Debt Recovery

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Debt Recovery International Best Practices Tanushree Mazumdar

Ever since a couple of banks were hauled by the Reserve Bank of India (RBI) for using strong-arm tactics in recovering debts due from borrowers, the issue of debt recovery (the processes involved and the role of the debt recovery agents) has engaged the minds of the media, the policy makers and the public in general. The policy makers have cautioned banks who have been guilty of using strong-arm tactics to refrain from doing so. The minister of state for finance is also reported to have warned banks of a ban (temporary or permanent) if they continued with such aberrant behaviour. Let us examine the case that provoked the minister to make such a statement to understand the situation of loan

had bounced; he paid those instalments in cash. The bank did not bother to return the bounced cheques to him.

. Subsequendy,he failed to pay 4 monthly instalments. . The bank did not send him a notice or at least he did not receiveany notice from the bank. . The bank sent a few recovery agents who, in a case of mistaken identity, beat up the borrower's friend till he bled severely and forcibly took possession of the car (for which the finance was taken) and deposited it in the bank's garage.

recovery by force. The case, as is wellknown by now, involved an important private sector bank which was slapped a fine of INR 50 lacs and was directed

In this case there are clearly, at least, three parties involved: the borrower, the bank and the agency for recovery functions. The case can be looked at

to pay compensation of INR 5 lacs by the State Consumer Commission to the borrower whose friend was beaten

from each of their point of view in two ways: as an aggrieved party and as a responsible party. The borrower as an aggrieved party in the above case is not difficult to understand. However, it was also the borrower's

up with rods by the recovery agents of the bank. The other facts of the case are as follows: . The borrower had taken a loan (in 2005) for buying a car and was paying his monthly instalments regularly.

. Three of his post-dated cheques 42

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responsibility to keep his bank informed about his difficulty in paying the instalments especially since he seems to have no mala-fide intention and may have faced genuine difficulty in repaying the instalment. That would have been responsible borrower

behaviour. The bank as an aggrieved party is also easy to understand. It is their right to recover their money especially since they work on leveraged funds. But as a responsible bank it should have made more efforts to engage the customer by trying to get in touch with him through the telephone or by sending one of its officers to the customer to convey to him the urgency of recovering the money. But since it is not possible for a bank to depute its own staff for recovery (especially of smaller amounts), it was well within its rights to employ a recovery agency. However, due-diligence in the selection of the agency as well as proper communication to the recovery agents regarding the process of recovery was the responsibility of the bank. Though it might seem that the recovery agents are the guilty party only, they could also be looked at as an aggrieved party. It is unlikely that the bank would remunerate them if they did not recover the dues. So for them, recovering the dues was their raison d'etre. In addition, they were presumably not properly briefed about the code of conduct to be followed in recovering the money. Or rather they didn't understand the implications of not adhering to the guidelines. Therefore, in a way, they too are an aggrieved party. Their responsibility was to ensure that they behaved Vol II! No.2 - February

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politely and in a manner befitting the civil society. A sensitisation programme on debt recovery has to take into account the interests and responsibilities of all the stake holders. The RBI is making it mandatory for all recovery agents to undergo a certification/training programme before they can be deployed for the purpose of debt recovery. What would be the inputs in such a programme? And how is such a programme delivered? Are there any examples around the world? What are the international best practices with respect to debt recovery? This article explores some of the recorded best practices in debt recovery in the world so that some lessons may be drawn from them for India.

Debt recovery In UK Debt recovery in UK is fairly institutionalised and there is a Credit Services Association (CSA), an association of debt recovery agents which acts as a self-regulatory organisation (SRO) and aims at professionalising the business of debt recovery. Debt collection in UK is divided into number of sections viz consumer debt collection, commercial debt collection, international debt collection, legal collection and tracing missing debtors. There is a set of eligibility norms laid down for a person to be hired as a debt collection agent. There is no minimum requirement of educational qualifications though basic literacy, numeracy and computing skills are laid down as part of personal characteristics sought in a recovery agent. Other soft skills that are laid down as desirable for persons hoping to make a career out of debt recovery are good negotiation skills, good skills of judgement, knowledge of court procedures, etc. Agents, once recruited, are put through a training process, the initial training being onVol III No.2. February 2008

the-job with the agency. Thereafter the agency may put the agents through training via seminars and courses. However, there is no certification requirement for the debt recovery agents in UK though any credit collection or debt recovery agency must obtain a Consumer Credit License from the Office of Fair Trading (OFT) which is a government department. Obtaining a license does not certify the agency as being fit and proper for debt collection. It is merely an act of registration meant more for the purpose of keeping records. There are around 400 credit collection agencies which are registered in UK. The process of debt recovery in UK begins with reminder letters sent to the debtor. If the debtor fails to respond to the letters, telephone calls are made to try and arrange for recovery or design a payment plan. There is also a specific, usually weekly collection for small debts/debtors. Debt recovery agents usually go to the doorsteps of these debtors and collect the small amounts due to the bank/ fmancial institution. This is the last resort to which the agents take recourse to when all other means to recover have failed.

