On "Merciless" Loan Recovery, Finance Minister's Instructions To Banks

Union Finance Minister Nirmala Sitharaman today said the government has instructed both public and private banks that harsh steps should not be taken when it comes to the process of loan repayment and that they should handle such cases with humanity and sensitivity.

Ms Sitharaman 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.

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 process of loan repayments and they should approach the… pic.twitter.com/vSbDVXVeAt

— Nirmala Sitharaman Office (@nsitharamanoffc) July 24, 2023

The Madras High Court had last month observed 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 said, while disposing of a public interest litigation petition alleging coercive methods being used against farmers.

The Reserve Bank of India had in a 2008 circular warned banks that it might consider imposing a ban on a bank from engaging recovery agents if it receives complaints about the agents. Further, the banks had been asked to periodically review their recovery mechanism and give their feedback/ suggestions for improvement in the guidelines.

The central bank has since regularly issued circulars aimed at curbing harassment by recovery agents hired by banks and Non-Banking Financial Companies.

The RBI had in March this year fined RBL Bank Ltd Rs 2.27 crore for not complying with certain directives on loan recovery agents. The RBI noticed "deficiencies in regulatory compliance" after it examined complaints received against the Mumbai-based lender's recovery agents during the financial years 2018-19 to 2021-22, the central bank had said in a statement.

The central bank has also imposed penalties on several cooperative banks for contravention of its different norms.

In August last year, it issued fresh instructions barring recovery agents from resorting to intimidation of borrowers, as well as calling them before 8 am and after 7 pm.