Streamlining recovery processes for retail lending to boost financial inclusion

The lending industry takes great pride in disbursing loans in minutes. Can the same apply to recoveries?

By Gaurav Gupta 

Earlier this month, a meeting with microfinance lenders led the Karnataka Government to introduce a law aimed at establishing 'collection protocols'. The meeting focused on lending and collection practices. Although this law doesn't apply to banks and NBFCs, it created a ‘sensation’ on the ground. Borrowers found a pretext to delay payments, and a few collection executives faced complaints and were ‘reported’. In short, it caused further confusion in an already perceived ‘unfriendly’ practice of collections, further emboldening delinquent borrowers.

The Corporate Insolvency Act was a watershed event for corporate lending. It established a ‘time-bound’ recovery process for ‘all’ lenders to corporates, streamlining debt recovery. This resulted in faster and more predictable recoveries, increased accountability among borrowers, and cleaner balance sheets for lenders. Consequently, lenders became more confident and willing to lend to corporates, leading to increased lending and more competitive borrowing costs. In my opinion, this streamlined recovery mechanism is a key factor driving capital investments and will ultimately contribute to higher and more sustained GDP growth in the country.

In recent years, there have been repeated demands from the NBFC industry to extend the Sarfaesi Act provisions to loans above ₹1 lakh (similar to the provisions available to banks and housing finance companies), but this request remains unaddressed.

What retail lending needs is a corporate insolvency-like process: a clear, well-defined process that ensures timely resolution. The Sarfaesi Act, to a large extent, is akin to a corporate insolvency process. The Act lays out a well-prescribed, time-bound process for repossession and recovery in the case of mortgages. Its defined processes ensure transparency and accountability, reducing the need for alternative recovery practices that often lead to customer complaints and disputes. In contrast, the existing arbitration and Debt Recovery Tribunal (DRT) mechanisms are complex, time-consuming, and costly. This sometimes compels lenders to adopt ‘unconventional’ collection practices.

A couple of years ago, a well-known lender was reprimanded for not following appropriate repossession practices. Some banks now avoid repossessing vehicles for fear of customer complaints and regulatory backlash. Would such practices be necessary if the legal framework clearly outlined the obligations of defaulting borrowers, including the peaceful surrender of collateral?

Customers today are far more informed than before. They are aware of the limitations of the current recovery laws. As they understand the importance of customer complaints for a lender, in many instances, customers tend to exploit these gaps. Although this represents a small fraction, around 5%, it disproportionately affects the overall lending environment. The majority, approximately 95%, are well-intentioned borrowers who would benefit from a transparent and predictable system.

Today, the lending industry takes great pride in disbursing loans in minutes (facilitated by advancements in technology). Can the same apply to recoveries? Aligning recovery mechanisms with the speed of disbursement would enable lenders to extend credit more confidently and at lower costs. This would truly promote credit access to underserved segments, bolster micro-enterprises, contribute to GDP growth, and enhance financial inclusion in India.

(Gaurav Gupta, Founder, MD and CEO, Tyger Capital.)

Views are personal, and do not represent the stand of this publication.