"Recovery Raj" and RBI India's impotent Banking Regulator

From "The Indian Express" 17-April-2005

MUMBAI, APRIL 17: As banks get more competitive on the loan front with disbursements touching new highs, the customer is the winner and the loser at the same time.

While getting a loan may have become easier, a wee bit delay in payment can unleash a volley of abuses and intimidation at the hands of the recovery agents appointed by various banks.

More and more consumers are taking the legal route to restrain the banks. Things have come to such a pass that in a recent public interest litigation (PIL) filed in the Mumbai High Court against the high-handedness of the recovery agents, the court observed verbally that agents and their activities could be “illegal”.

In response to the court’s observation, the Reserve Bank of India (RBI) has said that it is legal for the bank to appoint such private agencies to recover money.

The RBI argument is that the appointment of such agencies are not violative of the Banking Regulation Act.

‘‘The role of RBI is limited/restricted to ensuring that the banks do not subvert the regulations,’’ says Rahul Narvekar, an advocate for RBI.

When contacted, an RBI official said the IBA is responsible for framing the code of conduct for recovery agents. Banks are subject to the guidelines laid down by the Indian Banks Association (IBA).

But when recovery agents resort to questionable methods, shouldn’t banks which employ them be taken to task?

According to noted criminal lawyer Shrikant Bhat, not only do the acts of the recovery agents amount to violation of the Indian Penal Code, the banks could also be guilty of ‘aiding and abetting’ the act.

‘‘If the agent gives a direct or indirect threat to recover money owed to him (read: bank), it amounts to offence of criminal intimidation. Added to that if the employer (banks) has knowledge that its employees (the recovery agents) are routinely using threat to recover money, then the employer is also guilty of aiding and abetting the act and of common intention,’’ Bhat says.

Since in most such cases, the consumers have spoken to at least one bank official regarding the agents, which would qualify the bank for the second violation.

According to Bhat, this would make the RBI guilty of uttering a shameful half-truth. “Therefore the RBI stand should be corrected. It should be probed by the court to ask if it knows or not that the agents are employing muscle power and threats to recover the money,” clarifies Bhat.

When the issue was put to HSBC, after repeated attempts, the bank refused to comment on the recovery process, saying, ‘‘That it could be under the contract law.”

Shifting the obligation to the IBA, the RBI says that the Indian Banks Association (IBA) has been already entrusted with the task of writing down code of conduct for the recovery agents.

‘‘Yes, we already have a Model Code of conduct for Collection of Dues and Repossession of Security (CDRS code). The code was prepared late 2003, and it basically speaks about how to deal with customers in a civil manner,’’ says K Unnikrishnan, senior V-P (policy), IBA.

But there’s a problem. ‘‘The code of conduct is voluntary, not statutory. There is no compulsion on banks to enforce the code of conduct, it’s is totally voluntary,’’ he adds.

So, where does the buck stop? If there is a code of conduct for recovery agents, why has it not been enforced? “These acts do not violate any provisions of the Banking Regulation Act,” says Rahul Narvekar, advocate for RBI.

But who takes the blame when things go wrong?

‘‘The banks must undertake extensive due diligence before disbursing loans,’’ thinks S. Santhanakrishnan, chairman of The Credit Information Bureau India Ltd (CIBIL).

According to him the incremental non-performing assets of banks are less than 2 per cent. ‘‘In fact, in recent reports, the RBI has sounded an alarm to the banks asking them to be more careful about loan disbursements,’’ he adds.

Right now, that just doesn’t seem to be the case.

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Read the Convenor's Complaint and Rejoinders to learn why RBI clamped down from the night of November 6th 2004.