RBI Guidelines for Loan Recovery Agent and Process - 2024
The best thing about a personal loan is that it helps us when we are in a financial crisis. So, as a borrower, it is only right to repay the loan as fast as possible. This will build a healthy credit score which will help you become eligible for a higher loan amount the next time you need it.
In case you can not repay the loan in the given time period, banks send recovery agents to obtain the remaining amount from you.
The Debt Recovery Tribunal in banking law facilitates speedy recovery of the loans. In this article, let us take a look at how a loan recovery process is generally conducted.
Read More About: Legal Action for Loan Defaulters
Ways of Loan Recover
When a borrower is unable to repay a loan, the lending institution initiates a loan recovery process.
RBI guidelines for loan recovery ensure that the process is beneficial to the lender while also respecting the borrower’s legal rights and obligations.
There are two main ways of loan recovery -
- Through a non-judicial route
- Through judicial processes
Process of Loan Recovery
One of the main criteria that determines a loan recovery process is the reason for loan default. Let us understand this with examples.
Situation A
Mr. X is financially responsible and has a good credit score. But due to unexpected circumstances (eg. the COVID-19 pandemic), he has lost his job and is unable to repay the loan.
In this situation, the lending institution may offer him/her one of the following options -
- Extension of repayment tenure which reduces the EMI amount
- A moratorium wherein he will not have to pay the EMI for a few months
- Accept a ‘haircut’ wherein the lender waives a certain amount of loan if the borrower is in no position to repay the loan in the near future as well
It should be noted that if Mr. X opts for a moratorium or a ‘haircut’, his credit score may get negatively affected. Repaying the loan amount in full with an extended tenure is the best option for him.It should be noted that if Mr. X opts for a moratorium or a ‘haircut’, his credit score may be get negatively affected. Repaying the loan amount in full with an extended tenure is the best option for him.
Situation B
A borrower Mr. Y has a low credit score but has availed a loan even when he is unsure about his repayment capacity. Due to this, although he has received a loan, the interest rate is high and the repayment term is short.
At any point in time, if he is unable to repay the loan, even if the circumstances are genuine, he may not be offered a moratorium or ‘haircut’.
If this was a secured loan and Mr. Y defaults, the lender may also choose to sell the asset given as collateral to recover the loan amount. However, Mr. Y has the right to receive any excess amount made through the sale after the loan amount has been repaid.
If neither of these options works, the lender may opt to send loan recovery agents.
RBI Guidelines for Loan Recovery Agents
Loan recovery agents are almost always looked at negatively and with fear. You may have heard of stories where agents have harassed innocent individuals in the name of loan recovery. However, these are illegal as there are elaborate guidelines put forth by the RBI when it comes to loan recovery.
Agents are legally bound by these guidelines and cannot harass borrowers in any way. Some of these guidelines are as follows -
- Banks must have a diligence process in place when it comes to engaging with loan recovery agents and are responsible for all complaints filed against them.
- Borrowers must be notified first about the details of the recovery agency.
- The agent must also carry the authorization letter and copy of the bank’s notice when meeting the defaulter.
- In case a complaint has been lodged by the borrower, banks are not allowed to forward the respective case to a recovery agency until the said complaint has been solved/disposed of.
- However, this is nullified if the bank is convinced with proof that the complaints are frivolous or pointless.
- The bank must also ensure that borrowers' grievances regarding the recovery process are addressed appropriately.
What to Do if Debt Recovery Agents Harass You?
The Reserve Bank of India provides rights to people that protect borrowers from being harassed by debt recovery agents. Recovery agents sometimes employ coercive tactics to recover debts from defaulters, like frequent phone calls, abusive messages, and visits.
According to the RBI's rules for loan recovery agents:
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Recovery agents are not allowed to contact borrowers between 7:00 p.m. to 8:00 a.m.
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Agents are not allowed to intimidate or harass borrowers. This includes invading the borrowers' privacy, making threatening phone calls, and sending inappropriate messages.
If you were or are being harassed by recovery agents, you can take the following steps:
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File a police complaint against the recovery agent under Section 506 of the Indian Penal Code.
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Seek an injunction from the Civil Court against the recovery agents.
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File a complaint with the RBI Ombudsman against the bank that works with the recovery agent.
Debt Recovery Tribunal in India
The Debt Recovery Tribunal facilitates these loan recoveries by banks and other lending institutions. Their power is limited to settling the claims. In case a bank declares a loan account as a non-performing asset(NPA), the debt recovery tribunals ensure the balance amount related to the loan account is recovered.
