After Hazaribagh incident, RBI to introduce master directions on outsourcing of recovery agents

Reserve Bank of India (RBI) will soon come out with a detailed master direction on appointment of third-party recovery agents by lenders for loan recovery purposes, M Rajeshwar Rao, the central bank's deputy governor, said on September 30.

Rao said the RBI had issued a circular on outsourcing of financial services and responsibilities of recovery agents in August. Separately, the RBI’s master directions for microfinance institutions, which was released earlier this year, had also clearly highlighted the conduct that the recovery agents must adopt, he said.

“Both these instructions would be integrated and we are coming out with a Master Direction on Guidelines for Outsourcing and conduct of recovery agents,” Rao said in a post Monetary Policy Committee meeting presser today.

His comments come on heels of the RBI barring large non-banking finance company Mahindra & Mahindra Finance from undertaking loan recovery or any repossession activity through outsourcing arrangements, until further orders. The NBFC has been mandated to use only in-house recovery agents for repossession and recovery by the regulator.

This action, RBI said, was based on certain material supervisory concerns observed in Mahindra Finance’s management of its outsourcing activities.

On September 16, news agency PTI reported that a 27-year-old pregnant woman was allegedly crushed to death under the wheels of a tractor which was forcibly being driven away by a recovery agent of a finance company in Jharkhand's Hazaribagh. The infamous incident at Hazaribgah reportedly occurred on September 15.

A clarification by the Mahindra Group confirmed later that the vehicle was indeed financed by Mahindra Finance. The loan was passed under the name of the victim’s differently-abled father, as per media reports.

Moneycontrol reported on September 19 that the central bank may look at imposing punitive fines at Mahindra Finance for violation of norms on recruitment of loan recovery agents.

Other NBFCs, however, will not face similar action, RBI deputy governor M.K. Jain said today.

“We have not stopped or restricted the outsourcing activities. What we have issued is various guidelines on outsourcing activities and on fair practises code. We expect that the regulated entities have to come out with their board approved policies and have more oversight and monitoring around the outsourcing activities.

“It is not taking away the rightful right of regulated entities…but we expect that it should be on right side of the law,” the DG said.

While the Hazaribagh incident has forced the regulator to issue new directions, whether they will be followed in letter and spirit by all lenders, especially large sized-ones, remains to be seen, senior bankers say.