Debt recovery In Australia In Australia the Australian Competition and Consumer Commission (ACCC) is an independent statutory authority set up to enforce the Trade Practices Act. The ACCC is concerned with upholding of the consumer rights. Being treated fairly as per the law is one of the rights available to the consumers under debt collection. The ACCC is responsible for overseeing that these rights of the consumer are upheld. One of its mandates is to prevent 'unconscionable conduct' which can often happen with debt recovery. The ACCC aims to educate

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consumers about their rights with respect to debt collection and also makes them aware about the debt collection practices to be followed by the debt collection agencies. The procedures for debt collection are clearly laid down to the last detail. For example, the Commission lays down rules for contact such as the number of phone calls that can be made to a customer per week (three phone calls or ten letters), the hours for personal contact, etc. It also encourages responsible borrowing by educating debtors about their obligations to honour their debts and timely repayment. It also encourages debtors to engage their creditors in case of genuine problems of repayment that may arise owing to circumstances beyond the control of the debtor. The Commission also encourages debtors to seek counselling from the community financial counselling centres that have been set up by the Australian federal or state governments in various states and territories. Such counselling is available free of cost to the citizens. Debt collection is an important business in Australia with some of the debt collection companies even being listed on the Australian stock exchange. The procedure followed is similar to what is followed in UK. If the loan is overdue, attempts are made to contact the debtor over the phone. This is followed by a 'letter of demand' which clearly states the amount owed to the creditor and demands payment and even chalks out a payment schedule. The other important characteristic of a demand letter is that it carries a threat of action in case the overdue amount is not received as per the date stated in the letter. The letter of demand serves another purpose, as a document that can be produced in the court as written evidence of the creditor's claim on the debt and attempts to settle the claim. As with the process of debt The Indian Banker

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collection, the dos and don'ts for a letter of demand are also clearly spelt out both for the debt collection agency as well as the debtor. A debt collection agency is told to refrain from harassing the debtor as well as making the letter of demand seem like a legal document as it is not a legal document. The debtor is advised not to ignore the letter of demand and also seek legal advice from the financial counselling centres (mentioned above) in case of a disputed claim.

rights of the consumer not to be harassed, deceived or be invaded in their privacy, among other things. The procedure for debt recovery is well laid out and includes the following: . The debt collectors have to send a written notice to consumers that includes details such as the amount of debt owed, the name of the creditor to whom the debt is owed and a statement that if within 30 days of receiving the notice the consumer disputes the debt in writing, the collector will obtain verification of the debt and mail it to the consumer.

There is no minimum education qualification prescribed by collection agencies to hire debt collectors. Only personal characteristics like good communication skills, negotiation abilities, etc are mentioned. Training to the agents/collectors is provided by the debt collection agencies on recruitment. Debt recovery In USA Debt recovery, especially fair practices in debt recovery, is covered in USA under the Fair Debt Collection Practices Act (FDCPA). The Federal Trade Commission is the main body responsible for overseeing the enforcement of the Act. With respect to banks there are two agencies that are responsible for overseeing the enforcement of the Act: the Office of the Comptroller of Currency (OCC) which enforces compliances with respect to national banks and the Federal Reserve Board (FRB) which enforces compliance with the FDCPA with respect to other banks in the Federal Reserve System, other than the national banks. The FDCPA prohibits 'abusive, deceptive, and otherwise improper collection practices'. However, it permits 'reasonable collection efforts' to ensure repayment of legitimate debts. The Act is an attempt to finely balance the rights of the debt collector to recover legitimate debts with the 44

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. Debt collectors are also prohibited from calling at the consumer's place of work if the collectors know that an employer disallows such calls at the place of employment.

through reviews of any written collection procedures, reciprocal collection agreements, validation notices, etc. The main objectives of the examination are to determine if the institution is a debt collector under FDCPA and whether the institution has established internal procedures and controls to ensure compliance with the FDCPA.

Indian practice compared to International best practices In India fair practices covers not only debt recovery but also loan sanction. The procedure for loan sanction is laid down for all loans and the procedure specifies that it should include information about processing fees payable (including what portion will.be refunded if the loan is not sanctioned), prepayment options and any other matter that affects the interest of the

. Third-party contact (friends, relatives, neighbours, etc) for debt collection is permitted only to seek information on the location of the debtor.

borrower. Banks are also required to give reasons to the applicant as to why the loan has been rejected. The intent of the rules is to ensure that a borrower makes an informed decision

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and is in a position to compare the rates offered by all the banks.

