This article is written by Nishtha Garhwal, a student of Alliance School of Law, Bangalore. The article tries to study the coercive tactics that recovery agents adopt in order to collect the payments owed by a client and the remedies available to such a client against harassment.

Introduction

Recovery agents are hired by a bank or a financial institution in order to collect the installments or payments due for a charge owed by the clients to the bank or financial institution. These recovery agents are not a party to the original contract (that is between the financial institution and the client). They are thus considered a third party to the contract.

There are many instances where borrowers have committed suicide because of the humiliation faced in front of family members and neighbours. Borrowers not just face threatening calls from these agents but also face actual damages. One such case is of Telangana where a 23-year-old student hanged himself because of being harassed as he was unable to repay the loan.

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There are plenty of cases in India regarding recovery agents’ illegal and oppressive conduct with an intention to benefit the bank or financial institution by collecting the pending dues from its clients. Due to such conduct, there exists a fear of recovery agents in India. 

Harassment by recovery agents

For a long time, recovery agents have threatened and caused mental anguish to the borrowers who owe payment to the bank or financial institution. During the Covid-19 crisis, there has been a rise in the cases of recovery agents utilising coercive and oppressive tactics in order to collect payment dues. There is a fear among the lenders of the surge in Non-Performing Assets (NPA) because of the stress faced financially by the borrowers in the Covid crisis.

In the case of ICICI Bank Ltd. v. Prakash Kaur and Ors.(2007), a loan was taken by the Petitioner in order to purchase a car and certain defaults were committed by him in repayment. As a consequence of this, the vehicle with the Petitioner was taken away from the Petitioner by force through employing musclemen. The Court, in this case, gave the ruling that neither force can be utilized nor musclemen or hooligans can be hired by a private or nationalized bank in order to recover the amount of a loan.

What is and is not considered harassment by a lender

Any of the following things done by a lender is deemed to be harassment.

  • Lender attempting to approach the borrower multiple times on each day.
  • Using relatives, neighbors, or friends of the borrower in order to spread the message about the borrower’s debts.
  • Humiliating the borrower in front of the public.
  • Using fake logos or forms to give an impression that they are official, for example sending letters to the borrower that give an impression that they represent court forms.
  • Contacting relatives or friends of the borrower continuously.
  • Pressurizing the borrower to sell his home.
  • Attempting to seek the borrower on a social networking site.

In the case of ICICI Bank v. Shanti Devi Sharma and Ors. (2008), the Appellant’s son was humiliated and threatened before his family and neighbors by the recovery agents appointed by the bank to recover the amount he took in order to buy a motorcycle which resulted in the son committing suicide. The Court in this case gave the judgment that the deceased was prompted to commit suicide because of the humiliation faced by him in front of his family and neighbors by the bank’s agents and it was held that banks are not permitted to hire and use musclemen and hooligans for recovering loans from the defaulters.

In a judgement given by the Kerala High court in the case of Smart Security Secret Service Agency v. SBI (2016), it was ruled that the utilisation of musclemen for the recovery of a due amount would lead to lawlessness in a democratic country like India. Therefore, it was held that the application of solid arm strategies in order to recover credit by a bank or financial institution is opposed to public policy and therefore, is unlawful. The financial institutions were guided to follow the due process of law in an authorised way.

However, not all the tactics used by a lender are considered harassment and a lender is allowed to get the amount owed in some way. If a lender sends installment updates and demands, calls at customer’s home at a reasonable time, or initiates a court motion, it won’t be considered harassment, and the lender is permitted to adopt these measures to recover the due payment.

Guidelines for the protection of borrowers from the recovery agents

A Fair Practice Code has been laid down by the Banking Codes and Standards Board of India (BCSBI) which is an autonomous banking industry watchdog that seeks to provide protection to the consumers of the Indian banking services. As per the BCSBI’s Code of Customer Rights, the recovery agents cannot visit a borrower before announcing and if they want to meet a borrower, they must inform the borrower to decide the place of meeting. During the meeting, the recovery agent must interact with the borrower in a civil manner and respect their privacy. A letter of authorization from the bank must be brought by the recovery agent for the meeting. In addition to this, the recovery agents are only allowed to contact the borrower between 7 AM to 7 PM. 

In case the borrower cannot be contacted, such a borrower’s friends, relatives or neighbors can be approached by the recovery agent. The duty to keep updating the contact details with the lender is upon the borrower. As per the BCSBI’s Code of Customer Rights, lenders should inform the borrower before beginning the recovery proceedings and the banks are also supposed to provide the name of the recovery agent to the borrower who has been hired to handle the case.

The Reserve Bank of India has also laid down certain guidelines to define what can and cannot be done by a recovery agent and these guidelines must be followed by all banking and financial institutions. As per this, if any grievance has been raised by a customer, recovery cases cannot be forwarded by the bank to a recovery agency till the time the grievance is settled.. Coercive tactics are not supposed to be utilized by the lenders for recovery. For any action by the recovery agents or their behavior, the banks are held responsible. Thus, it is necessary for the banks and financial institutions to ensure that their agents don’t violate the RBI guidelines. 

