An analysis by the Society for Development & Justice
The Reserve Bank of India (RBI) has been periodically warning banks against taking the law into their own hands while effecting recoveries. The warnings fell on deaf ears. Apparently deciding 'enough is enough' it has now come out with draft operational guidelines.
IN its mid-term review of the Annual Policy for the year 2007-08, the RBI said that it would issue an operational circular by November 15, 2007 with regard to recovery agents engaged by banks in India. Well, it has placed on its website the operational guidelines that it proposes to issue for adoption by all banks (vide DBOD.No.Leg. 6723 /09.07.005/2007-08 dated November 30, 2007). It has asked all the scheduled commercial banks to furnish their views and comments on the proposed guidelines within a period of one month from November 30, 2007.
Some of the operational guidelines are analysed in the following paragraphs:
Banks are required to have a due diligence process in place for engagement of recovery agents, which should be so structured as to cover, among others, the individuals involved in the recovery process.
Comments: This is going to be difficult for banks since there are individuals and individuals. The agent himself may be a jail-bird of which the bank has no knowledge or the individual engaged by the agent may be a jail-bird of which the agent has no knowledge. In the latter case, the agent is still liable because the scope of the definition of 'agent' is vast. It includes agents as well as employees engaged by the agents! Thus, for the bank, it is going to be difficult and costly to screen the prospective agent; for the agent, it is going to be even more difficult to screen his agent or employee because he has to spend upfront for the purpose. Not many may qualify as agents in the process. Agents may become scarce almost overnight just as 'independent directors' became scarce after corporates were obliged to adhere to the corporate governance code.
>>>To ensure due notice and appropriate authorization on their part, banks should keep the borrower informed of the details of recovery agents engaged for the purpose, while entrusting default cases to the recovery agents. The details should include the telephone numbers of the agent. The agent should call the borrowers only from the telephone numbers conveyed to the borrower by the bank.
Comments: This is a welcome provision but suffers from a lacuna. The agent may have furnished the telephone number incorrectly to the bank (either by design or by accident) or the bank may have furnished the telephone number incorrectly to the borrower or the telephone may have gone out of order when the agent attempts to contact the borrower obliging the agent to use another phone number for the purpose. In fact, the 'out of order' excuse may be misused and abused by the agent to justify using other telephone numbers for the purpose. To err on the side of caution, the agent may furnish even five or ten telephone numbers to the bank! RBI therefore would do well to advise the banks not to permit the agent to furnish more than two telephone numbers for the purpose.
>>>Each bank should have a mechanism in place to address borrowers' grievances with regard to the recovery process. The details of the mechanism should also be conveyed to the borrower. This is a welcome provision since there is generally a huge communication gap between the bank and the agent himself as to the status of the loan account.
>>>Another guideline disapproves of banks setting very stiff recovery targets or offering high incentives to recovery agents. These have, in turn, induced the recovery agents to use intimidatory and questionable methods for recovery of dues. RBI has therefore advised banks to ensure that their contracts with the recovery agents do not induce adoption of uncivilized, unlawful and questionable behaviour or recovery process.
Comments: It is better that the said contract is drafted by the RBI itself for adoption by all banks. Alternatively, the RBI may mandate the Indian Banks' Association (the Bankers' Club) to do this. This is important since what is uncivilized or unlawful or questionable behaviour may be perceived differently by different banks.
>>>Circular DBOD.Leg.No.BC.104/09.07.007/2002-03 dated May 5, 2003 on Guidelines on Fair Practices Code for Lenders and Master Circular DBOD.FSD.BC.17/ 24.01.11/2007-08 dated July 2, 2007 on Credit Card Operations of the RBI advises banks that in the matter of recovery of loans, (a) the lenders should not resort to undue harassment, viz. persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc. (b) banks should ensure that agents engaged by them for debt collection refrain from action/s that could damage the integrity and reputation of the bank (c) their agents should not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude into the privacy of the borrowers' / credit card holders' family members, referees and friends, making threatening and anonymous calls or making false and misleading representations. The 'Code of Bank's Commitment to Customers' (BCSBI Code) obliges banks to strictly abide by the codes pertaining to collection of dues. RBI Circular DBOD.NO.BP. 40/21.04.158/2006-07 dated November 3, 2006 on guidelines on managing risks and code of conduct in outsourcing of financial services by banks, advises banks to ensure that, among others, the recovery agents are properly trained to handle with care and sensitivity, their responsibilities, in particular aspects like hours of calling, privacy of customer information etc. Therefore RBI wants the Indian Banks' Association to formulate, in consultation with Indian Institute of Banking and Finance (IIBF), a certificate course for Direct Sales Agents / Direct Marketing Agents / Recovery Agents with at least 100 hours of training. Once the course is introduced by IIBF, banks should ensure that over a period of a year all their Recovery Agents undergo the said training and obtain the certificate from the said institute. Further, service providers engaged by banks should also employ only such personnel who have undergone the said training and obtained the certificate from IIBF.
>>> RBI has advised banks to rely only on legal remedies available under the relevant statutes which allow them to enforce the security interest without intervention of the courts, when they take possession of property mortgaged / hypothecated to them. This is necessary in the light of a recent Supreme Court observation that 'we are governed by rule of law in the country and the recovery of loans or seizure of vehicles could be done only through legal means'. The guideline also says that 'where banks have incorporated a re-possession clause in the contract with the borrower and rely on such re-possession clause for enforcing their rights, they should ensure that such repossession clause is legally valid, is clearly brought to the notice of the borrower at the time of execution of the contract, and the contract contains terms and conditions regarding (a) notice period to be given to the customers before taking possession (b) the procedure which the bank would follow for taking possession of the property and (c) the procedure which the bank would follow for sale / auction of property. This is expected to ensure that there is adequate upfront transparency and the bank is effectively addressing its legal and reputation risks'.
But here again, subjectivity could creep in because most such contracts prescribed by banks are one-sided and when challenged in a court of law, this demerit will show up. RBI should mandate banks to file with it a copy of all contracts banks require the borrower to execute for ratification by it.
If RBI has done well to caution that banks, as principals, are responsible for the actions of their agents. Hence, they should ensure that their agents engaged for recovery of their dues should strictly adhere to the above guidelines and instructions, including the BCSBI Code, while engaged in the process of recovery of dues.
Comment: I wish banks in general and the ICICI Bank in particular paid heed to this caution from RBI. The Delhi State Consumer Commission ordered ICICI Bank to pay Rs 50,00,000 by way of fine for employing goons to recover loans form its consumers. The Commission deplored the practice of the bank intimidating the consumers to collect the loan instalments. The Commission also ordered ICICI Bank to pay Rs 5,00,000 to a consumer who was allegedly beaten up by its recovery agents who also took away the complainant's car. The victim sustained injuries on the skull and other parts of the body. But ICICI Bank's effrontery has led it to refuse to own up the act on grounds that agents were employed separately by the recovery agency and it could not be held culpable of any such act as it had asked the agency to conduct itself in accordance with the law. In the light of RBI's caution, will ICICI Bank's argument hold water?
Perhaps fed up with the banks' reluctance to adhere to its instructions the RBI has said that any complaints received by it regarding violation of the proposed guidelines and adoption of abusive practices on the part of banks' recovery agents would be viewed seriously. Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of the guidelines, Reserve Bank may consider extending the period of ban or the area of ban.
Similar supervisory action could be attracted when the High Courts or the Supreme Court pass strictures or impose penalties against any bank or its Directors/ Officers/ agents with regard to policy, practice and procedure related to the recovery process. RBI has realised that sparing the rod will spoil the child!