| Until the emergence of debt collection business, debt | | | | regulator to pursue collection business in India. The |
| collection in India, was never treated as a specialized | | | | extant guidelines applicable to banking industry are |
| job and was always treated as one of the jobs that | | | | found inadequate as they address only the problem |
| legal departments of the banks and financial | | | | of debtors' harassment and the guidelines do not |
| institutions were required to undertake. A typical legal | | | | regulate the industry as such. The Government is well |
| department of an organization would approach the | | | | aware of the need of having a specialized legal |
| collection job strictly as a legal issue rather than as a | | | | mechanism for recovery of institutional debts which |
| revenue collection measure. Litigation would be the | | | | has become a huge problem for the entire banking |
| only tool used for recoveries and no other tool was | | | | industry. |
| either known or used by the industry. Litigation as a | | | | Every bank is grappling with the non-paying accounts, |
| recovery measure always had its own limitations due | | | | known as Non Performing Accounts (NPA) in the |
| to long and winding court procedures the Indian legal | | | | Indian banking parlance. The problem has taken |
| system is always criticized for. On the other hand, | | | | enormous proportion and threatened the economy. |
| foreign banking firms introduced the concept of | | | | Creation of Debt Recovery Tribunals in the year 1993 |
| specialized debt collection services. Debt collection | | | | was a step in the direction of facilitating fast |
| services became one of the many services that | | | | recoveries by the banks . The intention behind |
| began to be outsourced to specialized agencies. The | | | | creation of such Tribunal was to ensure that banking |
| collection business had a very humble beginning and it | | | | industry was provided with its own recovery |
| barely qualified as a specialized service. | | | | mechanism that was part of the legal system but at |
| However over a period of time with the emergence | | | | the same time exclusive to the banking industry. |
| of India as a global outsourcing destination the | | | | Bank debts above USD 22,727 could be recovered |
| domestic businesses also adopted the outsourcing as | | | | through the Tribunals. |
| an efficient business tool. With the result today, the | | | | However, over a period of time it was realized that |
| third-party debt collection industry plays an important | | | | this new mechanism did not yield the desired result |
| role in the Indian economy. The industry employs | | | | since the recoveries were still slow and due to shear |
| hundreds of thousands of Indians as collection | | | | volume of work, the Tribunal became like any other |
| professionals, who are servicing several industries | | | | court. The whole objective of having a fast track |
| ranging from banks, to telecom service providers to | | | | and efficient recovery mechanism was therefore |
| insurance companies. Typically, only small recoveries | | | | defeated. Bank debts still remained a major problem |
| arising from periodic billing defaults by the customers | | | | to be solved since it affected the entire economy of |
| are outsourced to the collection agencies. Not only | | | | the country. The Government felt the need of |
| the collection business has become a direct source of | | | | having a mechanism that was minimally dependent on |
| employment to thousands but its contribution to the | | | | the courts for effecting recoveries since the legal |
| economy is more pronounced because it helps infuse | | | | system could not be reformed overnight. Therefore |
| money back in the economy that otherwise would | | | | instead of reforming the court procedure the |
| have remained uncollected. The economic benefits of | | | | government did some clever thinking and came up |
| third-party debt collection are significant. Citibank is | | | | with a legislation that minimized the intervention of |
| the pioneer in introducing third party collection | | | | court and empowered the banks with special powers |
| techniques in India. | | | | using which the recoveries could be affected. |
| The debt collection industry in India also has grown | | | | The government thus came up with a new law |
| sharply this year as higher borrowing costs; rising | | | | Scrutinization and Reconstruction of Financial Assets |
| inflation and the general slowdown in the economy | | | | and Enforcement of Security Interest Act, 2002 |
| force more companies and individuals into difficulties. | | | | (SARFAESI Act) where under the banks are allowed |
| Underlying debt has gone through the roof and | | | | to liquidate security given by the borrower for |
| lenders and organizations increasingly want to move | | | | recovery of their dues. This law also paved the way |
