Loan recovery is being revolutionised in India. With stricter rules aimed at shielding borrowers from abuse and for banks and recovery agents to be more accountable, the Reserve Bank of India suggests a whole new chapter.
Draft directions published on May 20 were intended to establish transparency and discipline in the handling of recovery operations by regulated financial sector firms. One of the highlights of the initiative was that lenders would no longer be free to block or disable smartphones and other privately financed devices when a borrower failed to make a payment.
Under the proposed framework, the banks and non-banking financial companies (NBFCs) can only disable financed mobile phones if the loan is overdue by at least 90 days. Even after that, the lenders must give a comprehensive 21-day notice and seven days warning before making use of the remedy.
RBI has also established strict measures to protect against incorrect device blocking. Should it be wrongly blocking a customer's device or done without a process, the borrower deserves to be compensated Rs 250 an hour for any inconvenience. The move follows an upward trend in complaints about aggressive recovery tactics used by agents, especially in digital lending and smartphone financing cases.
The central bank said that borrower dignity and fair treatment in the recovery of a loan could not be compromised. Under the policy, all banks and regulated entities would need to adopt a board-approved recovery policy that would address such factors as collection processes, borrower communication requirements, grievance redressal measures and agent behaviour.
The RBI has also suggested compulsory certification for recovery agents through the Indian Institute of Banking and Finance (IIBF). It is to professionalise recovery operations and make agents trained to recover lawfully and ethically.
Financial institutions would also be required to disclose publicly the names and details of such empanelled recovery agencies on their official websites and mobile applications. Before any recovery visit, borrowers will need to get a clear notice. The proposed rules focus significantly on the prevention of intimidation and harassment.
Recovery personnel and bank officials must only be allowed to contact borrowers as long as the time varies from 8 am to 7 pm. They will need to have proper ID, an authorisation letter and to come along while visiting customers. Crucially, the RBI has banned lenders and agents from reaching out to borrowers in a sensitive situation, such as a bereavement ceremony or a marriage occasion.
The regulator has further made warnings against the use of threatening words, repeated calls, public shaming or inappropriate messages over phones and social media. Another major move includes lenders being obliged to keep records of calls made by recovery agents and to preserve those recordings for at least six months.
Incentive structures that promote aggressive or coercive recoveries have also been barred under the draft framework. The RBI added that banks cannot shift all recovery cases to agencies if borrower complaints related to recovery practices remain unresolved. After seeing numerous instances of unethical recoveries from accounts in the financial industry, the central bank first published these draft guidelines back in February.
The framework will provide lenders with a better means of recovering their dues and borrowers with a fairer and more civil system. If adopted in practice, the new RBI guidance would potentially alter the way in which banks, NBFCs and digital lenders in India would manage credit recovery, such as in the booming smartphone finance and digital credit industry.
