An old colleague called me up after reading one of my articles. We spent some time reminiscing about the old times and the people we had worked with before he came to the real reason he had called me. I knew he had lost his job in 2009 and his divorce had also put a lot of pressure on his finances. Although as a finance professional he understood the value of a good credit standing but circumstances had forced him to start defaulting on his car loan and credit cards after his entire savings were wiped out to pre-pay the home loan (his ex-wife got the flat) and to meet his day to day expenses during his unemployed days. He wanted to make a fresh start as he had just managed to get a job offer but his defaults were now beginning to affect his life. He was aware that he would need to repair his credit standing but was not aware of how to go about it. That rang a bell. I have been asked similar questions by a lot of people who either through circumstances (like my friend) or because of lack of financial discipline had defaulted on their financial obligations but were now wanting to make amends but did not know how to.

First a crash course on what happens when you default on your financial obligations. Today every lender is required to share data about the repayment history of their borrowers with at least one credit Information Company (generically known as CIBIL – since Credit Information Company of India Ltd Or CIBIL is the largest and the oldest of the 4 licensed credit information companies). It is a popular misperception that lenders share repayment data only about customers who default on loans. They are required to share data about the repayment of all their borrowers. So anybody who has taken in a loan (and that includes me as well) and is currently servicing it will find “his or her name in CIBIL”. But for most of us this is extremely useful. If I were in the market for a new loan now the banks will be happy to lend to me at good rates simply because they will discover that my existing loan repayments have been bang on time and the level of indebtedness is very reasonable. The issue of course arises if my credit information report shows defaults (current or past).

This credit report has special significance in today’s life (obviously after our school’s report card) as it determines the credit worthiness of any individual. The need for credit is important aspect of modern day life, which one can hardly do without. The day is not far when matrimonial alliances will be based on the credit reports of bride and the groom…so till death do us apart will probably be replaced by …till finances do us apart.

So if you have defaulted on your payments for any reason, your Credit information report will immediately disclose this status to any prospective lender. With a bad credit report it is highly unlikely that you can get any loan or credit card from any bank.

But all is not lost…you can slowly and gradually build your credit history all over again.

Now that you have been reported a defaulter, and you are burdened with debt, then what should you do? The help comes in the form of specialized credit counseling agencies who can assist you in such a situation. The well-known ones are ICICI initiated venture Disha Trust (www.dishafc.org) or Bank of India initiated Abhay Credit Counselling (www. abhaycreditcounselling.com) which assists you in negotiating with your existing lenders and re-structuring your debt, which can be curative and preventive both.

“The customized advise given by Disha Trust is absolutely free irrespective of the bank the customer has a defaulted with and not just ICICI bank,” shared Ms. Nutan Lugani - Counselor of Dish Trust. She adds, “ We hold extensive counseling sessions with the customers then work out an action plan and accordingly make recommendation to the banks. It is not mandatory for the bank to consider them but it is a win win situation for both, the bank and the customers. With restructuring or rescheduling of loans, banks recover their money without incurring costs of litigation etc. and customer gradually comes out of debt.”

So all is not lost. If you are considering obtaining a loan in future with low interest rates, you must have a healthy credit score. “Worrying too much about your bad credit history is not going to help, but doing the right things will certainly help, “ adds Ms. Lugani.

First start with paying off the re-structured debts and start the process of rebuilding your credit history. But remember, rebuilding your credit history is a slow process. It is a misperception that if you could somehow find the money and pay off all the debt now it will give you a clean slate. What the report will show is that you had defaulted in the past but that you cleared everything off at a particular point of time. That coupled with some other steps should help you in slowly rebuilding your credit history. Ms. Lugani says, “ Customers should not be obsessed about CIBIL credit report. They should first think about the loan, which they have to repay, and the need of the hour is how to come out of it, CIBIL report is secondary. Once you regularly start paying your debts in time then with the passage of time your credit history will improve.”

Remember CIBIL keeps your records for 7 years but displays the month-by-month repayment record only for the last 36 months. What it means is that if you start maintaining a clean history after re-structuring or paying off your loans than your credit history will start looking good after 3 years. Of course CIBIL also computes a Credit score (the process is internal to CIBIL) for each individual, which probably is based on the entire 7 years data. However, currently only a few banks use the Credit score so it is your visible data for 3 years that has more relevance.

