Late Extra: Is public humiliation of loan defaulters ethical?

The new millennium has ushered in a new phase adopted by some banks in India to recover outstanding loans. There have been reports from various parts of the country of some creditors, ranging from banks to non-banking financial institutions, using 'strong arm' methods to recover bad debts.

The latter has been debated in the media and the general consensus was that the adoption of such methods might lead to criminals jumping on to the bandwagon and launching a parallel extortion racket. The result is that the big banks, which are claimed to have given the nod to the use of strong-arm methods, have now stopped the practice.

The latest media report which created a stir is on one of the leading public sector banks whose officers have taken to the streets and then stage a sit-in at the defaulter's house or business premises. The report from Gorakhpur, one of the larger towns of the Indian state of Uttar Pradesh, claims that the bank officials led by their assistant general manager have reported sensational success.

The defaulters, it is claimed, "begged for mercy" and some even promptly paid up to avoid further public humiliation. Emboldened by the success, this particular bank now proposes to stage this "innovative method" in other towns and cities of the state.

Pressure

It is a fact that banks, particularly the Indian 'nationalised banks' as the public sector banks are classified in this country, have huge bad debts on their books. This section of the Indian banking is under pressure from the government to launch recovery drives and eradicate the bad debt column from their books.

Officials of the nationalised banks claim that they have tried to recover 'bad debts' through conventional methods including recourse to legal action. However, they claim that by and large they have failed. Legal action normally comes under the jurisdiction of the civil courts and because the legal system is overburdened, cases filed by the banks stretch over a number of years if not a couple of decades.

Taking action with the authorisation granted under the newly-introduced Securitisation Act of 2003 is another avenue. However, recourse to action under this is limited to loans extended with tangible assets tendered as collateral. In instances when the so-called tangible asset is immovable property like a dwelling or factory, the Securitisation Act does come in handy.

Tedious

But bankers point out that the actual recovery of funds through this method is a tedious and lengthy process.

Firstly, the attached property has to be sold in the case of a dwelling. Where industrial units are concerned bank officials claim the process is more intricate.

Such units usually owe money not just to the bank but also to a number of other creditors such as firms, which supplied the raw material. Thus, the actual eventual recovery of funds by the bank itself may not be enough to match the sum lent.

Officials of the bank that has adopted the public picketing method claim that it is, to date, the most cost-effective, time-saving way of recovering outstanding debt. The question now being debated by other banks is whether this method is ethical.

This bank's officials have been told they have to perform or perish. It is not that easy to sack an officer of a public sector bank in India but it seems the officials face interdepartmental action if they do not act. So, for them, the ethics of public humiliation of debtors is certainly debatable but they have to act or face the consequences.

Arun Solomon is an India-based journalist