Monday, October 01, 2007

Lessons from a suicide: ICICI Bank's settlement logic

So a bank finally got fingered. So far, we had been reading of instances where people got hurt, died, or even got kidnapped, ‘ostensibly’ by loan recovery agents. In most of these cases, the affected banks survived the poor PR well, thanks to a lingering distaste for debt among us, and by default, for people who took these loans.
After all, weren’t the people keeping their eyes open when they took the loan?

The recent death of Prakash Survankar by suicide, and his suicide note that laid the blame squarely at the door of ICICI Bank’s ‘agents’ could provoke a much needed rethink for this industry. For one, look at th way the bank finally responded. Not with insinuations and denials, but a quick move to give his family compensation totally Rs 15.50 lacs(Rs 1.55 million), about 31 times his loan amount. What has interested me is the structure of this compensation, which is clearly built on some experience the bank has had with this category of borrowers. Thus you have an FD for 10 lakhs to be handed over as 15 lacs on maturity in 5 years, medical cover for his family worth Rs 3 lacs, and a life insurance policy of Rs 25 lacs for his wife. The motives aside, I will tll you why this is a perfect model for compensation.

The money in an FD insures that it doesn’t get spent immediately, something that happns all too frequently with victims in India, as relatives/friends take over the lives of the families.

Prakash’s wife is working, and by default, the sole bread winner now for the family. Thus, with a regular but single source of income in place, it made sense to protect the rest of the family from further mishap, thus, the hefty life policy.

Finally, if you look at the majority of people who do take the loans in the 25-75K range, more often than not, it is unexpected emergencies like a critical illness, accident, or even birth complications that can cause them to look outside for help. Moreover, even for this category which is well over the poverty line, it does take just one long spell in hospital, (government or private) to slip back into poverty. Thus, the medical cover for mother and the daughters was a good, well thought through decision.

So while ICICI Bank’s collection methods might verge on madness, there is something to follow from the method in their settlements.

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