NBFC

NBFCs must have Zero Tolerance for Strongman Recovery Tactics

Non-banking finance companies are essential to the expansion of the economy since they give entrepreneurs loans to launch their ventures and provide loans as working capital to run their businesses successfully. The recovery of loans and interest is the NBFCs most difficult phase. The Reserve Bank of India (RBI), having determined that it was required in the interest of the public, has periodically provided Master Directions and notifications for the operation of Non-Banking Financial Companies in response to the problems faced by the NBFC. 

To effectively manage its NBFCs, each non-banking finance company should establish a recovery policy approved by the board. The Non-Banking Financial Companies’ recovery strategy is based on treating clients with respect and decency. The NBFC must adhere to ethical debt collection and security repossession standards to build long-lasting trust among its clients.

RBI’s Recent Action on Outsourcing Activity

Mahindra & Mahindra Financial Services Limited (“the Company”) was ordered by the Reserve Bank of India (“RBI”) to immediately stop engaging in any recovery or repossession action through outsourcing arrangements until further orders.

The RBI acted in response to reports that a tractor being operated by a recovery agent working for M&M Finance reportedly crushed a 27-year-old pregnant woman on September 15, 2022, in Jharkhand.

The RBI informed the company in a letter dated January 4, 2023, of its decision to lift the restrictions placed on the company with immediate effect based on the submissions made by the company and its commitment to strengthening its recovery practises and outsourcing arrangements, tightening the process of onboarding third party agents, and strengthen accountability framework as per its Board approved action plan.

All NBFCs must strictly adhere to appropriate regulations, given the growing importance of NBFCs. The large finance NBFC was required to employ solely in-house agents for recovery. The regulator mentioned that the action was taken as a result of “some material supervisory concerns” over how the Non-Banking Financial Company was managing its outsourcing business. 

Recovery Agents

Recovery agents” refers to companies the RE has hired to recover debts owed by its borrowers and those who work for those companies.

Usage of Recovery Agents

The entities must have a framework in place for hiring recovery agents that includes, among other things, people participating in the recovery process. The antecedents of their employees must be verified by the recovery agents that REs have hired, and this must include police verification. The frequency at which re-verification of antecedents will be used must also be determined by REs.

The entities must give the borrower the contact information of the recovery agents when the recovery procedure is started in order to ensure proper notification and authorisation. Along with the identity card that was granted to him by the company or the agency, the agent must also carry a copy of the notice and the authorisation letter from the RE. The new agent must also carry the notification and the authorisation letter together with his ID card in cases where the entity changes the recovery agency in the middle of the recovery process and informs the borrower of the change.

The contact information for the recovery agency and the RE must be included in the notice and authorisation letter, along with additional information. The RE’s website must also include the most recent information about the recovery organisations it has hired.

Will Strongman Recovery Tactics Stop?

Unless the regulator takes severe action in response to cases recorded, the situation regarding the employment of (RAs) recovery agents by Non-Banking Financial Companies won’t change.

The situation is not going to change until the lenders who appoint the RAs are made liable for the recovery agency’s negligent behaviour. “Non-Banking Financial Companies are prone to overlook this kind of behaviour by RAs, while PSBs are generally exempt from this threat because they closely adhere to RBI regulations in this area.

It is declared that improper behaviour by recovery agents (RAs) is unacceptable and that all NBFCs must strictly adhere to the Reserve Bank of India norms. If there is any violation, severe action should be taken.

An agreement is drafted with the borrower’s permission before a loan is disbursed. When a borrower cannot uphold the terms and defaults, appropriate legal actions must be pursued to reclaim the debt. Anything beyond legal action is unacceptable. Leaving away the Reserve Bank of India regulations, the people of our country, according to the Constitution, have some fundamental rights that must be honoured.

