Loan collectors face heat from RBI for unfair practices

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Rohit Bhatia (name changed) from Alwar in Rajasthan was the guarantor for a home loan of Rs 1.5 lakh which his neighbor took out. However, when her neighbor failed to repay for 3 months, Bhatia started receiving regular calls from debt collectors.

Bhatia’s case is not isolated as many clients and their guarantors complain of harassment from debt collectors at financial companies.

Even as financial institutions are in the thick of the action with regulation, the role of loan collectors is resurfacing. This follows an order from the Reserve Bank of India prohibiting Mahindra Finance from using third party debt collectors for the recovery and repossession of assets after an unfortunate incident in Hazaribagh last week.

The central bank’s decision came after reports that third-party loan collectors working on behalf of M&M Finance ran over a 27-year-old woman with a tractor in Jharkhand’s Hazaribagh district, crushing her to death. . Local media reported that debt collectors were in the process of taking possession of a tractor, after the farmer defaulted on a loan. Although an argument took place between the farmer, his daughter and the recovery agents, during the incident.

Financial institutions outsource some of their recovery and, more importantly, asset repossession to third parties, especially in India’s B&C tier cities. It is unclear whether the RBI order benefits consumers from loan collection harassment.

Loan collectors, on the other hand, say they only try to do collection or repossession in a timely manner. “If we don’t do the recovery or repossession within the given time, the contract moves to another agency,” said an employee of the Mumbai-based Badshah Recovery agency. “Commission after recovery only comes after two months from banks and non-bank lenders. By then we have to pay our collections team. After Covid our business has declined as many banks and NBFCs rely on their internal resources,” he added.

In a statement released shortly after RBI’s order, Mahindra Finance said it had not outsourced any collection activities in its vehicle finance business to third-party agencies and therefore does not expect any impact on collections.

“We have a detailed policy in place for third party compliance with respect to vehicle repossession,” said Ramesh Iyer, VC&MD, Mahindra Finance. “In light of the recent tragic incident, we have stopped third party repossessions and will further examine if and how third party agents will be used in the future.”

As post-pandemic banks and NBFCs face increased loan defaults, these companies can increase the role of employees or internal resources in recovery and repossession, phasing out debt enforcement interventions. third, experts said.

“We have changed our policies based on RBI standards. We no longer employ third-party agents, as this is a sensitive issue for the regulator,” the CEO of a major NBFC said on condition of anonymity.

Shachindra Nath, VC & MD of UGRO Capital, recently mentioned in a TV interview “We have stopped third party repossessions and will further investigate if and how third party agents will be used in the future.”

In another interview, Cholamandalam Finance said they have 1,500 external agents and employees accompanying them for collections. They have another 13,000 in-house employees who are focused on recovery. Shriram Transport, another non-bank lender, said all of its collection was done in-house.

Letters sent by ET to these entities elicited no response up to press time.

Businesses are now worried about business interruption due to the fear of employing such third-party agents.

“How will the financial industry survive without a third-party collection system?” asked a senior manager of a micro-finance organization. “In Alwar district alone, at least 1500 boys are working day and night for recovery, all of them are part of third party recovery agencies.”

In August this year, RBI tightened rules to crack down on unfair collection practices and heavy-handed tactics used by loan collectors after complaints against them continued to mount, forcing all entities under its regulation to strictly ensure that debt collectors do not intimidate borrowers or seek recourse. unsavory practices. RBI is currently working on a framework to ensure that the outsourcing of activities by banks and NBFCs does not expose them to any risk.

But despite RBI’s warnings, several digital lenders, banks and non-banks continue to deploy strong arm salvage tactics. “We receive at least 80 to 90 calls from borrowers every day about unsavory practices deployed by lenders against borrowers. Lately, we are handling a few complaints received against Dhani Loans and Kotak Mahindra Bank and have forwarded these complaints to RBI,” said Pravin Kalaiselvan, Director of SaveThemIndia Foundation, an NGO focused on assisting borrowers.

In accordance with RBI rules, banks and non-banks must ensure that debt collectors do not publicly humiliate the borrower’s friends and family members or intrude on their privacy and should avoid sending inappropriate messages on mobile or via social media, or making threatening or anonymous calls to them.

They also exposed the deceptive business activities of digital lenders. In line with the RBI framework, there is a complete ban on data harvesting from consumer phones, outright consent for data collected for loans, prior disclosure of all costs involved, and a cooling off period for borrowers to exit. digital loans.