In the meantime you can also start adopting measures, which enable you to rebuild credit history like taking secured credit cards, which are given against the security of your Fixed Deposits. Your credit limit will probably be raised in future if you have shown good financial behavior. These credit cards may not be your dream cards, but they are often the best option you have since you are unlikely to be eligible for their regular credit cards.

You can also opt for secured personal loans where an asset is required as collateral. It normally involves bigger sums of money, moreover secured personal loans are preferred by the lenders due to the fact that they are secured against your assets such as jewelry, securities such as shares/mutual fund units, bonds, NSC, KVP, Life Insurance policies with high surrender value, etc. All these loans (with the sole exception of Loan against property which is unlikely to be available for somebody who has defaulted in the past) are available irrespective of your credit record.

Ms. Lugani concurs, “Such customers should look at liquidating the existing liabilities by taking loan against some kind of security, whether it is of stocks and shares or gold, or consider borrowing from some rich relative who can give them at a much lower rate. But word of caution here is that check your expenses, do not increase your credit exposure and repay the present loan to salvage the situation immediately.”

You should pay more than the minimum payments each month if you cannot afford to pay off the credit card fully. Loan, whether big or small needs to be serviced and repaid regularly and on time. Service these loans religiously and the new disciplined you will also reflect in your repayment history in CIBIL records. In fact after three years the remanents of your bad history will no longer be visible.

So remember – slow and steady wins the race.

Next week I intend to cover how to get mistakes in your credit report corrected. I invite readers to share their experiences on this issue.

And No, this question is not asked in the political context with our Northeastern borders racked by chronic insurgency and of course the unrest in J & K.

It is not even in the context of a common single market where many foreign direct investors will testify that this is not just a rhetorical question. In fact the early investors in the India story discovered the maze of local taxes, levies and regulations divided India into many small markets (of which some were more profitably serviceable from manufacturing locations located outside India rather than from a location within India). Anyway much water has flown down the Ganges since those early days and the impending implementation of the Goods and Services Tax would perhaps be the culmination of a series of steps that have already been initiated in recent years to forge a common India market.

The question is in the relatively mundane context of Home loans. Recently I spoke to a friend of mine who wanted to a buy a flat in Kolkata while he was working in Mumbai. He wanted to use my expertise on home loan to suggest solutions for a problem that he was facing in getting a loan. He approached a bank in Kolkata who said they would have given him the loan as both the property and his income papers were in order, but they asked him to visit their branch in Mumbai to get a loan as he was working in Mumbai. When we came back to Mumbai after finalizing the property in Kolkata, he approached the branch of the same bank only to be informed to visit a branch in Kolkata as the property is in Kolkata and they need to value the property before giving the loan. This friend of mine had already paid Rs. 51,000 for booking amount and if he was unable to book the flat, the developer would return back only 50% of the booking amount (after negotiations as the developer was not ready to return a penny out of it). Tensed with all these issues, he called up asking me – Is India really one Nation? The property was ready to move in with all title documents and his loan eligibility was coming around to more than Rs. 20 lakhs (he needed only Rs. 14 lakhs).

I decided to do some research on the same as the number of people moving to other cities for work has been increasing significantly and this may be a common problem faced by quite a few of them who either have plans of relocating or to buy a property for their parents in their “home” city. We have also seen an increase in the number of similar queries we receive on Apnapaisa.com.

We did a round of mystery shopping as well as spoke to the major home loan players. Here is what we found. When we spoke to the players officially each of the players said that such loans are no problems as they have a single common system across the country. However the situation on the ground was a little different. From among the lenders we spoke to as mystery shoppers only HDFC and ICICI followed up on our initial call (we had dangled the bait of Rs. 70 lac home loan). Even the official we spoke to in a SBI branch assured us that they would be able to do the transaction subject to their normal credit and operational checks. The other two private sector banks and the one foreign bank that we spoke to (or visited) as mystery customers either told us that they could not do such a deal or did not respond back after taking down the initial details.

We already knew a few DSA’s (who are our clients as advertisers on our site) and we thought of getting this answered from them also. We spoke to a large DSA based out of Mumbai who serviced many banks. His feedback corroborated our own findings on mystery shopping.

Another DSA we spoke to in Mumbai (who did not work with either HDFC or ICICI) said he would be able to get the transaction done provided the project in Kolkatta was pre-approved by any of the banks he worked for.

