Till a couple of months back, 26-year-old Kusum, a tele-caller at a Mumbai-based loan recovery agency, would argue with a defaulting borrower to make him pay up. Today, she just ends the call at the slightest sign of recalcitrance.

Recently, a new recruit at a large private sector bank was called to a police station and made to sit there the whole night. A few days into the job, he had just done his duty of calling up a borrower urging him to clear the overdue amounts but found himself in the police station.

The borrower had filed an FIR (first information report) alleging that he was threatened with dire consequences by the bank employee.

The focus on instances of excesses by banks in their attempts to recover money has had the unintended effect of encouraging some borrowers to dare banks to take steps to recover loans.

The defiance by some borrowers has forced banks to become cautious about pursuing their normal recovery efforts.

For instance, the first reaction of a bank would normally have been to take possession of a car it has financed after the borrower defaults on payments. That's not the case any longer. Repossession of car is now only the last option.

Banks fear that the boldness of some defaulters exposes their and also their recovery agencies' employees to the risk of getting embroiled in a criminal case that takes upwards of four to five years to be disposed of.

"The entire process of repossession of vehicles has become difficult and tedious after the recent incidents of abuse of recovery agents. But we have not stopped the process. If we stop we will have to shut the business," said a senior HDFC Bank [Get Quote] official.

The watchfulness following a backlash against reported instances of abuse by recovery agents and the threat of regulatory action by the Reserve Bank of India [Get Quote] has acted as a dampener on collections, with a 10 to 15 per cent dip across personal loans and auto loans.

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, banks can approach debt recovery tribunals only for asset-backed loans of Rs 10 lakh and above. For loans less than Rs 10 lakh, banks have the power to give advance notice to the defaulter and take possession of the asset.

If banks were to take recourse to courts, the process of a court receiver taking possession of a vehicle and auctioning it would take really long.

The collection head of a private sector bank said, "The legal process would take at least six months. By then, the resale value of the car would have fallen significantly making it an unviable option."

A closer look at the borrower profile with a Mumbai-based recovery agency reveals that defaults are higher among over-leveraged borrowers.

Nearly half of the defaulting borrowers have taken loans from more than one lender and one in every four of such borrowers defaults on multiple loans at the same time. Fifteen per cent of the personal loan defaulters are less than 25 years old.

"Two years back we saw a trend of rising defaults among 23-24-year-olds on mobile phone bills. These individuals used credit cards to pay cell phone bills and then to pay credit card dues, availed of personal loans. Defaults are now surfacing on these (personal) loans too," said Pankaj Joshi, director of Omega Alliance Recovery Solutions, and a former banker.

"One trend that is common to all defaulters is of over-leveraging even up to 120 per cent (of total monthly income). An equated monthly installment of 40 per cent of monthly income is a serviceable ratio. However, some lenders consider even a 60 per cent indebtedness acceptable," said the collections head of another large private sector bank.