The Indian Economy Blog

August 20, 2005

Debt Collection In India

Filed under: Banking — Prashant @ 6:39 pm

The BBC reports

A bank in India has decided to publicly shame defaulters in order to recover outstanding loans. Employees of the Urban Co-operative Bank in the eastern state of Orissa have begun staging noisy demonstrations outside the home of defaulters.

Armed with posters, they kicked off the loan recovery drive outside the homes of two defaulters last week. Officials say this is the final resort for the bank which is facing problems over mounting bad loans.
Some 77% of the bank’s loans have gone bad – this amounts to $6.13m of unrecovered money.

77%?! Whence this number? I wonder what proportion of the loans were made because of non-economic reasons (politics, quotas) as opposed to sheer ineptitude? Maybe I should approach them to finance my bridge buying plans…

Hat tip: the World Bank blog


  1. As an econ blog, how can you not consider the incentives to repay?
    What is the recourse to defaulting in India, if not being embarrassed
    in front of your neighbors? Why does anyone repay for that matter?

    Comment by axe — August 21, 2005 @ 1:33 pm

  2. A great blog! I have added you to my blogroll and also mentioned you in my weblog today. Keep up the good work guys.

    Comment by New Economist — August 22, 2005 @ 1:38 pm

  3. Thank you, New Economist..

    Comment by Prashant Kothari — August 22, 2005 @ 2:50 pm

  4. From what I know, the defaulters bribe the loan recovery officials- so it is corruption surrounding recovery that is a greater cause of bad debts than granting loans to bad prospects.
    The marriage market is most efficient is tracing flows of wealth so you will find men with
    such jobs rewarded with higher dowry than those in private air-conditioned banks like Citi.
    What You Don’t Learn From “Dutt and Sundaram”…

    Comment by BridalBeer — August 23, 2005 @ 4:14 am

  5. I’m not surprised at the 77%. Axe is right, there are very few incentives to repay. Other than regular letters, or occassionally sending someone over to your house to collect the money (both of which can be ignored), they have no way of forcing you to pay the loan back. A more decent set of people pay back at least part of it (“I can’t pay back the 20k, but I’ll give you the 5k I have in the bank, lets call it even” – because the rate of default is so high, collectors are left with little choice but to agree), but even that has become a means to get rid of the nuisance of collectors constantly calling.

    It is only recently that many of the banks have made the decision to link up their customer information databases, so that they can keep track of regular defaulters (makes it harder for someone who defaults in one bank to get a loan from another).

    Comment by bak — August 23, 2005 @ 3:28 pm

  6. “I’m not surprised at the 77%. Axe is right, there are very few incentives to repay.”

    The incentive to repay should be the ability (or not) to get a loan in the future, not to mention the bad kharma of one’s own financial condition worsening eventually, as a result of one’s own irresponsibility. Eventually that comes to pass and if debtors have to be reminded of that by way of picketing or peer pressure, it’s a point they really ought to take in. There’s more at stake here for the individual than whether the creditor has the mechanical means to make a debtor repay in the short term.

    Comment by Hans — September 9, 2005 @ 9:14 am

  7. Appalling. Goes against typical ‘code of banking practice’ standards prevalent in most countries. Also, the lending specialists approving and disbursing these loans should be investigated, and in a lot of cases, fired, considering the outrageously high bad debts accumulated by the bank. What were these loans drawn against? I’m sure our defaulter friends have assets to cover the same. If not, they should be black-listed using credit-rating systems available to all major financial and lending services institutions nation-wide. (crap, just read that they have no credit-approval systems in place)

    At the same time, keeping in mind the afore-mentioned codes of banking practice, I believe these “harassed” customers would be able to seek legal recourse in many parts of the world – would you happen to know if that’s the case in India?

    Comment by cow tse tung — December 14, 2005 @ 6:32 pm

  8. The issue of NPAs (Non Performing Assets) is not as simple. NPAs are caused due to various reasons. Many can be genuine too.

    Repayment of loans depends on two things
    (1) Ability to pay
    (2) Willingness to pay

    Like in the Mid-1990s, post liberalization in India, several Indian small businesses died out. Consequently, the banks that had lent to these businesses had to face high NPAs. ‘Farm credit’ still does not get the kind of importance it should get. Farmers in India heavily depend upon the rainfall, in turn their lenders have to bare the risk.

    The nexus between promoters of companies and the bank officials is also evident. Even if a project is not bankable (lendable) the loan officers could somehow pass it through for self-interests. Also political pressure can also play a huge role in disbursement of funds. Many of the Cooperative banks have been abused by the interference of politicians.

    Banks also resort to evergreening of loans i.e. reissue an existing loan as a fresh loan, in order to show lower NPAs on paper.

    We need a more transparent system. A credit score should be ascertained for borrowers. For this banks need to collaborate and share information on borrowers. Also measures should be taken to make loan officers more accountable to the lending they approve.

    Even banks have gone to extremes to recover money. Some send goons, or call up and abuse over the phone. Recently (Feb 2007) a branch of ICICI Bank in Southern India was shut down. Incidentally, the branch had a defaulter who had not repaid 4 installments of Rs.1000. Allegedly, the goons sent by one of the agencies attacked the couple with swords.

    A balance needs to be striked between slackness and harshness.

    Comment by Eli — February 25, 2007 @ 10:26 am

  9. actually, i feel the persons whom we call goons are forced 2 behave like this dat’s what ihave experienced.incidently ,i myself has exp. personal loan cheque was bounced n rec. agent caalled up n i asked him 3 come aftr one week n he behaved very nicely came aftr week ipaid him one ins. as 4 as my exp. is conc. i don’t think there is any type of goons if we behave decenty.

    Comment by munish sharma — October 20, 2007 @ 11:53 am

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