April 24, 2008
Scheduled Commercial Banks
Mid-Term Review of the Annual Policy for the year 2007- 08 –
engaged by banks
Please refer to the paragraph
172 and 173 of the mid-term review of the Annual Policy for the year 2007-08,
a copy of which is enclosed. In view of the rise in the number of disputes and
litigations against banks for engaging recovery agents in the recent past, it
is felt that the adverse publicity would result in serious reputational risk for
the banking sector as a whole. A need has therefore arisen to review the policy,
practice, and procedure involved in the engagement of recovery agents by banks
in India. In this backdrop, Reserve Bank issued draft guidelines which were placed
on the web-site for comments of all concerned. Based on the feedback received
from a wide spectrum of banks / individuals / organizations, the draft guidelines
have been suitably revised and the final guidelines are as follows:
of Recovery Agents
2. Banks are advised to take into
account the following specific considerations while engaging recovery agents:
‘Agent’ in these guidelines would include agencies engaged by the bank and the
agents/ employees of the concerned agencies.
should have a due diligence process in place for engagement of recovery agents,
which should be so structured to cover, among others, individuals involved in
the recovery process. The due diligence process should generally conform to the
guidelines issued by RBI on outsourcing of financial services vide circular
DBOD.No.BP.40/ 21.04.158/ 2006-07 dated November 3, 2006. Further, banks should
ensure that the agents engaged by them in the recovery process carry out verification
of the antecedents of their employees, which may include pre-employment police
verification, as a matter of abundant caution. Banks may decide the periodicity
at which re-verification of antecedents should be resorted to.
To ensure due notice and appropriate authorization, banks should inform the borrower
the details of recovery agency firms / companies while forwarding default cases
to the recovery agency. Further, since in some of the cases, the borrower might
not have received the details about the recovery agency due to refusal / non-availability
/ avoidance and to ensure identification, it would be appropriate if the agent
also carries a copy of the notice and the authorization letter from the bank along
with the identity card issued to him by the bank or the agency firm / company.
Further, where the recovery agency is changed by the bank during the recovery
process, in addition to the bank notifying the borrower of the change, the new
agent should carry the notice and the authorization letter along with his identity
(iv) The notice and the authorization letter should,
among other details, also include the telephone numbers of the relevant recovery
agency. Banks should ensure that there is a tape recording of the content / text
of the calls made by recovery agents to the customers, and vice-versa. Banks may
take reasonable precaution such as intimating the customer that the conversation
is being recorded, etc.
(v) The up to date details of the
recovery agency firms / companies engaged by banks may also be posted on the bank’s
(vi) Where a grievance/ complaint has been lodged,
banks should not forward cases to recovery agencies till they have finally disposed
of any grievance / complaint lodged by the concerned borrower. However, where
the bank is convinced, with appropriate proof, that the borrower is continuously
making frivolous / vexatious complaints, it may continue with the recovery proceedings
through the Recovery Agents even if a grievance / complaint is pending with them.
In cases where the subject matter of the borrower’s dues might be sub judice,
banks should exercise utmost caution, as appropriate, in referring the matter
to the recovery agencies, depending on the circumstances.
Each bank should have a mechanism whereby the borrowers' grievances with regard
to the recovery process can be addressed. The details of the mechanism should
also be furnished to the borrower while advising the details of the recovery agency
as at item (iii) above.
Incentives to Recovery Agents
It is understood that some banks set very stiff recovery targets or offer high
incentives to recovery agents. These have, in turn, induced the recovery agents
to use intimidatory and questionable methods for recovery of dues. Banks are,
therefore, advised to ensure that the contracts with the recovery agents do not
induce adoption of uncivilized, unlawful and questionable behaviour or recovery
Methods followed by Recovery Agents
A reference is invited to (a) Circular
DBOD.Leg.No.BC.104/ 09.07.007 /2002-03 dated May 5, 2003 regarding Guidelines
on Fair Practices Code for Lenders (b) Circular
DBOD.No.BP. 40/ 21.04.158/ 2006-07 dated November 3, 2006 regarding outsourcing
of financial services and (c) Master
Circular DBOD.FSD.BC.17/ 24.01.011/2007-08 dated July 2, 2007 on Credit Card
Operations. Further, a reference is also invited to paragraph 6 of the 'Code of
Bank's Commitment to Customers' (BCSBI Code) pertaining to collection of dues.
Banks are advised to strictly adhere to the guidelines / code mentioned above
during the loan recovery process.
