India is increasingly witnessing concerns about loan distress due to rising defaults, coupled with illegal and aggressive recovery practices. These aspects are causing borrowers further disarray, with significant financial and psychological pressure. Although lenders have every right to recover their dues, the aggressive and often illegal recovery practices by recovery agents have put the entire process at a disadvantage. This is why the Reserve Bank of India (RBI) has established a framework that balances the recovery needs while focusing simultaneously on borrower rights.
The RBI has mandated strict conduct rules for recovery agents, while also establishing a methodologically structured grievance redressal system headed by an ombudsman. These mechanisms put in place by the RBI emphasize empowering borrowers to push back against unfair treatment and seek relief in a formal way.
Loan distress in India is hyperreal, and many recent reports highlight this problem as well. From illegal loan-providing applications to prominent lenders, aggressive loan recovery techniques have impacted a significant portion of the population. Recent prominent surveys show that up to 68 per cent Indian borrowers are actively facing the brunt of loan distress, and as a solution, they are taking out new loans to focus on managing older debts. This essentially creates a cyclical process, and borrowers are squeezed incessantly by loan recovery agents who often ignore RBI-mandated frameworks for the same.
RBI guidelines on loan recovery
The Reserve Bank of India has laid out a comprehensive framework for banks and NBFCs in order to ensure fair, transparent, and dignified recovery practices. This guideline not only benefits the borrowers but also the lenders in a mutually beneficial process. To begin with, the RBI mandates that lending organizations must engage only authorized recovery agents for loan recovery processes, and they must inform the borrowers of the name and contact details of the agents in writing. At the same time, the recovery agents are expected to speak politely and must not engage in intimidation or humiliation of the borrowers.
The recovery agents are also mandated by the RBI to contact borrowers between 8 AM in the morning to 7 PM in the evening, unless they share written consent for interacting beyond hours. The organizations and recovery agents must also integrate privacy protection of the borrowers, as their personal details cannot be shared with any third party, like neighbours or employers. The banks are also required to record conversations with borrowers and act promptly on any complaints of misconduct. Finally, the RBI guidelines also reveals that it is banks who remain responsible for misbehaviour to borrowers, and not the recovery agents. These measures focus on ensuring lawful recovery efforts, while also integrating a humane aspect.
How guidelines are ignored in reality
While the RBI has already mandated a comprehensive and straightforward framework, these are often violated by recovery agents. Borrowers often have to face harassment, which leads them to make impromptu decisions. They often face harassment via relentless calls at late night or early morning, or public shaming through agents contacting friends & family, and employers for pressure.
Recovery agents have also been reported to issue threats of arrest or property seizure without any legal backing. They also resort to using abusive language to the borrowers and coerce them during visits or phone calls. Coupled with these methods, agents often fail to provide valid authorization or misrepresent themselves as officials, leading to a dire lack of transparency.
As per the RBI guidelines, these methods violate the RBI’s frameworks for loan recovery and also cause mental challenges. These practices of extreme harassment have also been reported to lead borrowers to take equally extreme steps like suicide. This has led the RBI to issue a warning to lenders that these organizations will be held directly accountable for the misconduct or illegal practices of their loan recovery agents.
Grievance redressal system
While the recovery agents often take it beyond what is agreeable, borrowers also have rights to escalate things to the appropriate authorities. The RBI has established a methodologically structured grievance mechanism that begins with a complaint. At this stage, borrowers must approach the concerned lender, i.e. bank or NBFC, to file an official complaint. Once the complaint is filed, the lender has 30 days to act on it.
In case this does not happen, or is ignored, rejected, or addressed with visible deficiency, the borrower can approach the RBI Ombudsman via the RBI Integrated Ombudsman Scheme (RBI-IOS, 2021). At this stage, the complaints can be filed digitally via the RBI’s Complaint Management System (CMS), by email, or through a written document.
Once the complaint to the RBI Ombudsman is filed, the Ombudsman looks to attempt conciliation or mediation. In case of non-agreement of settlement, the Ombudsman is able to issue a binding order that include up to INR 20 Lakh compensation for direct financial loss, and up to INR 1 Lakh for mental harassment.
If this is not satisfactory to either the borrower or lender, they can go through an appeal process at the Appellate Authority within the RBI. The borrowers also retain the right to take the issue to consumer or civil courts, depending on the scenario, helping them to ensure that they are not harassed by the lenders or the recovery agents.
Importance of RBI’s guidelines
The guidelines laid out by the RBI focus on issuing a borrower-centric policy that achieves three primary objectives: deterring harassment, ensuring accountability, and providing relief. The framework regulates agent conduct and restricts the calling hours, mitigating the intimidation factor. It also holds the lenders directly responsible for the actions of their agents, essentially ensuring there is no way of ignoring the responsibility of misconduct. Furthermore, integration of the Ombudsman system provides borrowers with an accessible, time-bound, and free mechanism that promotes justice.
However, it is important that borrowers understand their rights in such cases. Since many are not aware of the rights of the borrowers, they remain unable to escalate complaints beyond the lender or claim compensation. It also makes compliance a significant part of the operation for lenders and promotes trust in the financial system and accountability.
-Anurag Mehra, Director, Expert Panel
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