Why your neighbour won't know about your debt, but the world will

The economic slowdown and prevalent high interest rates are pushing up banks’ non-performing assets to alarming levels. And this rise has made banks desperate to look for ways to stem the rising defaults. According to a story published in Firstpost yesterday (read here) , in order to force defaulters repay, banks are planning to resort to a name-and-shame policy. They would publish wilful borrowers’ photographs, names, addresses and other details in newspapers.

[caption id=“attachment_657157” align=“alignleft” width=“380”] The name-and-shame policy as of now has been used by banks against wilful defaulters. Reuters[/caption]

Whether effective or not, the strategy is riddled with ironies, for one this goes against the privacy and confidentiality provided by the Banking Codes and Standards Board of India (BCSBI).

More from Investing

MSMEs are breaking the traditional convention. Look who’s funding them Scale-up your startup without an investor! Here’s how

As per this code, banks are not permitted to reveal information or data related to your account to a third party, unless under certain conditions. A senior officer of BCSBI told Firstpost the lender or the recovery agent is not permitted to discuss a defaulter’s debt with other parties even if it has initiated the recovery proceedings.

So, on the one hand, you have a code that forbids discussing your debt with a neighbour, while on the other hand, you have banks publishing photos and other details about the debt. Is that legal?

“Yes” said VN Kulkarni, chief debt counsellor, Abhay Debt Counselling Agency, affiliated to state-run Bank of India. “When a borrower takes a loan, it’s mentioned in the terms and conditions that on the event of failure to repay the loan, the banks, after taking all the necessary recovery steps, have the right to publish your details in the newspapers, as per name and shame policy, to recover their dues,” he said.

Then there is the Banking Secrecy Act? Doesn’t it mandate that banks and financial institutions should keep their customers’ details secret? “Not really”, says a Calcutta-based lawyer. “The Banking Secrecy Act will stop the bank from sharing details of your bank balance with your neighbour, but it certainly won’t stop them from publishing your photos in the newspaper, if you are a wilful debtor.”

In fact, in case of default of a home loan, if the bank decides repossession of the property via the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, a demand notice is issued which has to be published in two local newspapers. The demand notice contains your personal details and well some details about the property and details about the debt amount.

“As long as principles of natural justice are followed, the defaulter gets an opportunity to pay the debt, a demand notice is issued and communicated to the defaulter. The publishing of details in the newspaper about the default is fair,” says Uday Wavikar, a lawyer with the Bombay High Court. He thinks 90 days is adequate for a defaulter to pay up.

“Banks have been publishing photo of wilful defaulters in newspapers in Bangalore for almost a year and a half now. In Mumbai, this has not been a common practice though,” said Kulkarni of Abhay Debt Counselling.

“As far as the code of debt recovery goes, if the recovery agent discuses your debt with a neighbour, it is harassment. But banks are well within their rights to publish details in the papers,” he said. But why are the banks publishing photographs? Wouldn’t just making the name public serve the purpose? No, it would not, say experts. “In India, there is a possibility that people names are very similar. Or the grandfather’s name is same as the grandson’s name. It’s to avoid ambiguity in identifying the proper defaulter, banks now publish photos as well,” said the Kotkata-based lawyer.

Who is a wilful defaulter? The name-and-shame policy as of now has been used by banks against wilful defaulters. Loosely put, the Reserve Bank of India defines a wilful defaulter as, those who are found to be engaged in deliberate non-payment of dues despite adequate cash flow and good net worth.

Besides, banks can also classify defaulters as ‘wilful’ if the loans are utilised for purposes other than those previously stated, funds are siphoned off from the bank-financed activity, records are falsified, securities are disposed of without the bank’s knowledge and the borrower indulges in fraudulent transactions.

So, if you go by this definition, if you’ve taken a home improvement loan, but bought a two-wheeler instead and are unable to make payments for whatsoever reason, you become a wilful defaulter. And, though thankfully, the recovery agent won’t be able to tell your neighbour about the debt, the bank can, after taking all the necessary steps of recovery, publish your photograph, personal and loan details in the newspaper.

The bottom line is take measures to not fall in such a debt trap. If you are struggling to pay your debt, get in touch with a credit counsellor. They would help you get out the difficult situation, and you won’t need to worry about these laws.

If you’ve been a guarantor for someone else’s debt, make sure they are disciplined with their payments, or might just have your photo published in the papers, that too for no fault of yours.

PS- The intention of this story is to give you an overall idea of what’s happening in the debt recovery space and not to get into finer legalities of individual Acts. If you need to know more on the same, get in touch with your credit counsellor or Certified Financial Planner.