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