| any bad debt off their books. Whether it is a high | | | | for creation of asset reconstruction companies that |
| street bank, a credit card lender or a mobile phone | | | | take over the security interest of the debtors. These |
| company, growing numbers are turning to | | | | agencies are thus another form of debt collection |
| professional debt collectors in a more difficult | | | | agencies that have been institutionalized. |
| environment. | | | | The need to share credit information among the |
| The debt collection industry in India is growing at a | | | | banking industry was also felt in order for the |
| faster pace and is surely poised for growth. The | | | | industry to benefit from each other. Thus Credit |
| credit card outstanding have shot up by a whopping | | | | Information Companies (Regulation) Act was enacted |
| 87% at USD 6114 Million during this year, from USD | | | | in the year 2005. |
| 2844 Million in the period year ago. The Reserve Bank | | | | INDIAN LEGAL SYSTEM AND COLLECTION |
| of India (RBI) which regulates the banking industry in | | | | PROCESSES |
| the country encourages banks to shift bad loans off | | | | The Indian legal system is absolutely fair and assures |
| their books more quickly because they will be | | | | justice to the party involved. There are remedies |
| required to hold more capital against risky assets that | | | | available under the law to collect the debt, if the |
| may default. | | | | debtor does not agree to pay under normal |
| COLLECTION INDUSTRY - UNREGULATED | | | | circumstances. The creditor may file a suit for his |
| SCENARIO | | | | recovery. Debts based on written contracts could be |
| The collection business has its own inherent | | | | recovered by following fast track procedure. If the |
| shortcomings due to unregulated and primitive nature | | | | debtor is a company, creditor / his lawyers may |
| of this business in this country. The persons | | | | apply in the 'Company Court' for winding up of the |
| employed in the industry are untrained both in soft | | | | company due to non-payment of substantial amount |
| skills and legal skills. Being unregulated, the procedures | | | | of debt. Summary trial is another way. The process |
| are not standardized and there are no industry | | | | may take time-1 to 2 years. Evidences are recorded |
| specific checks and balances. Still litigation is used as | | | | appropriately and produced in the court of law, |
| the last resort tool for recoveries. However the | | | | whenever required. There is also the arrangement of |
| industry has been accused of manipulating the legal | | | | appeal to be filed at later stage. |
| system to their advantage by using courts as their | | | | US OUTSOURCING SCENARIO |
| agents of recovery. It is seen that big corporations | | | | India has attracted many technology jobs in recent |
| with large volumes of recoveries have unwritten | | | | years from Western nations, particularly the United |
| understanding with the local courts at the lowest | | | | States. Now, it is on its way to becoming a hub in |
| level. With the patronage of minuscule minority of | | | | another offshore outsourcing area - debt collection. |
| pliable judges simple civil defaults are registered as | | | | According to the industry report, units of General |
| criminal cases thus pressurizing the debtors into | | | | Electric, Citigroup, HSBC Holdings and American |
| paying the dues. Slow and long civil recovery court | | | | Express have used their India-based staff to pursue |
| process has no takers in this age of instant results | | | | credit card debt and mortgage payment by calling |
| where revenue targets are the most sacrosanct. | | | | defaulters. |
| Under such strict and cut throat environment, there | | | | US debt collection agencies are the newest to start |
| is pressure on the banks to keep their account | | | | outsourcing their work to India and are satisfied with |
| books healthy therefore such aggressive and | | | | the results produced by the polite but persistent |
| extra-legal methods are employed for quick | | | | Indian experts. After insurance claims and credit card |
| recoveries. | | | | sales, debt collection is a growing business for |
| GOVERNMENT / RBI INTERVENTION | | | | outsourcing companies at a time of downturn in the |
| Debt collectors in the past had a lot of leeway and it | | | | US economy when consumers struggle to pay for |
| wasn't uncommon for collectors to embarrass, harass | | | | their purchases. |
| or humiliate debtors by adopting extra-legal measures. | | | | Debt collection is a vital and growing component of |
| In the absence of any regulatory regime the courts | | | | US economy. There is more than $2.5 trillion in |
| had to step in by laying down guidelines for the | | | | outstanding consumer debt. As a result, the |
| industry to follow. After the intervention of judiciary, | | | | third-party collection industry makes more than one |
