After loans are lent away by banks, there are many cases of defaulters who do not pay back the due money within time, intentionally or unintentionally. In such cases, banks or Non-Banking Financial Companies (NBFCs) employ certain agencies which obtain the due debt by occupying the defaulters’ properties.
These agencies, along with the individuals working for them, are called recovery agents. After some legal tensions, the Reserve Bank of India laid down strict guidelines regarding loan recovery practices. In this article, we’ll be giving a brief overview of these guidelines.
Guidelines set by the RBI:
How the guidelines were created
The need arose to scrutinize the pre-existing procedures, practices, and policies of the banking sector. So the RBI created a few prototype guidelines, which were circulated amongst a vast network, including banks, individuals, and organizations.
These groups reviewed these drafts and made suggestions. The RBI created a final draft of the guidelines after carefully considering these suggestions.
The guidelines were issued amongst all as the circular DBOD.No.Leg.BC.75/09.07.005/2007-08 dated April 24, 2008.
Guidelines for banks regarding recovery agents:
- The reference “Agent” in the guidelines would mean to include both the agencies employed by the financial institutions as well as the individuals working under those agencies.
- In agreement with the RBI guidelines regarding outsourcing of financial services, a due diligence process should be put in place by all banks. The guidelines are to be found in circular DBOD.No.BP.40/ 21.04.158/ 2006-07 dated November 3, 2006.
- Banks will verify the borrower’s background data, including pre-employment police verification, through their agents in the recovery process. This will be done as a precautionary measure. The bank will decide the frequency of these background checks.
- The bank must make sure that the borrower is notified of the recovery process, as well as given details regarding the process and the agent carrying it out, as soon as the bank employs any agent.
- The agents must carry proper identification papers given to him by his institution and the authorization letter from the bank before initiating contact with the borrower.
- If any change is made in the agent handling the case, the borrower should be immediately made aware of that change. The new agent must follow the same proper protocols as his predecessor.
- The agent must include appropriate details in the notice and authorization letters, which document the agent’s contact information, like personal email id and phone number.
- Banks may keep a record of all the communications between the borrower and the agent. In which case, it would be pertinent to notify the customer about this recording process as a legal precaution.
- The bank may display regularly updated information about the recovery agents on its website.
- If the customer lodges any complaint, the banks should address those issues legally before the case is handed over to recovery agents.
- The bank must, at all times, have in place appropriate and adequate systems to address such complaints and grievances brought forth by the clients with urgency. The details of these systems must be fully disclosed to the customers.
- If the borrower is intentionally lodging disingenuous complaints to delay the recovery process or with other insidious motives, the bank needs to gather ample evidence. Only then can they legally initiate the recovery process, complaints notwithstanding. However, as long as the judiciary considers the case, banks must be cautious in engaging recovery agents.
- The banks must make sure that the various recovery agents’ incentives are not unreasonably high. Such an incentive can urge a recovery agent to adopt dubious and immoral methods to collect the due debts. However, banks should be putting their best foot forward and ensure that no such incidents occur.
- The following circulars dictate the methods allowed for the recovery agent:
(i) Circular DBOD.Leg.No.BC.104/ 09.07.007 /2002-03 dated May 5, 2003, regarding Guidelines on Fair Practices Code for Lenders,
(ii) Circular DBOD.No.BP. 40/ 21.04.158/ 2006-07 dated November 3, 2006, that pertains to the various aspects of financial services outsourcing , and
(iii) Master Circular DBOD.FSD.BC.17/ 24.01.011/2007-08 dated July 2, 2007, related to the different aspects of Credit Card Operations.
Guidelines for the training of recovery agents:
- Para 5.7.1 of RBI Circular DBOD.NO.BP. 40/ 21.04.158/ 2006-07 dated November 3, 2006 enforces the regulatory procedures and guidelines of managing all possible risks and code of conduct while banks outsource financial services.
It dictates that all banks must make sure that along with other factors, the recovery agents are adequately coached and instructed. Their training should be holistic so that they perform their duties with care and sensitivity. These duties include matters such as privacy of customer information, hours of calling and others.
- RBI has asked the Indian Banks’ Association to consult with the Indian Institute of Banking and Finance (IIBF) to create a certificate course for Direct Recovery Agents, entailing at least 100 hours of training.
- Once IIBF introduces this course, banks should make it mandatory for all of the recovery agents employed to undergo the course for a year and obtain the relevant certification from IIBF.
- The agencies employed by banks should also recruit only the personnel who have undergone this specific training.
- Other banks and financial institutions may collaborate with IIBF to impart this training to as many people as necessary all over the country. This training course is to be a compulsory requirement for all legal recovery agents.
Guidelines regarding the acquisition of properties and assets pledged as collateral to the banks:
- As deemed by the Honourable Supreme Court of India, the law of the land is ultimate, and even while seizing properties or assets rightfully belonging to the banks, the means and methods adopted should fall conclusively within the purview of the Indian legal system.
- Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002 contain well-defined procedures for enforcing security interest and auctioning immovable and movable property after enforcing the security interest.
- In some instances, banks may incorporate a repossession clause in the contract with the borrower. If so, they would depend on that repossession clause for enforcing their rights.
- The banks must verify the legal validity of the repossession clause. It should also comply with the provisions of the Indian Contract Act.
- The bank must also notify the customer of the repossession clause in due time when the contract is executed.
- The terms and conditions laid down in the contract must strictly adhere to the terms of the Recovery Policy. There should be multiple provisions regarding-
(i) Notice period before possession is taken,
(ii) Multiple circumstances under which there can be a waiver of the concerned notice period,
(iii) The procedure that involves taking possession of the security,
(iv) A provision that incorporates the final chance to be provided to the borrower for repaying the loan amount before their property/assets are sold/auctioned,
(v) The elaborate procedure that provides repossession to the borrower, and
(vi) The detailed procedure that involves the sale/auction of the property of the borrower.
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It can be a challenging task to navigate the world of loan banking. Both banks and financial institutions and the customers they serve should be aware of the legal boundaries and provisions regarding loaning and loan recovery to ensure transparent and efficient work.
These guidelines are meant to provide a working model for the banks while making sure the common consumers are not cheated in any way.