I also did a bit of informal talking with the private sector banks that had turned down (or did not show much interest in) our mystery shopper. What came out was that none of them had an effective loan origination system across the country and unless the loan amount was big enough the amount of effort required to co-ordinate with another city was just not justified. Each office is driven by its own KRAs and as legal checking work done for another office was not counted as part of their KRAs this clearly did not enjoy any priority.

What it boiled down to was that a loan that was clearly falling within their credit and legal norms of the bank was being given up simply because of the mismatch of KRAs between the two branch offices. Of course for a determined customer this would still be possible but it might take a lot more time than usual.

The only saving grace to come out of this story was that at least for a few lenders India was a “single” country.

Amen.

Disclosure: Most of the banks mentioned in the article are advertisers on Apnapaisa.

The regulator does not like them. The consumers cannot seem to have enough of them. Yes I am talking of the teaser rate home loans that have become so popular in 2009. Whilst most of the banks had withdrawn these schemes in the first quarter of this year, India’s largest bank State Bank of India doggedly kept the scheme on (albeit with increased rates from its earlier scheme). Given the universal expectation that interest rates are bound to go up this year, the customers found the safety of fixed rates even if only for a limited period quite attractive relative to a regular floating rate product. This consumer preference has forced market leader HDFC to come out with its own teaser rate loan scheme and ICICI bank has also joined the party this week. The teaser schemes, Bank of Rajasthan and LIC Housing Finance always had the scheme on and their schemes are continuing. As of now the teaser rate loan schemes of HDFC, ICICI and SBI are scheduled to apply only for sanctions till April 30, 2010. The partial disbursement should be latest by June 30, 2010 in case of HDFC and ICICI. However it is expected that the schemes will be extended at least till the end of this quarter.

Let’s take a quick look at some of these schemes and their salient features for a loan of Rs. 30 lacs for 20 years:

So how should a consumer decide on which schemes to go for?

Firstly if you are in the market for a new home loan, it is advisable to choose from one of the above teaser rate schemes (versus a regular floating rate product from them or other lenders) since it will give you the safety of low fixed rates during the next few years during which interest rates are likely to rise. Between them also the real difference will arise once the fixed rate period is over and the time comes for the floating rates to take over. At that time how accurately the lenders reference rates reflect the changes in the market interest rates will determine what the actual effective cost is for the consumer. (See article on how lenders do not pass on benefit of lower interest rates to their existing loan consumers in the DNA of February 13, 2010) . It is here that the public sector banks have a relatively better record. The Mohanty committee set up to suggest changes to make credit pricing more transparent found that whilst the BPLR of all banks moved up when RBI increased Repo rate the BPLR of public sector banks were impacted (lowered) more significantly than their private or foreign sector counterparts when RBI dropped Repo rates.

In any case this is an area with developing implications as the new Base Rate system scheduled to be operational in the second half of 2010 should improve the transparency on fixation of reference rates for floating rate loans.

However the biggest opportunity is for existing home loan borrowers who are in a regular floating rate loan. Chances are that you are already paying a fairly stiff rate (probably in excess of 9.50%) compared to what is available for new loan consumers today. Get rid of your inertia and shift now to a teaser rate loan and do it now. This is a small window of opportunity, which may not remain open for too long.

“In order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products. The methodology of computing the floating rates should be objective, transparent and mutually acceptable to counter parties. Banks should not offer floating rate loans linked to their own internal benchmarks or any other derived rate based on the underlying.”

No, this is not an extract from any of the Blog Posts at Apnapaisa. Rather this is a contained in a circular of the RBI dated July 1, 2006 and re-iterated faithfully in annual master circulars (which consolidate all regulations governing interest rate on advances) every year since, including on July 1, 2009. This is supposed to be binding on all banks and yet to the best of my knowledge not a single bank in the country is following this diktat. In fact it cannot be unknown to RBI that the biggest complaint on Home loans is that banks link their floating rate loan products to their internal benchmark rates only and not to any external rate. Clearly this is one RBI regulation that is not being followed.

