the payment history of a borrower.

Apart from Credit Information Bureau (India) Ltd, (existing credit information company in operation since January 2001), the Reserve Bank of India has issued certificate of registration to Experian Credit Information Company of India Pvt Ltd and Equifax Credit Information Services Pvt Ltd in the February-March 2010 period to commence the business of credit information.

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RBI move to have NPAs sold by banks on credit data records

The Reserve Bank of India is considering allowing asset reconstruction companies (ARCs) to take membership of credit information companies (CICs). This is to ensure that the ‘defaulter' status of a borrower continues to be reflected in the records of CICs even after the sale of non-performing loans by banks to ARCs.

If ARCs are allowed to become members of CICs, then it will become well-nigh impossible for defaulters to obtain loans from lenders. The reason: with NPLs getting transferred to their books by virtue of acquisition from banks, the ARCs will take up the responsibility of updating the credit information pertaining to defaulting borrowers.

Continuity in credit information pertaining to defaulting borrowers, whose loans have been sold by banks to ARCs, will ensure that they will not get loans from other lenders – banks, non-banking finance companies (including housing finance companies) and financial institutions, said a senior banker clued in to the development.

“Once an ARC buys a non-performing loan from a bank, the loan ceases to be in the books of the latter. Hence, it is important that information pertaining to the sale of the loan to an ARC as well as the extent of recovery of loan outstanding should get reflected in a CIC's system so that other lenders are in the loop, in case they want to check the borrower's credit history,” said Mr M. R. Umarji, Chief Legal Adviser, Indian Banks' Association.

Credit Information Bureau (India) Ltd, India's only operational CIC which provides details pertaining to credit facilities already availed of by a borrower as well as his payment track record, reportedly moved the RBI to allow ARCs to take membership of CICs. This move comes as banks are increasingly resorting to sale of NPLs to ARCs to clean up their balance sheets.

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NPA's of Banks in India for the last three years