RBI bans M&M from outsourcing recovery agents

Use of recovery agents in the financial services business is nothing new. Most of the banks and NBFCs employ professional collection agents to collect dues on credit cards, personal loans, car loans etc. However, once in a while, the situation does get ugly and attracts a lot of attention and confers a lot of negative publicity. The recent case of a young pregnant lady being killed by the callousness of one of the recovery agents of M&M Financial Services has forced the RBI to act quite strongly. Here is what the RBI has done.

On Thursday, 22nd September, the Reserve Bank of India (RBI) instructed M&M Financial Services not to undertake any loan recovery or repossession activity through outsourcing agents or outsourcing arrangements, pending further orders from the RBI. However, RBI has allowed M&M Financial Services to go ahead and carry out recovery or repossession activities, through its own employees. But before going ahead into this order, let us understand what was the genesis of this entire issue. It started in Hazaribagh in Bihar and became a big issue.

It began with a rather shocking reported by the Press Trust of India (PTI) on 16th September stating that a 27-year old pregnant woman had been allegedly crushed to death under the wheels of a tractor. What was more shocking was that this incident happened when the recovery agent was forcibly driving away the tractor which had been financed by M&M Financial Services and the borrower had been unable to service the loan. This had led to the agents forcibly taking repossession of the tractor, but the magnitude of the tragedy brough the entire case into focus. It happened in Hazaribagh in the state of Bihar.

Over the next few days, a number of details had emerged. The loan was indeed financed by M&M Financial Services. The tractor had been passed in the name of the lady’s father, who was differently abled. There are several issues that have arisen here. First, it pertains to the violation of norms on recruitment of loan recovery agents. Secondly, it applies to the tactics used. Using strong arm tactics is a common occurrence in many such cases and this is not the first time that loan recovery agents have led to tragic consequences.

 
In response, Anand Mahindra had personally tweeted his apologies for the incident and even promised that a detailed enquiry into the incident would be immediately instituted. Now M&M Financial Services is undertaking a comprehensive review of appointment of third-party agents for recovery purposes. This is likely to put most of the NBFCs in a tight spot, since most of the NBFCs heavily rely on recovery agents for the job. They are already under pressure after the RBI’s November 12th circular on standardisation of assets.

The November 12th circular of the RBI is quite stringent in the compliances that NBFCs have to go through. For instance, under the circular, NBFCs must mandatorily stamp non-performing assets (NPAs) daily. In addition, as per the RBI circular, an NPA account cannot be upgraded to a standard asset category, till all dues (including compounded rate of interest on the loans) are paid upfront. This may be quite impractical at times, and has forced the NBFCs to increasingly resort to collection agents.

Most of the NBFCs and banks have traditionally relied on external collecting agents since it is very difficult to justify high-handed collection tactics if the person is their own employee. However, in the case of collection agents, the NBFCs and banks have, in the past, managed to wash their hands off any responsibility. This RBI circular puts the onus of taking responsibility for collection agents on the NBFC. That should be an interesting shift.