On not following regulations let me turn to the experience of my nephew (we also incidentally share the exact same name) who wished to pay his monthly credit card bill vide a cheque. He wanted acknowledgement of the cheque deposit on the bank counter, which the branch was unwilling to give. His employee (who had taken the cheque for deposit) was brusquely informed to drop the cheque in the drop box and told in no uncertain terms that an acknowledgement was not possible. My nephew dug out a copy of the RBI circular dated April 10, 2004 wherein the RBI has clearly directed that “ …the facility for acknowledgement of the cheques at the regular collection counters should be available to customers and no branch should refuse to give the acknowledgement if the customer tenders the cheques at the counters. We agree with this recommendation and advise that it is important that there is no curtailment of the rights of the depositor to obtain an acknowledgement by going to the concerned counter. You may please advise all your branches to ensure that the above instructions are scrupulously followed and customers are not inconvenienced in this regard. “ (Emphasis added). I think anybody who has tried to get an acknowledgement from a bank counter for payment by cheque of a credit card bill will immediately empthasise with the experience of my nephew.

But let’s revert to the experience of my nephew. When even a personal visit by him to the branch did not yield any results he filed an official complaint with the bank. When that did not yield any results he filed a complaint to the banking ombudsman with a copy to the bank. Only then the bank got into action and agreed to accept and acknowledge the cheque over the counter in the future and even provided a written apology. The banking ombudsman closed the case based on this apology letter and expressed inability to announce any punitive measures to prevent such occurrence in the future. A complaint to the RBI to take punitive measures to prevent a recurrence of such action was also turned down.

The upshot is that my nephew continues to face the same problem month after month. His employees are now adept at carrying a copy of the apology letter issued earlier and on that basis getting an acknowledgement for the cheque. But it is clear that the bank is not providing the same service to any other customer who may not be as persistent as my nephew. Clearly a case where the RBI regulation is observed more in its breach.

This is not to say that RBI goes easy on the banks, which violate its regulations. In fact for regulations that are important for systemic stability even minor violations are punished with warnings and fines. That’s the main reason why our banking systems came out unscathed from the global financial tsunami, which took down with it several globally renowned banks. Even in consumer facing regulations the office of the banking ombudsman has bought significant relief to consumers.

But the real issue is that some consumer facing regulations have been bought in whose financial implication on the banks is perhaps not understood fully. For example on the acknowledgment issue, banks are quick to argue that providing a facility to acknowledge cheques across the counter is an expensive affair. That may be true but the solution lies in explaining things to the regulator to drop the regulation and meanwhile following the regulation scrupulously.

In fact on the regulation on fixation of external benchmark rates for floating rate loans – the financial impact of following this regulation is very significant – both for the banks and for the affected consumers. It would be interesting to see what will happen when an affected consumer complains to the banking ombudsman about the non-following of this regulation by the banks.

It would be interesting to see whether the regulation changes or the banks are forced to follow the existing regulation. Either ways it will have an significant impact.

A momentous moment in India’s retail lending history has just been ushered in very quietly. A few days ago Credit Information Bureau of India Limited (CIBIL), which is currently the only fully operational credit bureau in India, quietly introduced a manual system to provide consumers with their own credit history on a test basis. In a written communication from CIBIL to Apnapaisa it has been clarified by CIBIL that “CIBIL has started offering Consumer disclosures through an interim solution. This interim solution is a testing phase and we will be able to operationalize the full-fledged Consumer Relations System basis our learning from this phase. In this interim phase CIBIL will be manually handling consumer requests for a copy of their credit information report.  CIBIL is also developing the infrastructure, systems and processes for an automated solution that would be needed to enable an individual direct access to their Credit Reports from CIBIL on-line.  The full-fledged Consumer Relations System will have world-class features that will allow consumers to access their report on-line and banks to respond to errors via an on-line maintenance tool. The automated phase is expected to be ready by the beginning of next fiscal year “.

So why is this such an important event that I am calling it a momentous occasion for the Indian retail lending history. For those of you who have just tuned in, CIBIL is one among 4 credit bureaus that have been licensed by the RBI under the Credit Information Companies Regulations Act, 2005 (CICRA). CIBIL though is the only one that already been operational for around a decade now and has the credit repayment history of around 13.7 crore loans or credit cards.

Almost all of the major lenders provide details of the credit facilities given by them to their customers as well as the amounts that have fallen due and the repayment made by the customers on a periodical basis (monthly or quarterly). CIBIL collates and aggregates this information. Thus when a customer (say Mr. Desai) approaches any bank (say Bank of Bharat) for a credit facility CIBIL is in a position to go through its own records and provide details of the existing credit facilities enjoyed by Mr. Desai to Bank of Bharat as well as his repayment history on such facilities. This enables Bank of Bharat to take a more informed decision on Mr. Desai’s credit application since it now has access to credible third party information on Mr. Desai’s existing obligations as well as his repayment history. It also benefits Mr. Desai if he has maintained a spotless repayment history since he is able to get the credit facility quickly and cheaper based on such good record. If his earlier repayment history is not so good, off course, he will find it difficult (and more expensive) to get the credit facility.