Use of false and misleading threats of the consequences is prohibited by the Act. However, a threat to cause a consumer's arrest is considered to be a violation of the Act only if the collector does not have the legal authority or intent to accomplish the promised result.

Various agencies have been entrusted with the task of enforcement of compliance under FDCPA in USA. As mentioned above, the OCC and FRB are the enforcement agencies for compliance with FDCPA with respect to banks. FRB ensures compliance through regular compliance examination. The examination is conducted through interviews of banks' personnel who are directly engaged in the debt collection activities of the bank. It can also be

With respect to recovery there are guidelines provided by the RBI as well as Indian Banks' Association's (IBA) Fair Practices Code for recovery which the banks are expected to adhere to. Among other things, IBA's Fair Practices Code mentions that in case of appointment of third-party agencies for collection of dues the agencies must ensure that they do not indulge in acts, including harassment or intimidation that would affect the reputation and integrity of the bank/non-bank finance company that they are representing. The code also specifies that all letters issued by recovery agents must contain the name and address of a responsible senior officer of the card/loan issuing bank whom the customer can contact. Valli! No.2 - February 2008

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Each bank is also expected to constitute a grievance redressal cell within itself which can handle all

borrowers regarding the procedures followed for compliance.

grievances that may arise from the borrowers' end. In case a bank is

Inadequate public information could be another area of improvement with regard to debt recovery. A massive campaign to educate borrowers on not only their rights but also obligations needs to be carried out. This would go a long way in preventing delinquent accounts in the future.

unable to satisfactorily resolve a complaint the borrower is given the option of approaching the Banking Ombudsman, constituted by the RBI. Each bank is expected to put up a Fair Practices Code derived from RBI's guidelines and IBA's Fair Practices Code on its website. The bank is also expected to put up details of its grievance cell on its website as well as give enough publicity to the same through various media. When one compares the debt recovery practices in India with those in select countries abroad one finds that the guidelines laid down are almost the same. It recognises the borrowers' right not to be harassed or intimidated by debt recovery agents. The practices for debt recovery are also codified like it is done internationally. What we lack of are powerful institutions like the ACCC in Australia or an umbrella body like the Federal Trade Commission in USA which is responsible for ensuring compliance with the FDCPA. While we do have the Banking Ombudsman, its role is limited to addressing grievances. There is also no information available in the public domain on the process of compliance. For example, what is the procedure followed for compliance? What are the steps involved? How many phone calls are allowed per week? How often do the banks have to report to RBI on whether they are following the Fair Practices Code and how is such compliance recorded? Is there any penalty levied on banks/recovery agents that do not comply? There is scope for such details to be finely and firmly codified which leaves no ambiguity in the minds of the debt recovery agents as well as the Vol II! No.2 - February 2008

'Fact Sheet' (1-3), Credit Services Association, United Kingdom Reserve Bank of India (2007), 'Guidelines on Fair Practices Code for Bankers', March 6, 2007

'The Banking Code', British Bankers' Association, March 2005

'Consumer Compliance Handbook', Federal Reserve System, USA

So far our society has not been perceived to be a debt-happy society but changes are visible in the horizon as finance becomes easily available and the society becomes less cautious about borrowing to spend. It would be in the interest of all concerned, banks as well as borrowers, if prudent borrowing habits are publicised starting from now. So far there has been no requirement of certification for recovery agents working for banks in India. However, recently RBI has directed IBA to develop, in consultation with the Indian Institute of Banking & Finance (IIBF), a certificate course for recovery agents which will be made mandatory for all recovery agents hired by banks for the purpose of debt recovery. This would serve two purposes: ensure certain minimum criteria among those desiring to be hired as recovery agents (literacy, numeracy, etc) and would also create complete awareness about the process of debt recovery and the laws governing the same. A certified recovery agent also might have greater chances of recovering loans from wilful defaulters because the fear of law might be instilled in them.

www.artslaw.com.au

http://www.creditcollections.co.uk/debtrecovery-agents.htm

http://www.payontime.co.uk/

http://www. ftc.gov/os/statutes/fdcpa/senate 99.shtm

http://www.naclc.org.au/ http://www.collectionhouse.com.au/

http://www.expressindia.com/

About the Author Tanushree Mazumdar has been working with the Indian Institute of Banking & Finance as Deputy Director of Academic Affairs for more than 2 years. She has about 8 years of work experience and has done her Ph D in Economics from the Indian Institute of Technology,Bombay and MA in Economics from the Gokhale Institute of Politics and Economics, Pune. Her

References:

Indian Banks' Association, 'Bankers' Fair Practice Code'

Reserve Bank of India (2006), 'Master Circular on credit card operations of banks', July 1, 2006

areas of interest in academics are open economy macroeconomics, international economics, microfinance, banking and central banking. She has published in various journals, made presentations in seminars/conferences and has experience in teaching, training and research. The Indian Banker

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