Loan collectors face heat from RBI for unfair practices

Rohit Bhatia (name changed) from Alwar in Rajasthan was the guarantor for a ₹1.5 lakh home loan his neighbor took out. However, when her neighbor defaulted on repayment for three months, Bhatia began to receive 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 (RBI) 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 move came after reports that third-party loan collectors working for M&M Finance ran over a 27-year-old woman with a tractor in Jharkhand’s Hazaribagh district, crushing her to death. An argument had broken out between the farmer, his daughter and recovery workers, local media reported.

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 collections only comes after two months from banks and non-bank lenders. By then we have to pay our collections team. on their internal resources,” he said. 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 banks and NBFCs, post-pandemic, face an increase in loan defaults, these companies can increase the role of staff or internal resources in collection and repossession, phasing out the third-party interventions, 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 review if and how third party agents will be used in the future.”

In another interview, Cholamadalam Finance said it has 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.

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