Up to now Mr. Desai could not access his own credit report. There was a rather convoluted way for Mr. Desai to get a copy of his own credit report but with this step he can get a copy of his own report by paying Rs. 142/- to CIBIL. This will help him in finding out if there are any errors in the report. A large number of consumers today feel helpless about erroneous repayment history being reported by the banks to CIBIL showing the consumer in default even where the so called “outstanding payment” is in dispute. These kinds of errors are the highest in the case of credit cards.

Since now he can have access to his own report the consumer can point out any errors in the report to CIBIL who are, under the CICR Act, required to notify the concerned bank. The erroneous entry will have to be deleted by CIBIL unless the concerned bank reverts to CIBIL within 30 days of the consumer filing his error report with CIBIL. If the consumer is not satisfied with the action of the bank in this regard he can always file a grievance before the banking ombudsman. Thus by having access to their own credit report the good consumers can ensure that they do not fall victim to erroneous reporting by the banks. At the same time consumers who delay payment for any reason will have to pay the price for such delays. Good consumers who pay their instalments will stop subsidising the consumers who delay payments. At a future point of time CIBIL may even share their proprietary credit score with the consumers for an additional fee. This score predicts customer’s likelihood of becoming a defaulter in more than 91 days within the next year. Higher the score less are the chances that the consumer will default. Any score above 700 is considered good. Having access to this score will assist the consumer in getting a rough idea of how banks view his credit standing and he can then take action either improve his credit score or if his score is already very good take care to maintain it at a high level.

So if you want to get a copy of your own credit report download the form available on the apnapaisa website at this link and fill it in and along with the required documents (mentioned in the form) and the payment of Rs. 142/- send it off to CIBIL address mentioned in the form.

This historic step needs to be welcomed with all fervour by consumers who will now no longer be helpless in knowing what banks are reporting about them to CIBIL.

I have already sent in my application to get a copy of my credit report.  I have taken great personal care to keep my credit standing immaculate but am awaiting with bated breath what my credit standing looks like as reported by the banks.

Watch this space for my comments on my own credit report.

Just participated on a hour long TV show on a popular hindi business channel devoted entirely to CIBIL. The panel of experts included a retired PSU bank chief and a well known politician cum consumer activist from Mumbai. The anchor and the political panelist panned CIBIL for accepting any data that the banks/NBFCs provided to them (CIBIL) and branding consumers as  ”defaulters” on the basis of such wrong data. Suggestions were made on how CIBIL should seek confirmation from the customer before accepting any such data from the lenders. The retired PSU head also correctly suggested that CIBIL is only a reporting institution and that lenders can ignore the CIBIL report if they are satisfied with the consumers explanation of any default reported by CIBIL.   What he perhaps missed is that in retail lending the consumer does not get a chance to explain his side of the story.

I was almost ignored when i tried to get in a word that CIBIL keeps records of all your payments to lenders - whether on time or not -  as reported by lenders . I also pointed out that this ensures that for 90% of the consumers their good repayment track record (now provided by an independent reporting agency like CIBIL) ensures that they get fresh loans at a good rate and speed. This is how Credit bureaus work anywhere else in the world. Off course the banks there are under a legal obligation (Fair Credit Reporting Act in the US)  to report correct and accurate information. Obviously in a country where courts can award millions in punitive damages the banks do carry out their obligations seriously. The only role that a credit bureau plays is in making the credit reports available to the consumers themselves and allowing them to raise a dispute on any item. The disputed entries are referred to the concerned lender and the entry is deleted if the lender does not respond within a fixed time frame. Similiar provisions exist in Indian laws governing Credit Information companies such as CIBIL though such laws have just come in effect and will take time before they are implented on the ground.

Even on www.apnapaisa.com we receive about  10-20 queries daily purely on CIBIL related matters. The blogosphere is also full of how this new animal called “CIBIL” is affecting their financial lives without giving them a chance to provide their side of the story.

