Strong-arm tactics, no answer to loan default

Many digital apps adopt the “first trap and then embarrass strategy” to entice borrowers with easy loans on usurious interest rates.

Some of these transactions are camouflaged as purchases. What then follows is a virtual blackmailing of the borrower with threat of misusing the data mined from his cell phone. Clearly these apps are also used as eavesdropping softwares.

The RBI is able to regulate only those fintechs who partner with banks or NBFCs. Others are going scot free. But the recent suicide by a victim of the “name and shame” strategy of these digital demons has made the RBI sit up and take notice.

But merely exhorting the victims to lodge complaint with it is not enough. The RBI must crack the whip by framing foolproof regulations.

The RBI has done better in cracking down on the strong arm tactics adopted by banks and NBFCs. Hit them where it hurts. Penalties should hit the perpetrators of foul and inhumane recovery practices. The RBI has done well to slap a hefty and deterrent penalty of ₹2.5 crore on January 5 on Bajaj Finance for violating the Fair Practices Code (FPC).

These agents have had an unsavoury record of adopting strong-arm tactics which provoked the Supreme Court Bench to describe them as musclemen of banks and NBFCs. Car-owners were accosted at traffic signals by the recovery agents, ejected from their vehicles for failure to pay EMIs.

Similar practices led to the framing of the FPC, which alas has not brought about much good behaviour on lenders’ part as a recent case with an NBFC shows. Obviously banks and NBFCs are trying to take shelter behind the specious and self-serving plea that they cannot be made accountable for the actions of their recovery agents which clearly flies in the face of the law on principal’s liability for action and inaction of his agent.

The lenders and their rough behaviour with borrowers was explained away by Mukul Rohatgi representing ICICI Bank before the Supreme Court in 2007 as being necessary and inevitable as borrowers were not in honouring their commitments.

The logic of this argument was that to counter the “misbehaviour” of the borrowers, the lenders too had to behave in a similar manner. Neither the RBI nor the Supreme Court was amused by such an “eye for an eye” argument.

NPAs have been the bane of lending business in the country, but the solution does not lie in retribution or violence in recovery. Hefty penal charges/interest can be prescribed for non-payment of instalments. Credible guarantees can be taken and not waived in the desire to complete the business of lending quickly. Lend in haste repent in leisure seems to be the bane of our financial institutions and banks. The real reason behind NPAs is poor loan appraisal. Gold loans have bucked this trend because of the solid security pledged. Pledging is vastly different from hypothecation. Gold loans work better for lenders because gold is physically parted with by the borrowers and kept in lenders’ lockers whereas a car loan is an example of hypothecation — the physical security remains with the borrower.

The Insolvency and Bankruptcy Code (IBC) was effective in curbing the excesses of defaulting promoters. The IBC ousted such promoters from their complacent and smug perch till Covid-19 gave them a temporary reprieve. The point is for financial defaults the counter should be financial and not thuggery.

The writer is a Chennai-based chartered accountant

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