Saturday, October 18, 2008

India-based Debt Collection Business Soars

With the U.S. economy slipping into a potentially deep and prolonged recession, and increasing number of Americans unable to pay their debts, the debt collection call-center business in India is soaring.

According to a report in The Washington Post, India handles an estimated $16 billion -- or about 5 percent -- of delinquent U.S. accounts. More complicated health insurance bills and mortgage payments are still largely handled inside the United States, industry executives say. The debt collection business is expected to continue to grow as debt rises and companies look to cut costs, industry experts said. Aegis call center in New Delhi, which handles nearly a fourth of debt collection outsourced from the United States, is experiencing rapid growth. The company is setting up a second office building for 5,000 employees, many of them to be hired over the next few years. Most employees are college-educated and in their 20s. They earn about $5,000 a year, a competitive starting salary in India, but less than a quarter of what their counterparts in America make.

The International Herald Tribune has recently reported on Encore Capital Group, another debt-collection call center in India. "India will be the only place we grow this year," said J. Brandon Black, the CEO of Encore, collection company based in San Diego. India is Encore's largest operating area, with about half the company's collection force of more than 300.

Although the stereotype of a collector may be "some guy with chains and a cut-off shirt," Black is quoted by IHT, collectors in India are "very polite, very respectful, and they don't raise their voice." "People respond to that," he added.

There is almost a cult following of America among call center workers, a fantasy where hopes and dreams are easily achieved by people who live in a wonderland of well-paid jobs, big homes and expensive vacations. This perception seems to be changing, at least among the Indian debt collectors who regularly listen to sob stories of trouble in paradise.

U.S. household debt has increased from about 50% of GDP in 1980 to a peak of 100% in 2006, according to Harvard Business Professor Nial Ferguson who recently wrote a column for Time Magazine. In other words, households now owe as much as the entire U.S. economy can produce in a year. Much of the increase in debt was used to invest in real estate. The result was a bubble; at its peak, average U.S. house prices were rising at 20% a year. Then — as bubbles always do — it burst.

Professor Ferguson believes that U.S. banks and other financial institutions are in an even worse position: their debts are accumulating even faster. By 2007 the financial sector's debt was equivalent to 116% of GDP, compared with a mere 21% in 1980. And the assets the banks loaded up on have fallen even further in value than the average home — by as much as 55% in the case of BBB-rated mortgage-backed securities.

The heavy debt and deflating asset prices are now forcing "deleveraging", the sales of assets in a down market to pay debt that is contributing to an even greater drop in the value of stocks, bonds and real estate. With the banks trying to build up their capital reserves, they are not lending to even the most credit worthy customers, or to each other. Such caution is resulting in heavy job losses at businesses unable to borrow to meet their business needs. This climate has caused a significant loss of confidence among consumers, businesses and investors making matters worse. It is becoming a vicious cycle that the US Treasury and the Federal Reserve are trying to break by pumping over a trillion dollars into the banking system. However, the banks' continuing reluctance to lend is forcing a change in strategy by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. Both leaders are now buying stakes in the banks to try and change their behavior to relieve the continuing credit crunch.

The massive consumer and corporate debt and the unprecedented debt-addiction has brought the U.S. into this crisis. Ironically, it is the sudden withdrawal of debt that is making the situation worse. The contagion has now spread to the rest of the industrialized world. We are in uncharted waters now. Let us hope the captains of U.S. economy can navigate us out of the severe storm with as little damage as possible. Meanwhile, it is an opportunity for debt collectors in India to see the seamy side of the life in US while they make a few extra bucks to improve their own lives.

1 comment:

Riaz Haq said...

India's middle class is drowning in growing consumer debt, generally thought to be an American disease.

The amount of unsecured loans and credit-card receivables more than three months overdue is about 7% to 9% of total loans outstanding this year, and is about to head as high as 15%, according to ratings agency Crisil Ltd. in Mumbai.

For some, the problems are overwhelming. When police broke down the door of the Nair family's suburban apartment here earlier this month, they found four bodies and 73 credit cards. Burdened with too much debt, the Nairs decided to take their own lives, police suspect. A.K. Nair, 70 years old, and his wife, Shyamal, 60, swallowed poison. Their middle-aged son and daughter hanged themselves.