The old saying “Don’t do the crime if you can’t do the time” crossed my mind when I recently read this article in which loan defaulters protest against the aggressive procedures adopted by banks to recover their loans.
The typical refrain of almost every defaulter profiled in this article is “I couldn’t keep up with my repayments after losing my job. Since I’ve already informed my bank about this, it should put a stop to its constant follow up.”
Nice try, Charlie. That’s not how loans work.
When the borrower took a loan, he or she signed a contract with the bank to adhere to a certain repayment schedule. While doing so, they might have assumed total stability in their career, even continuous growth, but that’s not the bank’s problem.
Any default in repayments is a breach of contract and the bank has every right to take steps to collect. While borrowers can seek extra time to pay back their loans in view of the exigent circumstances, it’s up to banks to accept or reject their requests. Defaulters have no right to demand that banks must accede to their requests.
The article is right in urging banks to seek legal recourse in the event of a default. However, as anyone who has filed a lawsuit to recover their payments in India can tell you, the courts have a huge backlog of cases. Under the situation, banks can’t be blamed for resorting to some supplementary action to expedite recovery and keep their delinquent outstandings under control.
Citing the US Fair Debt Collection Practices Act (FDCPA), the article suggests a similar law to regulate the banking industry’s collection activities.
This is very naïve and displays total ignorance of how the American judicial system works: Once a court sets a date for a hearing, the defendant (borrower and loan defaulter) must attend it. Failure to do so inevitably leads to a suo moto award of the case in favor of the plaintiff (creditor aka bank).
Unfortunately, there’s no similar provision in the Indian judicial system. No-shows by defendants result in endless postponements of hearings, which is a major reason why court dockets keep mounting in India.
Just as banks must follow the law about when to call, whom to call and how to talk while seeking recovery of their overdue loans, borrowers must be equally circumspect about the amount, tenor and repayment schedule of the loans they take. Irresponsible loans set the stage for defaults when borrowers go through adverse life events such as a job loss. Besides, they cause hardship for everyone by creating bubbles in shares, gold, real estate and other assets.
As long as friends and family members stand guarantee for a loan, banks are totally right in following up with them when the loan goes bad, especially when banks are unable to reach the defaulter in question.
Let banks chase their defaulters aggressively and recover their dues. That’s any day better than going soft on them and then pleading for a public, taxpayer-funded bailout when their existence is threatened by skyrocketing Non Productive Assets.
India escaped that fate during the Great Financial Crisis but, as banks keep reminding us all the time, past performance is no guarantee of future results.
UPDATE DATED 23 JULY 2020:
It’s seven years since the above post was published. We’re in the middle of coronavirus pandemic outbreak. RBI has permitted banks to grant moratoriums on their loans. It’s up to banks whether to do so or not. Once again, defaulters are up in arms and seeking waivers of interest and EMIs. Consumer behavior never seems to change!
UPDATE DATED 9 JULY 2022:
But there’s one silver lining: the term “ex parte”. Going by personal experience, when you sue someone and they don’t appear before the court, in the past, courts tend to adjourn the hearing to a next date. (This is one main reason for the so-called “thareek pe thareek” malaise in the Indian judicial system.) Whereas, in this case, the court has given an “ex parte” verdict. That’s a step in the right direction.
Also from personal experience, in USA, Germany, etc., ex-parte verdicts are SOP. On top of that, if court awards damages and defendant does not pay them up by the court-mandated deadline, courts garnish the defendant’s bank account. I hope courts in India have / acquire that enforcement power in the forseeable future. That will be the real “closing the loop” moment for lawsuits like this.
On a side note, ex-parte will be a big help for banks and NBFCs to recover outstandings from delinquent borrowers. In the past, when lenders sued them, many borrowers get away by not appearing for the court hearing.