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.

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?

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.

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).