Tough Time for Large NBFCs

Analysts claim that Non-Banking Financial Companies continue to run in the face of several regulatory changes even as calls for further scrutiny of major lenders’ recovery procedures are growing. It is virtually hard for thousands of NBFCs to appoint or employ thousands of recovery agents on their own books, especially at a minor stage.

Some of the measures to handle this situation are:

• The NBFC needs to have criteria to determine between an honest and dishonest defaulter, even though it’s a challenging assignment.
• Extreme action should be taken when a borrower has the money but refuses to make payments. Customers should, however, be handled with respect and care when there is a legitimate reason, and repossession/recovery agents should only contact from recorded phone lines.
• While complaints against agents have increased, there is no denying that they are essential to how Non-Banking Financial Companies operate. Non-Banking Financial Companies, which maintain all agents on their staff rolls, are really challenging.
• The regulator is, therefore, in a difficult situation. Still, the regulator must be exceedingly serious and work to force the NBFCs to follow the rules, fining them with a penalty in a case of flagrant violation. The regulator must work to educate borrowers about harassment practices and how to report them.
• Before the appointment, it is necessary to undertake due diligence on third-party recovery agents and ensure that third-party recovery agents receive training. In relation to third-party recovery agencies, FIs must establish suitable reporting processes.

Responsibilities of regulated entities employing Recovery Agents

From time to time, the (RBI) Reserve Bank of India has reminded regulated entities (REs) that they are ultimately in charge of the services they outsource. As a result, they are accountable for the acts of all service providers, including recovery agents.

The RBI has observed that the RE-employed agents have been departing from the guidelines now in place for outsourcing financial services, representations, etc. It is advised that the REs strictly enforce that neither they nor their agents engage in any form of intimidation or harassment, whether verbal or physical, against anyone in their debt collection efforts. It includes acts meant to publicly humiliate or invade the privacy of the debtors’ family members, referees, and friends and send inappropriate messages via mobile or social media. 

Any violation by Regulated Entities in this regard will be taken seriously.

Responsibilities for Outsourced Activities

The Regulated Entities are exclusively responsible for following instructions. Outsourcing any activity does not relieve the REs of their obligations.

The loan agreement and the FPC posted in its office/branch premises/website both state that the RE shall be responsible for inappropriate behaviour by its personnel or workers of the outsourced agency and shall promptly address grievances.

RBI Guidelines for Recovery of Loans

Below are the guidelines issued by the Reserve Bank of India regarding the recovery of loans by Non-Banking Financial Companies.

• Every RE must set up a system for identifying borrowers who are having trouble making payments, engaging with them, and giving them the required advice regarding their options.
• The borrower and the RE shall agree on a designated/central specified location for recovery. If the borrower does not show up at the specified/central designated place twice or more consecutively, field employees may make a recovery at the borrower’s home or working office.
• Neither RE nor its agent shall use any coercive recovery techniques. Without limiting the general application of the foregoing, the following actions will be regarded as harsh:
  1. Usage of abusive or threatening language
  2. Calling the borrower repeatedly or calling them between the hours of 9:00 a.m. and 6:00 p.m. 
  3. Harassing the borrower’s family, friends, or co-workers.
  4. Publishing the borrower’s name. 
  5. Use or threat of using force or other similar tactics to threaten the borrower, the borrower’s family, their property, or their reputation.
  6. Misleading the borrower about the debt’s size or the effects of not making payments

• Each RE must have a specific procedure for handling complaints about the recovery process. The borrower will be informed of the specifics of this procedure at the time of loan disbursal.

Conclusion

The Reserve Bank of India has periodically reminded regulated entities (REs) that they are ultimately responsible for the services they contract out. As a result, they are responsible for the actions of all service providers, including recovery agents. Because of the growing importance of NBFCs, all Non-Banking Financial Companies must adhere to appropriate regulations. Also, RBI mandated that large financing NBFCs only use in-house agents for recovery as per the guidelines.

Also Read: Factors to Be Considered While Designing NBFCs Recovery Mechanism