NBFCs must have 'zero tolerance' for strongman recovery tactics, bankers say

It mandated the large tractor financing NBFC to only use in-house agents for collection purposes.

The action was based on “certain material supervisory concerns” observed in the NBFC’s management of its outsourcing activities, the regulator said. Moneycontrol had reported on September 19 that central bank action was likely against Mahindra Finance.

In a statement issued shortly after RBI’s order dated September 22, Mahindra Finance said it has a detailed policy for compliance of third parties with repossession fair practices.

“We have a detailed policy in place for compliance of third parties, with regard to repossession of vehicles. In light of the recent tragic incident, we have stopped third-party repossessions and will further examine whether and how third-party agents will be used in the future,” Mahindra Finance Vice-Chairman Ramesh Iyer said.

Will strongman recovery tactics stop?

As per Naresh Malhotra, veteran banker and independent consultant, the state of affairs concerning the appointment of recovery agents by NBFCs will not change unless the regulator cracks down on reported incidents.

“Unless the lenders are held accountable for delinquent conduct of the recovery agencies (RAs), the state of affairs is unlikely to change. PSBs are by and large free from this menace as they strictly follow RBI directives in this regard, but non-commercial bank lenders are prone to overlook this kind of behaviour of RAs,” Malhotra said.

Basu, who earlier served as State Bank of India Managing Director, said misbehaviour by recovery agents is unacceptable and all NBFCs must fully abide by the RBI guidelines in the matter and stringent action should be taken if there is any violation.

“When a loan is disbursed there is an agreement drawn up with the borrower. If the borrower is not able to adhere to the terms and defaults, then due legal process must be followed for recovery. Beyond that anything is unacceptable,” he says.

“Leave aside the RBI guidelines, the people of this country have certain basic rights that must be respected,” he adds.

In the past, Basu said similar such instances appeared at private banks and the RBI came down cracking on the same. At HDB Financial Services, “if someone gets over-enthusiastic” in recovery operation and the matter is reported to the senior management, immediate action will be taken, he added.

“Recovery is done by an in-house team and the message that there is zero tolerance in this regard is conveyed very clearly by the senior management and the Board fully supports this,” Basu said.

Another senior official at a large NBFC said though their NBFC does not outsource any recovery activity or actions including repossession, “such acts (Hazaribagh incident) take place when corporates outsource collections, etc”.

Tough times for large NBFCs

Even as calls for scrutiny over recovery practices of large lenders are rising, NBFCs continue to function among a host of regulatory changes, analysts say.

It is practically impossible for thousands of NBFCs to appoint thousands of recovery agents on their own books, especially at a small stage, said Akshay, research analyst at brokerage Prabhudas Lilladher.

“Although a difficult task, the NBFC must have parameters to distinguish between an honest and dishonest defaulter,” he says.

“Strict action should be taken in cases where the borrower has the money and is not paying. But in cases where there is a genuine reason, customers should be treated with dignity and calls made by recovery/repossession agents should be made only from recorded phone lines,” he added.

On RBI’s November 12 circular requiring NBFCs to mark non-performing assets (NPAs) on a daily basis and categorise the asset as standard only on clearance of all dues, Akshay says the regulator has given NBFCs enough time for compliance.

“Although complaints against agents have spiked, there is no doubt that they do play a crucial role in the functioning of NBFCs. It is extremely difficult for NBFCs to keep all agents on their employee roll,” he said.

“So the regulator is in a fix, but regulator must be extremely strict and try to make the NBFCs follow guidelines, and fine them heavily in a genuine case of breach. It is also important, that the regulator try and make borrowers aware of the harassment practices and that they can file a complaint,” he added.

Siddharth Mody, senior partner, Desai and Diwanji, says financial institutions must form control mechanisms and processes for recovery of loans. These include, among others, setting up an adequate due diligence process prior to disbursement of any credit facilities.

“A diligence on third party recovery agents prior to the appointment must be conducted, while also ensuring that training programmes for third party recovery agents are conducted. FIs must set out adequate reporting mechanisms in relation to third-party recovery agents,” he said.