EXPERT VIEW
Debt Recovery
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
recovery by force. The case, as is well-
known by now, involved an important
private sector bank which was slapped
a fine of INR 50 lacs and was directed
to pay compensation of INR 5 lacs by
the State Consumer Commission to
the borrower whose friend was beaten
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 The Indian Banker
International Best Practices
Tanushree Mazumdar
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.
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
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
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
1
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 2008

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 on-
Vol 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
EXPERT VIEW
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 43
 EXPERT VIEW
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.
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 The IndianBanker
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.
. 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.
. Third-party contact (friends,
relatives, neighbours, etc) for debt
collection is permitted only to seek
information on the location of the
debtor.
. 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
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
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
and is in a position to compare the
rates offered by all the banks.
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

Each bank is also expected to
constitute a grievance redressal cell
within itself which can handle all
grievances that may arise from the
borrowers' end. In case a bank is
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
borrowers regarding the procedures
followed for compliance.
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.
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.
References:
Indian Banks' Association, 'Bankers' Fair
Practice Code'
Reserve Bank of India (2006), 'Master
Circular on credit card operations of banks',
July 1, 2006
EXPERT VIEW
'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
www.artslaw.com.au
http://www.creditcollections.co.uk/debt-
recovery-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
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 45