These are tough times for those heading loan recovery sections in Indian banks. The courts have already told banks and loan recovery agents not to force people or be harsh on them while recovering loans. Rather, the banks have been advised to be “more humane”.

As a consequence, one of India’s largest private sector banks recently undertook an unprecedented step of hugely compensating the family members of one of its borrowers, who committed suicide in Mumbai. The head of the family had borrowed money from the bank but was not confident of meeting the conditions or repaying it. He felt humiliated and harassed over repeated reminders from the bank.

Concerned about the possible backlash and bad publicity, the bank also provided health insurance cover to the family members as a goodwill gesture. Unfortunately, such compassionate steps do not solve the problems of loan recovery in India’s huge market. Rather, it has complicated the situation by giving rise to organised activism against recovery of overdue loans.

It is estimated that Indian banks and financial companies have an outstanding loan of about Rs 45,000 crore given to sub-prime borrowers. What scares the lenders most is the emergence of organised platforms, which are openly calling defaulters to get in touch with them for help if any borrower feels harassed by banks or non-banking financial companies (NBFCs).

These institutions need to recover the overdue loans, especially in the housing sector, as people over the past few years have been borrowing — in some cases mindlessly without assessing their repayment capacity — to have their own houses.

Banks are authorised to take various steps, on the paper, and this includes the extreme step of detaching the property itself in cases of perennial defaulters. One apartment holder in Kolhapur learnt this recently when his property was confiscated by his bank and put on open auction. But now, banks seem concerned and afraid of taking such drastic measures. There is every likelihood of more activism and platforms against forcible recovery of loans emerging with the support of politicians and social activists.

There are options such as modifying loan terms, in which both sides can give-in a bit and carry on. This requires creditors to be more personal. Some say, it is impossible to modify the terms, since more often than not the borrowers overstate their income by 50 per cent to get loans.

In India, borrowers overstate their property valuation, provide false documents and mislead the bank about their actual income. The lenders are supposed to verify the claims, but given the competition, surplus money with banks and their eagerness to build the business, they get caught in a quagmire.

In the extreme case, the banks could be forced to write off the loans due to political pressure. But this could result in a crisis of unimagined proportions despite the fact that Indian banks are teaming with cash, thanks to the surging economy. With one bank already giving in, one wonders whether this sets the trend and forces banks to be more lenient and humane when it comes to recovering loans.

It is another matter that lenders alone are sought to be punished for the bad decisions made by the borrowers. On the lenders part they deserve to be punished for not realising that they had given loans to people, who cannot afford to pay back or know how to manipulate the system.