Riding Scotfree

As always, on the first day of his new caper, Tandon is amused by the courteous treatment he receives at the auto finance company. More than willing to do business, the young executive across the counter hurries through the formalities. He inspects the previous two years' balance sheets and income tax returns of Tandon's proprietorship company. The documents prove a modest income, but Tandon winks at the executive. "Who shows his real income nowadays?" he asks. "I earn six times this in black." The executive nods back conspiratorially. He asks for Tandon's proof of residence. A photocopy of his ration card is enough, he says, almost apologetically.

 "A little stricter than last time; they check more documents," Tandon thinks to himself. But he has come prepared. He hands over the ration card. "I've been living here for two years," he says, to reassure the young man that everything is in order.

When the credit boom began in the late '80s and practically every industrial house thought it made great business sense to float a finance company, auto finance was high on the agenda. Today, nearly 70 per cent of cars sold in India are financed by non-banking finance companies (NBFCs).

With the proliferation of finance companies came heavy competition. Not only did they compete to offer a lower rate of interest to their clients, in their zeal to increase their client list, some companies also compromised on their lending requirements. Besides, most companies relied on simple minimum income criteria to judge lending requests. If you could produce a chartered accountant's certificate that you earned above the minimum level demanded by the company, you got the loan.

 This allowed people like Tandon to inflate their real incomes by getting the required income statements from unscrupulous CAs. Many auto finance companies paid a heavy price for the irindiscretion. In fact, finance companies began to build the default rate into their interest rates. "The default rate touched alarming proportions for some companies and that's when the concept of documentation came in," says Yogesh Chopra, associate vice-president, Kotak Mahindra.

So, formula-based lending was replaced to a large extent by case-by-case scrutiny. Companies now ask for more documents, including signature verifications. Some physically verify the customer's antecedents. "Physical verification is done either by officials of the finance company or by agents hired by the finance companies. Their responsibility is to judge the borrower's credibility and his reputation in the market and locality," says Rajesh Ghosh, general manager, Gujarat Lease Financing Limited. The problem is that in a highly competitive industry where the crucial service factor is how fast the customer gets his loan sanctioned, executives constantly have to make difficult trade-offs between lending caution and business volume.

Despite all precautions, nearly 10 per cent of the borrowers default at least once. And even with the most thorough verification of the client's ability to pay, what can neverbe accounted for is his willingness to pay.

That's exactly what Tandon lacks: the willingness to pay. As soon as he is through with the formalities, he asks for a white Maruti, the most common car on Indian roads (an electric blue Maruti would be far easier to track). Of course, he'd like it now and, yes, he will pay the holding charges in cash. He has brought it along with him, in fact. He has got his cheque book with him and proceeds to make out all the post-dated instalment cheques. In 10 minutes, he is ready to take possession of his car.

Of course, the finance company will receive the down payment for the car through the cheque he has just written out. Besides, he has already paid the holding charges in cash. All pointing to his honest intentions. But a week later, he will clear out his bank account, and those post-dated cheques can keep bouncing till eternity for all he cares.

So what constitutes a default? "Considering that 10 per cent of the borrowers default at least once, finance companies have to differentiate between the intentional defaulter and the situational defaulter," says Satish Mittal, chief manager-(north), SRF Finance. The situational defaulter being a man who is unable to pay one or maybe two instalments because of a temporary cash crisis.

"In these cases we would prefer it if the defaulter comes up to us to explain the situation he is in and provides a guarantee that he would pay us as soon as he can," says Chopra. In most cases, this is what happens. But in the case of an intentional defaulter, finance companies have a problem on their hands.

 "Intentional defaulters usually clear their bank account of most of the funds. With the result that their post-dated cheques bounce. But we are legally bound to re-present their cheque at least once," says Chopra. And if the cheque is not honoured for the second time, the savvier companies begin tracking the car through the repossession agencies that all financiers employ. "You've got to be on the ball all the time. You have to make sure the defaulter doesn't get the opportunity to flee," says Chopra. Which is hardly difficult to do in India. Tandon can easily emigrate from Delhi to Madras, with little chance of being caught.

While keeping an eye on the car, the financier also goes through the motions of presenting cheques for the next two months. If the cheques bounce for three consecutive months, companies issue a notice of default to the customer and theprocess of repossession begins. This is usually spread over 15 days.

First the final demand notice is issued if nothing comes of the notice of default. If there is still no luck, the defaulter receives a legal notice. And if that doesn't shake the defaulter, it is followed by a repossession notice, a copy of which is deposited with the police. It's now the jobof the repossession agency to grab the car without any mess-ups or embarrassments for the finance company.

Most defaulters contest the right of finance companies to repossess a car. They say that legally, the only claim finance companies can make is under Section 138(B) of the Negotiable Instruments Act, under which the maximum penalty possible is six months in prison and/or double the amount to be recovered. Most finance companies prefer to avoid prosecuting a defaulter in court. "It can take three years or more for prosecution," says Mittal. Ghosh adds that the court is resorted to "when the amount involved is quite high. Any lender prefers to settle matters out of court to avoid the cumbersome and expensive procedure of going through legal norms."

With interest rates touch-ing record highs these days, auto finance companies can scarcely allow their funds to remain non-performing for long periods. And the thin margins they operate on don't give them the leeway to write off bad debts.

Tandon has now relocated to another part of the city. His bank knows nothing about his whereabouts, and the finance company follows up on his trading business only to run up against a blank wall: the business never existed. The police are unsympathetic, since the car technically has not been stolen. Tandon is now looking for a buyer for his brand new Maruti. It's all exactly like what he's done several times before.

But the repossession agency men spot his car at a traffic light and move in. They shove a legal notice under his nose and drive away with the car. Tandon, however, has always had a contingency plan ready. He rushes to the nearest police station and lodges a dacoity complaint. Some men dragged him out of his car and drove it away. The car had Rs 2.5 lakh in cash in the glove compartment.

The police station where the financier has filed the repossession notice is at the other end of town. This is where the repossession men are heading, to report that they have got hold of the car, and to park it there for the time being. Unfortunately, the police have acted fast on Tandon's FIR and have sent the car's number out on the wireless. The police pick up the car and the repossession men before they can reach the safe haven of their police station.

Police bureaucratese takes over. If the repossession notice was filed at the Kalkaji police station, how could it be picked up in an area under the jurisdiction of the Malaviya Nagar police station? And what about the Rs 2.5 lakh? Malaviya Nagar cannot let the car go without solving the purported dacoity. The repossession men, in their hurry to grab hold of the car, had missed one crucial step in the process: they had not made an inventory of everything in the car and got Tandon to sign it.

Tandon's brother-in-law knows a crime reporter in one of the afternoon tabloids. His harassment at the hand of goondas hired by a large financing company makes the headlines the next afternoon. The other dailies pick it up. The repossession men remain in lock-up for two nights. Three years on, the case is still dragging on in court. Recently, Tandon has been seen driving a brand new Maruti.