The Debt Recovery Tribunal Act was brought into effect to minimize the time taken to recover a loan from defaulting or non-performing borrowers and ensure a speedy process.However, the Debt Recovery Tribunal Act is only applicable for amounts above Rs. 20,00,000.
Is defaulting on a loan a criminal case? Will loan defaulters have to go to jail?
The answer to this is generally no, except in certain circumstances. Loan defaulting by itself is not a crime and defaulters cannot be arrested.
But if a defaulter has not repaid a loan despite being liable for the same, the lender can file a case in civil court against the borrower.
However, if the borrower is deemed to be a wilful defaulter by -
- Either not paying despite being able to
- Or diverting the loan or funds for reasons other than those provided while availing the loan
- Or even disposal or transfer of collateral without the lender’s knowledge
Then a criminal case can be filed against the defaulter which may lead to arrest and a trial in a criminal court.
Borrower’s Rights
Lenders have to legally follow certain processes if they wish to initiate a loan recovery process against the borrower.
In case collateral has been provided, the asset(s) can be repossessed by the lender under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests) Act.
However, the rights of every loan defaulter must be upheld. These are -
- Right to Notice
- Right to Fair Value
- Right to be Heard
- Right to Claim the Balance
- Right to be Treated Politely
For more information about this, take a look at our article on legal action for defaulters.
Conclusion
Banks and other lenders can generally predict when a borrower is on the verge of defaulting based on their financial behavior as well as their credit score. The process followed by each lender will vary but generally, it involves trying to change certain conditions to help the borrower repay the loan such as increasing repayment terms. If this does not work then assets may be seized in case of secured loans or loan recovery agents may be enlisted. If neither of these works, the lender may write off the loan or declare the borrower/company as a Non-Performing Asset or NPA.
Loan Recovery Process - Related FAQs
Here are some helpful strategies to employ much earlier in the lending lifecycle, as well as techniques to make loan recovery effective and resourceful, to prevent loans from turning into bad debts:
- Become more familiar with the applicant's creditworthiness.
- Make automated loan collections.
- Real-time monitoring of customer behavior.
If the bank or the recovery agent harasses the customer, he/she can go to the police station and file a complaint. This must be the first step before taking more drastic action. If the police do not provide any assistance or do not register the complaint, the client may proceed to civil court and seek relief.
The client can also file a complaint with the Reserve Bank of India (RBI), which can take strict measures to ensure that the loan recovery agent does not engage in illegal behavior.
In the case of a secured loan, such as a home or car loan, the lender may seize the asset used as collateral to recover the loan.
An unsecured loan provides no security to the lender and is solely based on the borrower's credit rating, so there is no imminent risk to the borrower about lenders having a claim on their assets.
As a result, no assets can be taken. In the case of a dispute, recovery is determined by the contract term and the legal process. However, the borrower’s credit score will be severely affected.
The borrower will not go to jail. Deferring on a loan is a civil charge that can lead to criminal charges. As a result, a genuine loan defaulter cannot go to prison. However, there are situations in which a criminal case may be filed against a defaulter if he/she -
- Does not repay despite being able to
- Diverts the loan or funds for reasons other than those provided while availing of the loan
- Disposes or transfers of collateral without the lender’s knowledge
Reducing the EMI: Banks can reduce EMIs by increasing the loan tenure or converting an unsecured loan to a secured loan.
EMI cancellation Payment for a limited time: In case of unforeseen circumstances, banks may permit non-payment of EMIs for a period of 3 to 6 months. After this time period, the EMI payment should resume.
The defaulter can convince the bank to close the loan once and for all for a part-prepayment.
In accordance with the SARFAESI Act, banks can recover NPAs without involving courts.
Debt recovery is the process by which a creditor engages a third party, to obtain payment for an outstanding loan that they may have defaulted on.
The major challenges a bank faces during the loan recovery process are:
- Lengthy and expensive legal procedures
- Uncooperative customers
- Hurdles in liquidating the assets
Like any other unsecured loan, a bounce-back loan is subject to repayment through a variety of methods. Banks have teams dedicated to recovering debt and they will communicate with you frequently. However, if you keep missing payments, it could lead to debt collection calls, and County Court Judgement, which could lead to bailiffs seizing company property as a means of debt repayment.
Yes. However, the loan recovery agent can only visit you between 8 AM and 7 PM. RBI has also stated that these agents can not resort to any kind of harassment.