Thus CIBIL is fast acquiring a perception of a BIG brother hand in glove with the banks that is out to make the helpless consumer pay up monies that are not due from him.

Clearly therefore there is very little understanding of the role that a credit information company like CIBIL plays in the market. So what has led to this wrong perception in the market.

First off course is the operational inefficiency of the banks (see my blog on  can we trust our lenders http://blog.apnapaisa.com/2008/06/26/can-we-trust-our-lenders/) . Bank’s machinery to deal with consumer grievances is only now acquiring some shape and form under the threat of the banking ombudsman. This leads to many disputes in loan/credit cards and in quite a few cases the consumer is clearly right. Thus when the data provided by the banks itself is suspect any reporter of such data also comes in the circle of suspicion automatically. This has more to do with the banks then CIBIL itelf.

However the perception gets magnified when CIBIL does not take active steps to dispel the wrong perception. CIBIL identifies only the lenders as it’s clients (after all they pay the bills) and perhaps see the obligation  to supply the consumers own credit report to him as a  drain on its profitability. The fact that this report would have to be supplied has been known for the last 30 months and yet they did not put into place any mechanism to deal with it as soon as the license was issued. Even now (almost 2 months + after the license has been issued) CIBIL is yet to officially give a date by which this facility will finally be available to consumers. Niether is there any word on the interim measures to provide credit reports to at least those consumers who are immediately  affected by any alleged wrong reporting by the banks.

CIBIL (and the other 3 credit information companies that have also been provided a license) will need to factor in the consumers as a significant stakeholder in the whole credit reporting process if they have to change the perception about themselves as “only collection aides” for the bankers.

Clearly a robust credit reporting structure benefits the consumers immensely but a consumer education drive is needed so that it does not acquire a bad name.

Any views or comments are welcome.

I had applied at Reliance Capital, New Delhi, for a Home Loan Balance Transfer (Rs. 50 lakhs) PLUS a term loan top-up of Rs. 70 lakhs. The BT (balance transfer of the home loan) draft was handed to our bank on 5th May, around 2 pm. I sincerely appreciate their brisk effort in finalizing the processing of my loan.

Incidentally, our existing bank (Indian Bank) decided to offer us the top-up loan of Rs. 70 lakhs, at a much better rate of interest. And I stand to save reasonably on account of the processing fees and the penalty for closing the loan.

Consequently, within 3 days they have sanctioned my loan, and the draft from Reliance Capital has not been cashed in the past 3 days. Today, I tried to return the draft to Mr. Jagrit Joshi at Reliance Capital, but he refused to accept it saying that it cannot be returned before 6 months. Neither is the zonal head Mr. Rishi Soni willing to consider my request for return of the draft.

After a lot of discussion, they say that I will have to bear a penalty of 5% on the total amount of Rs. 1.20 crores, of which Rs. 70 lakhs has not even been received by me.

I find this preposterous, and am feeling quite harassed that they are insist on charging interest on what they have not even disbursed to me. They are not willing to talk logically by disclosing the policy in this regard. I am willing to bear the penalty as per the standardized policy for “returning the un-cashed draft (on 3rd day), and where the top-up has not been disbursed yet”

As a consumer, I don’t find anything unfair if I intend to return the draft to them, which, unfortunately is not being accepted by them. I don’t intend to be unreasonable to anyone, but I do have the right to judge my interests and benefits. And, I don’t expect the company to be unreasonable to me either.

I had taken a home loan from ICICI Bank in December 2007 at the rate of 9.25%, for 228 months. In April 2008, interest rate changed to 10.75% which again changed to 11.75% in May 2008. Earlier when the bank sent repayment schedule it showed - for Rs. 7463 paid as EMI - Rs. 1296 paid towards the principal component of the loan and Rs. 6167 paid towards interest. Now the bank repayment schedule shows a principal payment of Rs. 539 and Rs. 7780 as interest. I don’t understand how principal can be less than interest. For financial year 08-09, the total interest paid comes as Rs. 92,468 and principal is only Rs. 6504.

Is this correct or is the bank fooling me? If it is correct, then please explain me how.

If a recovery agent knocks at your door you don’t have to hide in your house or avoid them by asking one of your family members to speak to them. They cannot harm you or force you to pay the outstanding at all.
The RBI has issued strict guidelines to protect the interest of the borrower and to stop unethical practices of recovery agents. You will find here the RBI guidelines towards recovery agents: how agents should approach, the time they can visit, and how they should behave.

