In the Shadows of India’s Loan Boom
Friday, January 11, 2008
Incidents like the one that left Mr. Kumar with 12 stitches in his scalp and a 10-day hospital stay reflect a dark side of India’s economic boom. As consumer lending soars to record levels, India’s banks face mounting criticism and government sanctions for their aggressive loan recovery tactics, which sometimes include using hired thugs. With the economy growing at more than 8.5% a year for the past four years, Indians are taking on home, car and credit-card debt as never before — with borrowing for the first time. Retail loans have almost tripled over the past three years, according to the Reserve Bank of India, or RBI, reaching $124 billion for the fiscal year ended March 31, 2007. Vinod Kumar was sitting in a friend’s car listening to the radio one evening last January when a stranger appeared, yanked him from the vehicle and beat him with an iron bar.
While the 21-year-old college student lay bleeding in the parking lot, the assailant sped off with the tiny silver hatchback. But this was no ordinary mugging: Mr. Kumar’s attacker was a goonda — a thug — working on behalf of one of India’s largest banks.
Incidents like the one that left Mr. Kumar with 12 stitches in his scalp and a 10-day hospital stay reflect a dark side of India’s economic boom. As consumer lending soars to record levels, India’s banks face mounting criticism and government sanctions for their aggressive loan recovery tactics, which sometimes include using hired thugs. With the economy growing at more than 8.5% a year for the past four years, Indians are taking on home, car and credit-card debt as never before — with borrowing for the first time. Retail loans have almost tripled over the past three years, according to the Reserve Bank of India, or RBI, reaching $124 billion for the fiscal year ended March 31, 2007.
The lending has helped drive a surge in consumption. But it has also created new headaches for Indian banks, which have limited experience recovering loans from defaulting borrowers. Traditionally, most Indians have avoided debt. Even now, only 30 million credit cards have been issued nationwide, an exceedingly small number for a country with more than a billion people. As a result, banks haven’t evolved standard procedures for recouping bad debts.
In another recent case, an HDFC Bank manager and two recovery agents were charged with criminal intimidation, extortion and “outraging the modesty” of a woman in Mumbai. The customer claimed to have already paid back the loan, while his wife told the police the agents had “misbehaved” with her. The case has yet to come to trial, and the manager still works for the bank. HDFC declined to comment.
Ruling on Mr. Kumar’s case in November, the Delhi State Consumer Commission fined ICICI Bank, India’s largest privately owned bank by market value, almost $140,000 for what a judge called “the grossest kind of deficiency in service and unfair trade practice.” ICICI Bank has appealed the decision to the Delhi High Court, arguing that the consumer court doesn’t have the authority to impose such a large fine and that the collection agency should be held responsible for the attack, not the bank. It has also fired the collection agency responsible for the attack.
While India’s overall percentage of nonperforming loans is low — about 2.5% of all outstanding loans — the absolute number of bad retail loans is growing with increased lending. ICICI Bank, for example, currently grants about 150,000 small-ticket loans (up to $1,270) each month. So, even a default rate of 2.5% means an additional 3,750 bad loans.
ICICI Bank has been India’s most aggressive bank in the retail market, using the Internet, phone banking and automated teller machines to target the increasingly affluent middle class. As of March 31, 2007, retail loans accounted for 65% of the bank’s total amount of money the bank has lent.
But the change has come at a cost. The bank’s gross nonperforming loans in the retail segment more than doubled during the financial year ended March 31, 2007, rising from $364 million to $790 million, and accounted for almost 74% of all its bad loans by value. And defaults are expected to keep rising, according to a Fitch Ratings Ltd. report on Indian banks released last month.
The report cited rising interest rates as the major factor affecting borrowers ability to repay. “The glorious run of an ever-improving gross NPL ratio that began in the late 1990s (when the ratio was more than 15%, before falling to 2.5% in 2007) may just be over,” the report says.
Loans are typically classified as nonperforming if a customer fails to make payments for 90 days. At that point, banks are supposed to issue legal notices to those in default. But because it can take years to pursue a debtor through India’s turgid legal system, many banks hire outside collection agents.
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