Nirmala Sitharaman Asks Banks Not to Take Harsh Steps For Loan Recovery

MUMBAI: Union Finance Minister Nirmala Sitharaman on Monday said that both public and private sector banks have been instructed not to take harsh steps to recover loans and that they should handle such cases with sensitivity.

Sitharaman said she had heard complaints about how mercilessly loan repayments had been followed up by some banks. She said this while making an intervention during the Question Hour in the Lok Sabha on a question related to repayment of loans taken by small borrowers.

"I have heard complaints about how mercilessly loan repayments have been followed up by some banks. The government has instructed all banks, both public and private, that harsh steps should not be taken when it comes to the process of loan repayment and they should approach the matter with humanity and sensitivity in mind," she said.
The Madras High Court had last month observed that if banks have to recover outstanding loan amount, the same has to be recovered in accordance with the procedure established by law.

"Coercive method of recovery by private agents, if appointed by banks, is not permissible. The banks certainly cannot use muscle power to recover the loan amount," it remarked while disposing of a public interest litigation petition alleging coercive methods being used against farmers.

In Aug 2022, the RBI tightened norms for digital lending to prevent charging of high-interest rates by certain entities and also check unethical loan recovery practices after it received complaints of unfair recovery practices and strong-arm tactic.

The central bank said banks, non-banking financial companies, cooperative banks, housing finance and asset reconstruction companies should ensure recovery agents desist from publicly humiliating borrowers or send inappropriate messages on mobile or through social media. They should also avoid calling borrowers before 8:00 a.m. and after 7:00 p.m. for recovery of overdue loans, and making false and misleading representations

Under the new norms, all loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the regulated entities (like banks and NBFCs) without any pass-through/ pool account of the Lending Service Providers (LSPs).

Earlier this year, the central bank directed digital lending entities to disclose upfront the names of their empanelled agents authorised to contact borrowers in case of default of loan, and also intimate the details to customers before initiating the recovery process.

The RBI issued a set of frequently asked questions (FAQs) on 'Digital Lending Guidelines'. On recovery agents, the FAQs said: "At the time of sanction of loan, the borrower may be conveyed the name of empanelled agents authorised to contact the borrower in case of loan default."

"However, if the loan turns delinquent and the recovery agent has been assigned to the borrower, the particulars of such recovery agent assigned must be communicated to the borrower through email/SMS before the recovery agent contacts the borrower for recovery."