Training for Recovery
(x) In terms of Para
5.7.1 of our 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, banks were advised that they should 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.
(xi) Reserve Bank has requested
the Indian Banks’ Association to formulate, in consultation with Indian Institute
of Banking and Finance (IIBF), a certificate course for Direct Recovery Agents
with minimum 100 hours of training. Once the above course is introduced by IIBF,
banks should ensure that over a period of one year all their Recovery Agents undergo
the above training and obtain the certificate from the above institute. Further,
the service providers engaged by banks should also employ only such personnel
who have undergone the above training and obtained the certificate from the IIBF.
Keeping in view the fact that a large number of agents throughout the country
may have to be trained, other institutes/ bank’s own training colleges may provide
the training to the recovery agents by having a tie-up arrangement with Indian
Institute of Banking and Finance so that there is uniformity in the standards
of training. However, every agent will have to pass the examination conducted
by IIBF all over India.
Taking possession of property
mortgaged / hypothecated to banks
(xii) In a recent
case which came up before the Honourable Supreme Court, the Honourable Court observed
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. In this connection
it may be mentioned that the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Security
Interest (Enforcement) Rules, 2002 framed thereunder have laid down well defined
procedures not only for enforcing security interest but also for auctioning the
movable and immovable property after enforcing the security interest. It is, therefore,
desirable that banks rely only on legal remedies available under the relevant
statutes while enforcing security interest without intervention of the Courts.
(xiii) 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 the re-possession clause is legally valid,
complies with the provisions of the Indian Contract Act in letter and spirit,
and ensure that such repossession clause is clearly brought to the notice of the
borrower at the time of execution of the contract. The terms and conditions of
the contract should be strictly in terms of the Recovery Policy and should contain
provisions regarding (a) notice period before taking possession (b) circumstances
under which the notice period can be waived (c) the procedure for taking possession
of the security (d) a provision regarding final chance to be given to the borrower
for repayment of loan before the sale / auction of the property (e) the procedure
for giving repossession to the borrower and (f) the procedure for sale / auction
of the property.
Use of forum of Lok Adalats
The Honourable Supreme Court also observed that loans, personal loans, credit
card loans and housing loans with less than Rs.10 lakh can be referred to Lok
Adalats. In this connection, banks' attention is invited to Circular
DBOD.No.Leg.BC.21/09.06.002/2004-05 dated August 3, 2004 wherein they were
advised to use the forum of Lok Adalats organized by Civil Courts for recovery
of loans. Banks are encouraged to use the forum of Lok Adalats for recovery of
personal loans, credit card loans or housing loans with less than Rs.10 lakh as
suggested by the Honourable Supreme Court.
of credit counsellors
(xv) Banks are encouraged to have
in place an appropriate mechanism to utilise the services of the credit counsellors
for providing suitable counselling to the borrowers where it becomes aware that
the case of a particular borrower deserves sympathetic consideration.
against the bank / its recovery agents
3. 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.
4. Complaints received
by Reserve Bank regarding violation of the above guidelines and adoption of abusive
practices followed by 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 above 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.
5. It is
expected that banks would, in the normal course ensure that their employees also
adhere to the above guidelines during the loan recovery process.
6. Banks engaging recovery agents are advised
to undertake a periodical review of the mechanism to learn from experience, to
effect improvements, and to bring to the notice of the Reserve Bank of India suggestions
for improvement in the guidelines.
Chief General Manager-in-Charge
of Paragraphs 172 and 173 of the Mid-term review of the Annual Policy for
the year 2007-08
Recovery Agents Engaged by Banks
In view of the rise in the number of litigations against banks for engaging recovery
agents in the recent past, it is felt that the adverse publicity could result
in serious reputational risk for the banking sector as a whole. An urgent need
has, therefore, arisen to review the policy, practice, procedure involved in the
engagement of recovery agents by banks in India. Accordingly, banks are urged
to follow prescribed specific considerations while engaging recovery agents.
Complaints received by the Reserve Bank regarding abusive practices followed by
a bank’s recovery agents would invite serious supervisory disapproval. The Reserve
Bank would consider imposing a temporary ban (or even a permanent ban in case
of persistent abusive practices) for engaging recovery agents on those banks where
strictures have been passed/ penalties have been imposed by a High Court/Supreme
Court or against its Directors/Officers with regard to the abusive practices followed
by their recovery agents. An operational circular in this regard would be issued
by November 15, 2007.