The recovery agents are supposed to record and maintain the calls with the borrower so that they can be used for investigation by the financial institution in case a customer makes a complaint of harassment or threatening calls by recovery agents.

Although several norms have been laid down by RBI to deter banks from delegating the recovery process to the recovery agents, these agents are still hired by the banks. 

Legal remedies available to the defaulter in case of harassment by recovery agents

The following are the remedies that the defaulter can seek in case of harassment by the recovery agents. 

  • A complaint can be filed by the defaulter against the bank and recovery office at the police station under Section 506 of the Indian Penal Code, 1860 which is about criminal intimidation. If vulgar language has been used by a recovery agent against a woman, an FIR can be lodged under Section 509 of the IPC. In case the police station does not register an FIR or take any action, the Magistrate can be approached and a complaint can be made under Section 156 (3) of the Code of Criminal Procedure, 1973.
  • A civil injunction suit can be filed by the defaulter in the civil court against the bank and recovery organization with an ad-interim relief. 
  • An objection can be filed by the defaulter with the Reserve Bank of India. With a purpose to regulate the approach towards defaulters, the RBI has laid down certain norms for the conduct of recovery agents after receiving some objections from the public and witnessing harassment cases by the recovery agents. Thus, the organization can be contacted and a legal complaint can be filed if the defaulter feels that they have been harassed.
  • A trespass objection can be raised in the form of a complaint about disregarding the right of an individual if recovery agents of the bank without consent enter a defaulter’s home illegally.
  • A case of extortion can be filed if the money has been recovered forcefully from the defaulter by the recovery agents. The banks will be vicariously held liable for the conduct of its agents.
  • Generally, every bank has a complaint department that the clients can approach to raise a grievance. Thus, the defaulter can register a complaint with the bank. After that, there is a thirty day waiting period for the client to get an answer or for the issue to be tackled.
  • In case the bank does not respond to the grievance within the specified time, the banking ombudsman can be approached by the defaulter. The individuals for redressing the grievances by the clients are appointed by RBI as a senior authority. The complaints in relation to credit cards are filed before the ombudsman whose jurisdiction lies within the billing address of the client. The banking ombudsman needs to make a settlement between the bank and the client and also give a legally binding decision. 

Legal remedies available to banks and Non-banking Financial Company (NBFCs) for credit recovery

The general laws, for instance, the Indian Contract Act, 1872, the Transfer of Property Act, 1882, the Specific Relief Act, 1963, and so on apply to all the banking transactions depending upon the nature of the transaction as an agreement is formed between the bank and the borrower when the credit is taken from the bank.

An Original Application (OA) to the Debt Recovery Tribunal can be utilized by a bank or financial institution against the defaulter for the recovery of the debt. The right to the implementation of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act, 2002) is reserved with a secured lender. 

If the amount of Non-Performing Assets (NPA) crosses the mark of  INR 1 Lakh and the account of NPA credit surpasses the principal interest by 20%, then the provisions given under the SARFAESI Act can be applied. The Act permits banks or financial institutions to recover credits through auctioning the business or private properties of the defaulters.

An ordinary money suit can be filed by a moneylender for the recovery of a pending amount from the defaulting borrower.

Legal remedies to corporates for advance recovery

Some general laws can be applied to all corporate transactions depending upon the nature of the transaction as an agreement is formed between the company and the borrower when the amount is borrowed. 

Legal moves can be taken by a company against the borrower in case such a borrower neglects to repay the borrowed amount. Under Order 37 of the Code of Civil Procedure, 1908, a summary suit can be instituted in a competent court. 

In addition to this, under the Arbitration and Conciliation Act, 1996, arbitration can be sought for the purpose of settlement outside the court.

Asset Reconstruction Companies (ARCs)

Although instances of harassment by the recovery agents are prevalent in the country, under the Asset Reconstruction Companies (ARCs), certain rules have been issued by RBI according to which a Fair Practice Code has been established. Thus, as per this, borrowers cannot be disturbed by the recovery agents, and a complaint redressal system has also been established so that genuine objections can be resolved quickly. In addition to this, the number and name of the assigned complaint redressal official need to be shared by the ARCs with the borrowers.

The role of ACR is to make sure that proper training of the recovery agents to handle their responsibilities with sensitivity happens. The recovery agents must be sensitive to the privacy of the client’s information. The information that is gathered by ARCs must not be leaked unless the law requires the disclosure of such information or if the client has given consent to it. The recovery agents must not indulge in any uncivilised and unlawful way of recovering debts from the clients. The recovery agents must adhere to the guidelines as there are many provisions through which a client can seek redressal and set the liability of the bank or the financial institution in case they have been harassed. 

Conclusion

The banking system and corporate business play a crucial role in an economy. If the borrowed amount is not recovered, it reduces the capacity of banks to lend and therefore, hinders the reuse of assets. The three primary functions of a bank or a corporate business include the mobilization of the available resources, their arrangement, and the re-utilization of resources.

Thus, if the borrowed amount is not recovered, it hinders all these areas of function. Even the honest borrowers have to suffer because of this as it also hinders the capacity of the bank to restore advances to financial institutions. The recovery of credit on time is crucial for the proper working of a corporate business. 

References

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