Loan Recovery Agents: Operating Amid Many Shades Of Grey
A loan collection agent holds up a gold necklace for a photograph while processing a customer’s gold loan application. Photographer: Dhiraj Singh/Bloomberg

Loan Recovery Agents: Operating Amid Many Shades Of Grey

Thirty-four-year-old Pallav, after quitting his job as a coal miner in Meghalaya, decided to become a loan recovery agent in 2012 on the recommendation of an old friend who did the same work. Today, he runs his own collection agency in a small town in Assam, not very far from Guwahati, that recovers loans for public-sector lenders across the state.

Pallav, who asked that his full name not be disclosed for security reasons, advises his employees to be polite and persuasive while talking to borrowers. But sometimes those tactics do not work. “When everything fails, I ask my agents to announce the borrowers’ names on the microphone in their locality.” The practice, he said, is common among the collection agencies in his area.

“If the borrower avoids meeting us repeatedly at their residence, we try to meet them in their office or sometimes even call their relatives and inform them about the situation,” he added.

Such practices are prevalent despite being in violation of the Reserve Bank of India’s Fair Practices Code, which asks collection agencies to train their field staff in “inculcating appropriate behaviour towards borrowers without adopting any abusive or coercive debt collection or recovery practices.”

Pallav is not alone in pushing the boundaries to collect overdue loans.

According to a public interest litigation filed by advocate Vishal Tiwari at the Supreme Court, lending institutions often “adopt illegal and violent methods” to recover loans. The PIL cites an incident that happened in August last year when a group of collection agents stopped a private bus, carrying 34 passengers, near Agra because the bus owner had not paid his loan instalments.

In the most extreme of such cases, the Hyderabad police arrested six people in December belonging to online lending firms Onion Credit and Cred Fox Technologies, after two borrowers committed suicide because of alleged coercive recovery practices.

Fine Line Between Harassment And Duty

Very often these cases are not black or white but peppered with shades of grey.

In a recent judgement, the Bombay High Court quashed a first information report against a finance company employee, who was charged with abetment to suicide for demanding loan repayments from a borrower.

As per a first information report filed at the Washim police station in Maharashtra, the deceased Pramod Prakash Chouhan had alleged in his suicide note that he was being harassed through phone calls from an employee at Mahindra Financial Services. A case was then filed under Section 306 (abetment of suicide) in August 2018. Chouhan had taken a Rs 6.21 lakh car loan, which he had agreed to repay over four years by giving monthly instalments of Rs 17,800.

While disposing of the criminal charge against the accused employee, a bench of Justice VM Deshpande and Justice AS Kilor of the Bombay High Court (Nagpur Bench) said, “... the demand of outstanding loan amount from the person who was in default in payment of loan amount, during the course of employment as a duty, at any stretch of imagination cannot be said to be any intention to aid or to instigate or to abet the deceased to commit the suicide.”

The banking regulator does not clearly define actions that would constitute harassment in the context of loan recovery practices. As such, there is scope for subjectivity in the interpretation of harassment.

“Which law says that the recovery agent cannot make multiple calls to a borrower, how else will we recover loans then?” asked Pallav.

But Tiwari said benchmarks can be established. The use of coercive methods or making repeated calls is a direct attack on an individual’s right to privacy and right to live with dignity, guaranteed under Article 21 of the Indian constitution. “Any kind of compulsive tactics, such as repeated phone calls, announcing the name of the borrower in the locality, calling their relatives and friends, use of abusive language—all such practices are coercive, and therefore, illegal,” he added.

In a 2007 judgement, the Supreme Court had pointed out that, “while there are guidelines both for lending and recovery, which contemplates that no use of force or abuse is used in recovery proceedings, in the absence of an effective overseeing body, these abuses continue.”

According to R Gandhi, former deputy governor at the RBI, this is not possible. “Forming a supervisory body to regulate individual collection agencies is not practical, as there are so many of them across the country and such a practice would prove restraining towards both the lenders’ and the agencies’ operations,” he said.

Gandhi said terms such as harassment and fairness are subjective and cannot be defined using a singular definition. Therefore, the banking regulator chooses to assess such complaints on a case-to-case basis. The onus, to a large extent, is on the registered banks and NBFCs to engage recovery agencies that comply with RBI’s fair practices code. “During the review, if RBI finds a lot of customer complaints, that particular lender is held responsible for the agency’s behaviour,” he said.

As per a 2007 RBI circular, any complaints made to the regulator regarding abusive practices followed by a bank’s recovery agent may even lead to a temporary ban, or even a permanent one in case of persistent abusive practices, on the lenders’ operations.