Approach of Recovery Agents
The RBI states: “To ensure due notice and appropriate authorization by the banks, they should inform the borrower the details of recovery agents engaged for the purpose, while forwarding default cases to the recovery agents. The details should include their telephone numbers, etc. The recovery agents should call the borrowers only from telephone numbers notified to the borrower.”
This clearly indicates that if any recovery agent approaches you without following the above guidelines you should not entertain them and if they try to harass you, you can make a complaint to the police and also to the Banking Ombudsman. The bank also has the responsibility to keep the borrower informed in case the bank has changed the recovery agent. “Where the recovery agency is changed by the bank during the recovery process, in addition to the bank notifying the borrower of the change, the new agent should carry the notice and the authorization letter along with his identity card.” - the RBI guideline states.

Time of Call
The recovery agents are allowed to call the borrower only between 7 am to 7 pm. It’s as per the Code of Bank’s Commitment to Customers which banks have to abide by. In addition, visits are strictly prohibited by the code in the case of bereavement in the family or calamitous occasions - “Inappropriate occasions such as bereavement in the family or other calamitous occasion the family would be avoided for making calls visits to collect dues.”

Behavior of Recovery Agents
The recovery agents are not allowed under any circumstances to thrash the borrower or speak indecently. If the borrower does not to want to speak to the agent, the agents have to obey. “The bank and their agents should not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors’ family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.” - states the RBI.

An important point here is to note that in case you have already lodged a complaint for any of your grievances, banks cannot send recovery agents for that specific issue. The RBI states “Where a grievance/complaint has been lodged, banks should not forward cases to recovery agencies till they have finally disposed of any grievance/complaint lodged by the concerned borrower.”

For some of us, who have seen the recently released movie EMI, newspaper reports about recovery agents may seem to be some sort of a controversy set to malign the profession and the banks involved. ‘Sattar’ in the movie might as well be confused with some angelic figure; falls in love with a debtor, Prerna… bye bye Prerna’s debt…

In real life, recovery gents, the process, and the very fact that you are a defaulter can be a serious pain in the posterior.

How do banks recover loans?
Banks have appointed special recovery agencies for loan recovery. These agencies could be either on contract or commission.
Some banks may start the process of loan recovery after a single defaults, other may wait for at least two such instances. The process begins with calls to the borrower. And, what follows is the field recovery process, which involves face-to-face interaction.

Are there any rules for recovery agents?
We have read countless newspaper reports about how the recovery agents come to a defaulter’s house or office at all god-forsaken hours. A bank’s representative is to contact the borrower between 7 am and 7 pm, unless one needs to visit a borrower at odd hours and occasions such as continuous irregularity in the accounts.
Agents also should avoid making calls or show up to meet the person concerned on inappropriate occasions such as mourning in the family or such other occasions for making calls/visits to collect dues.

The agents are required to carry proper identification and carry the concerned bank’s or agency’s authority letter. The agent should display the letter as and when required.

Before the recovery agent is sent across, the bank needs to have given sufficient notice (as prescribed by law) to the borrower before the filed recovery process is initiated. These are just a few of the guidelines.

Notorious Fame
What is it that the ‘agents’ are famous for?

Most agents are known to threaten people and verbally abuse and threaten the defaulters, despite bank’s directions. Some may threaten or actually use third-degree treatment on the borrowers.

Lucky, a recovery agent from Delhi told CNN-IBN in an interview that some recovery agents not only used lathis for recovery, but also their Mausers. These agents may stop a defaulter’s car on gunpoint and beat him up.

These recovery agents are not on any bank’s rolls but stand to get a hefty cut of booty they help recover.

Another recovery agent decided to take law in his hands and turned robber to recover the loan. In September 2008, in Pune, recovery agent Nitin Narayan Chavan robbed Gita Buremukla (25) of jewelry worth Rs 35,000.

This HSBC Bank recovery agent met Buremukla and informed her that there was a loan outstanding. She informed him that the person who had taken the loan no longer lived on the address, a Mr. K. Rambabu.

That didn’t satisfy the agent. The agent came back the next day to Buremukla’s house and entered it on the pretext of drinking some water. Note, recovery guidelines say that the recovery agent can’t gain forceful entry into a defaulter’s house.

Chavan locked the main door and threatened Gita with a knife and forcibly took her mangalsutra worth Rs 35,000.