“This is a story which keeps repeating over time. We do have systems in place to check the digression from the stipulated recovery procedures, but the implementation is lacking,” says Naresh Malhotra, veteran banker and independent consultant.
Rachna Jain, senior partner at law firm Desai and Diwanji, says recovery agents continue to be outside RBI's direct purview, and NBFCs solely bear the onus of regulatory compliance.
“Although instances of extortionate recovery have come down substantially, since many RBI directives, stricter implementation is lacking. The regulatory system may think in terms of imposing punitive fines for such indiscretions,” Malhotra added.
On its part, the NBFC has promised to investigate the incident from all aspects and extend all possible support to authorities investigating the case.
What is the Hazaribagh case?
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 incident reportedly occurred on September 15.
Subsequent media reports and clarification by the Mahindra Group confirmed 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.
Alarmingly, the death of an unborn child and a young lady was due to an unpaid amount of as low as Rs 120,000, local reports said. The police have registered a murder case against four men, reports said.
What do RBI’s recovery norms say?
On August 12, the RBI issued a release barring recovery agents from resorting to intimidation of borrowers as well as calling them before 8 am and after 7 pm.
While issuing additional instructions to banks, NBFCs, and Asset Reconstruction Companies (ARCs), the RBI said it has observed that recovery agents are deviating from its instructions.
The circular, however, was largely a reiteration of its earlier guidelines and unlikely to resolve a rising number of complaints against financial services providers, as Moneycontrol reported on August 16.
Further, in a 2008 directive, the RBI had categorically stated that banks should have a due diligence process in place while recruiting recovery agents. It should be so structured to cover, among others, individuals involved in the recovery process.
“Further, banks should ensure that agents engaged by them in the recovery process should carry out the verification of the antecedents of their employees, which may include pre-employment police verification, as a matter of abundant caution. Banks may decide the periodicity at which re-verification of antecedents should be resorted to,” the RBI had said.
The recovery agents, however, go unchecked, experts say. They add that recovery agents are usually employed by powerful men with connections in the right place, and thus have so far managed to run such illegal recovery operations.
“It is understood that some banks set very stiff recovery targets or offer high incentives to recovery agents. These have, in turn, induced recovery agents to use intimidatory and questionable methods for the recovery of dues. Banks are, therefore, advised to ensure that the contracts with the recovery agents do not induce adoption of uncivilised, unlawful and questionable behavior or recovery process,” RBI said.
Further, as per the RBI’s 2008 norms, in order for a bank to undertake possession of a property that has been mortgaged, it shall do so only on clearly communicated terms and conditions of the contract between the borrower and the bank.
The contract shall ensure that a notice period clause is in place before taking possession of the property.
Circumstances must be also studied under which the notice period can be waived and a provision regarding final chance must be given to the borrower for repayment of loan before the sale, auction of the property, as per norms.
Queries sent by Moneycontrol to Mahindra Finance went unanswered till the time of publishing this report.
While Mahindra Finance is undertaking a review of appointment of third-party agents for recovery purposes, NBFCs are finding themselves in a tough spot after the RBI’s November 12 circular on standardisation of assets.
The circular, apart from requiring NBFCs to stamp non-performing assets (NPAs) daily, also stated that an NPA account cannot be upgraded to a standard asset category, till all dues, including the compounded rate of interest on the loans, are paid upfront.
Mahindra Finance is a predominantly tractor-financing NBFC and the new norms resulted in a sharp spike in the NBFCs NPAs after the RBI’s announcement last year.
The regulator, as per reports, is not ready to budge to NBFCs’ request for some forbearance on the NPA circular.“…recovery agents continue to be outside RBI's direct purview. NBFCs may look into negotiating rigorous assessment of their agent's protocols and further making agreements with the agents amenable to judicial redressal where customer grievances arise,” Jain said.