Recently, the banking regulator imposed a Rs 2.5 crore penalty on the non-bank lender Bajaj Finance Ltd. for violating the Fair Practices Code and failing to ensure that its recovery agents did not resort to harassment or intimidation of customers as part of its debt collection efforts.

Defining Fair Practices

But the fair practices code itself is nebulous.

The code of conduct laid down by Banking Codes and Standards Board of India— a not-for-profit body constituted by an RBI committee in 2003, states that a recovery agent must visit the borrower at a specified place after informing them about the meeting, and in the absence of any specified place, at their residence or office.

For making calls, the agents are advised to call between 7 am and 7 pm, unless the customer requests otherwise. While not limiting the number of calls and visits that can be made by an agent, the code states that the borrowers’ right to privacy should be respected. It further asks agents to document the time and number of calls, as well as the contents of the conversation.

But loan collection and recovery agents often rely on banks’ and agencies’ codes of conduct and their own personal relationships with bank managers to conduct their operations, said Tiwari.

An independent collection agent from Dharwad in Karnataka, who has been in the collection business for 15 years, told BloombergQuint that he verbally updates the bank manager whenever he can. It’s difficult for me to document every call or visit I make and the regional manager also does not ask me to do so, he said, requesting anonymity.

Further, banks are also required to ensure that its recovery agents have completed a certificate course for direct recovery agents with a minimum of 100 hours of training, offered by the Indian Banks’ Association. The minimum qualification required for becoming an agent is having passed 12th grade.

Besides, as part of RBI’s code of conduct for recovery agencies, the regulator directed banks and NBFCs to compensate recovery agents on the basis of service and borrower satisfaction rather than merely the rate of recovery.

Almost all the collection agents BloombergQuint spoke to, said that their compensation is based mostly on the rate of recovery.

Solving The Debt Collection Issue, Digitally

Hoping that technology may resolve these issues to some extent, a few debt collection agencies are now using digital tools to overcome the problems of harassment and coercive recovery methods.

After having spent more than a decade in the debt collection industry, Gagan Kumar, former head of collection strategy at Standard Chartered Bank, started his own company— Secure Debt Management Consultants LLP—in 2015 to provide debt collection, recovery, and legal services to various banks, credit card companies and NBFCs across the country.

Kumar’s firm uses its proprietary analytics-based collections platform, Collect iQ, to automate repetitive manual processes like allocation and shuffling of cases, while providing real-time feedback to its collection agents.

“We also provide internal training to our employees, record all the calls made to borrowers and do regular quality audits on a random sample of calls, and then rate our agents based on its outcomes,” said Kumar. “These practices have really helped us in curbing cases of harassment.”

Another Mumbai-based digital debt management firm, Moneytor, is also trying to reduce human intervention by using artificial intelligence and machine learning to automate the debt collection process, wherever possible.

Founded in 2017, the startup manages recovery for loans ranging from Rs 500 to loans of up to Rs 20 lakh, for both fintech lenders and debt collection agencies, through a decision-making engine that suggests steps on a case-to-case basis to collection agents.

Our software reduces the number of random calls made to borrowers by providing real-time suggestions on when to make those calls based on earlier responses and repayment history. Further, the software also categorises borrowers into different buckets and recommends dynamic loan restructuring plans based on their specific situation and the success rate of certain plans among a set of borrowers.
Anubhav Singh, Co-Founder and Chief Executive, Moneytor

But Singh acknowledges that most debt collection agencies are still using the old methods.

“Even if we come on board as a software service provider, it is difficult to cut through the culture of legacy collection agencies or eliminate all of their inefficient practices,” he said. “Also, human intervention is necessary to understand the specific problems of borrowers, which is where most cases of harassment arise.”

Making A Choice

Even without clear guidelines on practices to follow and avoid, it’s possible for individual agents to make a choice.

Sixty-eight-year-old retired collection agent, MB Hariawalla, claims that he never had to use coercion to recover loans from borrowers. Having earlier been a banker at the Indian Overseas Bank for 35 years, Hariawala has closely seen both sides of the collection business in his lifetime.

“It’s important to step away when persuasion does not work. One also needs to be sensitive towards the borrowers’ issues and regularly communicate those with the bank,” he said. “It’s the job of a recovery agent to convince borrowers to pay timely, but not to coerce them into making those repayments, as there are legal ways for lenders to do that.”

While it’s important for collection agents to be conscientious, borrowers must also be aware of their rights and raise complaints, whenever necessary, said Gandhi. “They must reach out to the banking ombudsman regarding individual complaints on harassment from recovery agents.”

Further, borrowers can also resort to legal action against recovery agents in cases of harassment. “The borrowers can file a criminal complaint under section 447, 382, 504 and other relevant sections of Indian Penal Code against the agents who use force against them and defamation complaint under section 499, 500 IPC can also be filed against banks,” said Tiwari.

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