RIYADH, 12 November 2007 — These are tough times for those heading the loan recovery sections in the Indian banks. Indian courts have told banks and loan recovery agents not to force people or be harsh on them while recovering the loans from them. Rather the banks have been advised to be “more humane.”
As a consequence, one of India’s largest private sector banks recently undertook an unprecedented step of hugely compensating the family members of one of its borrowers who committed suicide in the commercial city of Bombay. The head of the family had borrowed money from the bank but was not confident of meeting the conditions or repaying the loan. He felt humiliated and harassed over repeated reminders from the bank. Concerned about the possible backlash and bad publicity, the bank not only coughed up a big amount as compensation but also provided health insurance coverage to the family members as a goodwill gesture. Unfortunately, such compassionate steps do not solve the problems of loan recovery in India’s huge market. Rather it has complicated the situation by giving rise to the organized activism against recovery of overdue loans.
It is estimated that Indian banks and financial companies have an outstanding loan of about SR120 billion given to the subprime borrowers. What scares the lenders most is emergence of organized platforms which are openly calling defaulters to get in touch with them for help if any borrower feels harassed by banks or non-banking financial companies (NBFCs). These institutes need to recover the overdue loans, especially in housing sector as people over the past few years have been borrowing such loan — in some cases mindlessly without assessing their repaying capacity — to have their own houses and apartments.
The banks are authorized to take various steps and this includes detaching the property itself in cases of perennial defaulters. One of the apartment holders in small city of Kolhapur in the western state of Maharashtra learned this recently when his property was confiscated by his bank and put on open auction. But now the banks seem concerned and afraid of talking such drastic measures.
There is likelihood of more activism and platforms against forcible recovery of loans emerging with the support of politicians and social activists. With one bank already giving in, one wonders whether this sets the trend that makes banks more lenient and humane when it comes to recovering the loans. Writing off loans, surely would result in crisis of unimagined proportions despite the fact that Indian banks are teeming with cash, thanks to the surging economy.
As the US housing market crumbles, homeowners are worried about mortgage payments and sellers are worried about slumping prices — but the companies that insure their loans are worrying about their very survival in the face of billions of dollars in claims.
Moreover, several of the United States’ leading banks warned the subprime lending crisis will contribute to another round of losses in the fourth quarter, a sign that fallout from the housing and mortgage-lending slump is spreading deeper into the nation’s credit markets. Wachovia Corp. began Friday by writing down the value of its loan-backed securities by about $1.1 billion (750 million euros), and was followed by Bank of America Corp. and JPMorgan Chase & Co., which both said their fourth-quarter results would suffer — although neither bank quantified any potential mark downs in filings with the Securities and Exchange Commission.
Insurers like industry leader MGIC Investment Corp. are predicting they will not turn a profit for at least a year.
The uncertainty has sent their stocks plunging and raised questions about what happens if so many loans go bad that the insurers behind them go out of business.