Factors to Be Considered While Designing NBFCs Recovery Mechanism

Soniya Khanna

19 Jul, 2023

Introduction  

The importance of Non-banking finance companies (NBFCs) in a developing economy like India cannot be ignored. NBFCs play a crucial role in extending loans to entrepreneurs to start their ventures and also as a working capital for continuing their business effectively. A pain point for most of the NBFCs is the recovery of these loans along with the interest.

The Reserve Bank of India^[1] (RBI) having considered these pain points faced by the NBFCs keeps issuing Master Directions and Notifications from time to time regarding the working of the NBFCs.

It is encumbent upon every NBFC to lay down a Board approved Recovery mechanism to run their NBFCs effectively. Such NBFCs recovery mechanism should not in any way adversely affect the dignity and respect of the customers. Moreover, NBFCs should adopt best practices with regards to collection of dues and repossession of security and thereby cultivate customer confidence and long-term relationships.   

What is the objective of NBFCs recovery mechanism?

The objective of NBFCs recovery mechanism should be to make the process of loan recovery seamless in case of default in making of repayment and not for whimsical deprivation of the property to the owner. The recovery mechanism should adopt the best practices such fairness, transparency in possession, valuation and realisation of the security. The practices adopted for following up, recovery purposes, and repossession of security should be in consonance with the law and not against it.

What are the important factors that should be kept in mind while designing the NBFCs recovery mechanism?

Following are some of the factors that should be kept in mind while designing the NBFCs recovery mechanism:

1. Clear and Precise Objective 

While drafting a recovery mechanism for an NBFC, the objective of the policy made should be clear and precise. It should not be unfair towards the customer and should be in consonance with the notifications, circulars, Master Directions issued by RBI from time to time.

• The objective of the NBFCs recovery mechanism should be towards reducing the NBFCs’ Non-performing asset level in absolute terms of slippage of accounts, providing directions to contain slippage to the NPA category and accelerating recoveries in the existing NPAs.
• The mechanism should clearly lay out the manner in which the management needs to deal with the customer, along with their specific roles and responsibilities.
• The mechanism should be such that constant updates with respect to the identification and reporting of accounts showing signs of slippage to the category of NPA.
• The nature of approach of the NBFC should be proactive in finding solutions which includes restructuring of loans if the intent of the borrower is positive.

2. Mechanism to be on the lines of Fair Practice Code  

The NBFCs recovery mechanism should be designed on the lines of the Fair Practice Code which has been approved by the Management.

• The recovery mechanism should instruct the recovery professionals not to keep pestering borrowers either during the course of or after the completion of the deal. It includes not communicating directly for loan recovery and not pestering the client for additional details with a view to know more about the borrower’s credentials etc.
• Where a default has taken place, the recovery team should only deal with the approved legal advisors.
• The most important of all is that the recovery agents in process of recovery is that the recovery professional should not discriminate against any person on the basis of caste, gender, or class and not resort to any kind of threatening tone or voice or intrude on the privacy of the borrower or of their family members at the time of recovery.

3. Mechanism should not be against public interest

The recovery mechanism designed should in no way be against the public interest and always be in consonance with the notifications, Master Directions, and Circulars issued by the RBI from time to time.

• A Recovery policy’s most important component system should always have a well-defined Grievance Redressal Mechanism properly describing the procedure as to how an aggrieved customer can lodge a complaint and the time period for the resolution of a complaint.
• The procedure for redressal of complaints should be simple, timely and cost-effective at the same time.
• No harassment should be done from the recovery team’s end, and they should be humble in their dealings.
• The terms and conditions of recovery should be same for all the borrowers and in no manner be discriminatory against any borrower on the basis of the above mentioned factors such as gender, race, caste, sex etc.
• The recovery mechanism should ensure that all the written and verbal communication should be done in a simple language.

4. Recovery proceedings defined exhaustively

A recovery mechanism should exhaustively define recovery proceedings.

• In case where the NBFC does not receive the payment on due date, then post-dates cheques should be resorted to for the recovery of dues. Where those cheques bounce, appropriate legal action must be initiated under Negotiable Instruments Act.
• In case of habitual late payers, follow up in terms of telephone calls, visit to borrower’s office, meeting promoter’s or key officials etc. are made for recovery of dues.
• Where a borrower has been defaulting persistently, efforts should be made to identify the reasons for such defaults and urgently decisions must be taken before the said entity turns slips into the category of NPA.
• The customers should be contacted between 7 am to 7 pm and not beyond that unless the nature of the customer’s business warrant a different time.
• The purpose of possession of security should be recovery of dues and not to deprive the customer of the property.
• It is the responsibility to serve a proper notice before taking possession of the security.
• The management decides the penalty in the form of interest for delay in payment of instalments.

5. Exhaustive coverage of Terms and Conditions

The NBFCs recovery mechanism should contain the terms and conditions for the purpose of recovery exhaustively.

• The recovery policy should clearly lay the down the periodicity of payments, interest rate and the interest rate charged as penalty on delayed payments.
• The time period should be contained in the policy to take action against the defaulting borrower.
• The grounds on which recovery proceedings can be initiated and the litigation charges if any that will be borne by the borrower.
• In case of genuine cases where the borrowers are not able to pay their loans, their loans can be restructures before the entity slips into NPA. However, such restructuring should be done as per the Board approved restructuring policy.

Conclusion 

The necessity of a robust recovery mechanism for NBFC cannot be dispensed with. However, such NBFCs recovery mechanism should in no way be designed to deprive the borrower from the possession of his security. A recovery mechanism should always have a fair policy and clearly list down them so that borrowers do not enter into a contract on ambiguous terms.

FAQs  

Read Our Article: Eligibility Criteria for Debt Recovery Reduced for NBFC’S: Under SARFAESI Act