| the RBI woke up to the need of regulating the unruly | | | | billion contacts with consumers each year. Recently |
| collection agencies and laid down its own guidelines | | | | this year, more than $39.3 billion in debt was returned |
| for the banking industry to follow. | | | | to creditors. |
| The guidelines prescribed by RBI are enforced against | | | | Indians have the advantage of lower salaries and |
| the banks that have contractually employed collection | | | | other expenses, which cut drastically costs of |
| agencies. The banks in turn via their contracts with | | | | collecting debts. Debt collectors in India cost as little |
| the collection agencies ensure that the RBI guidelines | | | | as one-quarter the price of their US and European |
| are followed. Now, under the RBI guidelines it is illegal | | | | counterparts and are often better at the job. Many |
| to threaten violence or cause harm to debtor, use | | | | such Indian firms run 24-hour services. Indian |
| obscene language, or repeatedly use the phone to | | | | debt-collection companies comply with strict |
| harass debtors. In addition, collection agents cannot | | | | regulations on operations in the American and / or |
| seize or garnish a consumer's property or wages | | | | European markets. |
| without recourse to court procedure. | | | | SUMMARY |
| The following are few of the core underpinnings of | | | | India has a long way to go in establishing a mature |
| the collection process. These are the norms | | | | collection services industry. The collection business |
| formalized by the top bank in India - RBI. | | | | needs to be regulated and empowered with legal |
| 1. DSAs/DMAs/Recovery agents to get minimum 100 | | | | powers to become an effective tool. Already, there |
| hours of training. | | | | is a realization in the country that court dependant |
| 2. Recovery agents should call borrowers only from | | | | recovery is an inefficient way of way of debt |
| telephone numbers notified to the borrower. | | | | collection. Creation of Assets Reconstruction and |
| 3. Each bank should have a mechanism whereby | | | | Securitization Companies under the SARFARESI Act |
| borrowers' grievances with regard to the recovery | | | | is a step in the right direction of recognizing debt |
| process can be addressed. | | | | collection as an independent and specialized business |
| 4. Banks are advised to ensure that contracts with | | | | function. While some progress is made for the bank |
| recovery agents do notinduce adoption of uncivilized, | | | | debts but still for a large volume of unrealized non |
| unlawful and questionable behavior or recovery | | | | bank debt there are no professionally managed and |
| process. | | | | regulated third party collection service providers. Non |
| 5. Banks are required to strictly abide by the codes | | | | bank debts are largely unsecured that makes it even |
| pertaining to collection of dues. | | | | more difficult to realize. No big corporations and |
| RBI in the draft guidelines issued for banks engaging | | | | business houses are interested in acting as collection |
| recovery agents, has asked banks to inform | | | | agents without there being an attraction of valuable |
| borrowers the details of recovery agents engaged | | | | security asset. Lawyers can fill this gap by providing |
| for the purpose while forwarding default cases to | | | | collection services for non bank debts. Indian law |
| the recovery agents. | | | | does not permit contingency fee that makes the |
| The Reserve Bank of India has also considered | | | | business less lucrative. India is therefore ready to |
| imposing a temporary ban (or even a permanent ban | | | | benefit from foreign experience, expertise and ideas |
| in case of persistent abusive practices) for engaging | | | | to create an efficient debt collection industry of its |
| recovery agents on those banks where penalties | | | | own at par with global status. This need is more felt |
| have been imposed by a High Court/Supreme Court | | | | now by India due to its global ambitions wherein India |
| or against its directors/officers with regard to the | | | | must adopt globally recognized practices and models. |
| abusive practices followed by their recovery agents. | | | | Transnational businesses need a uniform operating |
| An operational circular in this regard has been issued | | | | system for seamless transactions. Efficient debt |
| in November 15, 2007. | | | | collection industry will only instill confidence in |
| Other Laws | | | | companies doing business with Indian companies. |
| Still the non banking debts collection business is | | | | Collection professionals have this challenge facing |
| outside the purview of any regulator. There are no | | | | them of creating an efficient system that reduces |
| licenses or registrations to be obtained from any | | | | people's dependence on court supported recoveries. |