Banks have an advantage that they
can debit the customer account for the installment / EMI, on due date. Banks
lend mostly to its customers and obviously have a better knowledge and control
over customer account. If there is no balance in customer’s account, they come
to know of the delinquency on the very due date and may start the collection process.
Generally, banks do not lend in areas where their banks do not have branches.
But, non-banking finance
companies have a disadvantage here. They accept Post-Dated Checks (PDC)for future
installments from any bank.
Companies which hold post dated
checks deposit checks on due dates either directly into their bank or through
cash management service bank.
All PDCs are stored in a
single place/ city or with cash management bank, for security reasons. Local checks
are deposited through local clearing circle and the fate of the checks are known
in 2-3 working days. Either thry are cleared or bounced / dishonoured.
Outstation checks are sent
through clearing circle of customers’ banks. One gets to know the fate within, say 4-5 days depending upon proactive
approach. After all, cash management bank depending on Service Level Agreements,
stands to lose on interest if it does not collect money urgently or inform the
bounces to companies early.
But, some customers’ banks do not
fall in any of the clearing circle (remote, rural banks) and their checks are
sent directly to the banks for clearance / payment. Customers and bankers in
collusion neither clear payment nor bounce for a long period, sometimes exceeding 3 months.
This phenomenon is very common with co-operative banks; some of these customers
are a part of management of these banks; and even otherwise, they wield powers enough locally to
stall any action on those checks by bank managers. Rarely these checks are
cleared even after an undue delay. Complaints to the top management of these banks
and Reserve Bank of India have very less impact on curing.
Till bounces are notified,
accounts remain non-delinquent as presumptive credits are given on due dates by
cash management service bank. When bounces are notified in bunch, these accounts
get to 90-120 (days past due) bucket directly and get classified as high-risk-high-delinquency
category, leaving very little time to repair these accounts, before many of
them move to charge off / losses.
It is recommended strongly that
cash management is left to a bank for storing and collecting; there is hardly
any cost as banks are satisfied with the float of collection amount enjoyed for
3-4 days. At least, it reduces operational risk and improves efficiency.
Proactively, lenders need to be
alert if the post dated checks of co-operative banks are submitted by
customers. Even collectors must avoid receiving past due payments by checks of
these outstation and cooperative banks.
Solution lies in getting the list
of customers with checks uncleared for a month or more and have their credit reassessed by
field collectors ; easy and / or the right solution will be an
early repossession of the underlying asset in such cases.
