Loan recovery agents face RBI heat for unfair practices

Rohit Bhatia (named changed) from Alwar in Rajasthan was a guarantor for a Rs 1.5 lakh home loan that his neighbour took. However, when his neighbour defaulted on the repayment for 3 months, Bhatia started getting regular calls from recovery agents.

Bhatia’s case is not an isolated one as many customers and their guarantors are complaining about harassment from recovery agents of finance companies.

Even as financial institutions are in the thick of action with regulations, the role of loan recovery agents is coming to light once again. This, after a Reserve Bank of India order banning Mahindra Finance from using third party recovery agents for recovery and repossession of assets after an unfortunate incident at Hazaribagh last week.

The central bank’s move came after reports that third-party loan recovery agents working on behalf of M&M Finance allegedly ran over a 27-year-old woman with a tractor in Hazaribagh district of Jharkhand, crushing her to death. Local media reported that recovery agents were in the process of taking possession of a tractor, after the farmer defaulted on a loan. Though an argument took place between the farmer, his daughter and the recovery agents, during the incident.

Financial institutions outsource some part of their recovery and more importantly repossession of assets to third parties, especially in Tier B&C towns of India. It’s not clear if the RBI order benefits the consumers from the loan recovery harassment.

The loan recovery agents, on their part, say they are only trying to do the recovery or repossession within the targeted timeline. “If we don’t do the recovery or repossession in the stipulated time, the contract goes to another agency,” said an employee of Mumbai based Badshah Recovery agency. “The commission after recovery comes only after two months from banks and non-bank lenders. By then, we must pay our collection team. Post Covid our business has reduced, as many banks and NBFCs rely on their internal resources,” he added.

In a statement issued shortly after RBI’s order, Mahindra Finance said that it has not outsourced any collection activities in its vehicle finance business to any third-party agencies and therefore, do not expect any impact on collections.

“We have a detailed policy in place for compliance of third parties with regard to repossession of vehicles,” said Ramesh Iyer, VC&MD, Mahindra Finance. “In light of the recent tragic incident, we have stopped third-party repossessions and will further examine whether and how third-party agents will be used in the future.”

While banks and NBFCs after the pandemic face increasing default on loans, such companies may ramp up the role of employees or internal resources in recovery and repossession, thereby gradually eliminating third party interventions, experts said.

“We have been changing our policies based on the RBI norms. We no longer employ any third-party agents, as it is a sensitive issue for the regulator,” said the CEO of a large NBFC said on anonymity.

Shachindra Nath, VC&MD of UGRO Capital, recently mentioned in a televised interview “We have stopped third party repossessions and will further examine whether and how third-party agents will be used in future.”

In another interview, Cholamandalam Finance said it has 1500 external agents and employees accompany them for collections. They have another 13,000 in-house employees who focus on recovery. Shriram Transport, another non-bank lender, said all its recovery was being done in-house.

Mails sent by ET to these entities did not elicit any response till press time.

Companies are now worried about business disruption due to fear over employing such third-party agents.

“How will the finance business survive without third party collection system?” asked a senior official with a micro-finance lender. “In Alwar district alone, at least 1500 boys are working day and night for recovery, these are all part of third-party recovery agencies.”

In August this year, RBI tightened rules to crack down on unfair recovery practices and strong arm tactics used by loan collection agents after complaints against them continued to mount mandating all entities falling under its regulations to strictly ensure that collection agents do not intimidate borrowers or resort to unsavoury practices. RBI is now working on a framework to ensure that outsourcing of business by banks and NBFCs doesn’t expose them to any risk.

But despite RBI’s warnings, several digital lenders, banks and non-banks continue to deploy strong arm recovery tactics. “We get at least 80-90 calls from borrowers every day on unsavoury practices deployed by lenders against borrowers. Of late, we are handling a few complaints received against Dhani Loans and Kotak Mahindra Bank and have forwarded these complaints to RBI,” said Pravin Kalaiselvan, director, SaveThemIndia Foundation, an NGO focussed on helping borrowers.

As per RBI rules, banks and non-banks have to ensure that recovery agents do not use public humiliation of the friends and family members of the borrower or intrude upon their privacy and should avoid sending inappropriate messages either on mobile or through social media, or make threatening or anonymous calls to them.

They have also been coming down on spurious business activities by digital lenders. As per RBI framework, there is a complete ban on data scraping from phones of consumers, emphatic consent for data collected for lending, upfront disclosure on all costs involved and a cooling-off period for borrowers to exit digital loans.

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