“Aap sirf bank ke sales target mein dhyaan dijiye (You just focus on the bank’s sales target). Don’t worry about the rest. Your defaulted money, which has been stuck for six months, will be released within six days.” That’s the reassurance from Mumbai-based Good Luck Recovery Agency to banks saddled with bad loans. Inside its ramshackle office, housed in Firdaus Apartment in the Bhendi Bazaar area of south Mumbai, half a dozen agents dressed casually are negotiating, pressurising and threatening defaulting customers. At one table, a nervous couple is seen engrossed in a conversation. At another, a bearded man in his early 40s almost holds a defaulter by the neck, threatening to choke him to death. “My money should come within two days,” screams another 30-something in a red T-shirt with the looks of a bouncer. “Don’t show me the papers!” yells another agent to a middle-aged borrower who is pleading with folded hands. There is madness at the Good Luck office, which specialises in the recovery of personal loans and credit cards.

Sounds familiar? Could be. After all, this is actually a scene from the 2008 Hindi movie EMI: Liya Hai To Chukana Padega, in which Sanjay Dutt plays a local goon who makes it big by running a recovery business. It was but a reflection of what was happening in real life in the 2000s. Private banks would appoint recovery agencies to ‘persuade’ loan defaulters to return their money. The agencies, in turn, would appoint people like musclemen, eunuchs and others to do the job. Terrorised and, sometimes, physically harmed, several borrowers even committed suicide. This was despite a fair practices code for banks and agents being in place. India’s banking regulator, the Reserve Bank of India (RBI) then stepped in, and introduced over half a dozen borrower-friendly measures—police verification of agents, giving borrowers the details of recovery agencies, even recording calls.

We have received complaints of customers being contacted by recovery agents at odd hours... There are also complaints of agents using foul language. Such kind of actions... are unacceptable and pose reputational risk for the financial entities... we will not hesitate to take stringent action in cases where regulated entities are involved

Shaktikanta Das
Governor
Reserve Bank of India

Have these helped? Not really. A decade and a half after Dutt’s film, the reality on the ground still mirrors the movie scene, sometimes worse. An outsourced recovery agent of rural-focussed Mahindra Finance, a non-bank finance company (NBFC), mowed down the pregnant daughter of a farmer in Jharkhand last September. Then, three NBFCs in Maharashtra and Uttar Pradesh had their licences revoked for resorting to undue harassment of borrowers. RBI has woken up again, with Governor Shaktikanta Das warning publicly of action through law enforcement agencies.

Why this sudden return of the dreaded agent? Over the past two years, the Covid-19 moratorium on personal loan repayment (not waiver), job losses and salary cuts have led to higher loan defaults, and an escalation of recovery cases. After the economy reopened, soaring inflation and rising interest rates are now giving a reality check to young borrowers lured by digital apps. With defaults rising, banks are spending big to recover their money. Rishabh Goel, Co-founder & CEO of Credgenics, a new-age debt resolution platform, says: “The cumulative spend on collection by banks and NBFCs is a whopping RS 42,000 crore annually.”

When the recovery agent knocks on your door, he is the villain, and rightly so (despite you being the defaulter, nothing justifies strong-arm tactics). But there are other entities, too—RBI, Indian Banks Association (IBA), Indian Institute of Banking & Finance (IIBF), banks, NBFCs, digital lenders, new-age tech players, lawyers and loan settlement companies—which are responsible for protecting the interests of borrowers, but are failing them. A Business Today investigation deep inside the recovery chain unearths crucial weak links.

Booming Consumer Loans

Let’s first understand the context better. The proliferation of digital lending apps, buy now-pay later schemes, peer-to-peer lending, and bank pre-approvals has led to exponential growth in quick-to-get consumer loans across the country, including for new-to-credit customers. Fed on this seemingly limitless buffet, consumers are now increasingly taking loans for foreign holidays, dining out, buying luxury items, and what have you. A recent ASSOCHAM-CRISIL report talks about shifting stressed assets opportunity from corporate to retail and MSMEs. The new segments are personal loans, consumer durables, used cars, affordable housing and microloans. Until a few years ago, this was restricted to home loans and loans against property. Now, with layoffs happening across sectors, and higher interest rates marking up even older loans, defaults are rising. Industry sources estimate the size of retail NPAs at RS 5.5 lakh crore. 

Muzammil Patel, Co-founder of tech consulting firm Acies, says the size of NPAs will rise as the base of retail assets grows, even if the number of delinquencies does not. “The problem with personal loans is that banks haven’t necessarily been able to differentiate pricing despite having information about good and average customers,” he argues. Today, the whole loan process has gone digital, from lead generation to disbursement, yet the collection and recovery ‘industry’ remains archaic. “The lenders are now dealing with a much savvier customer,” says Manavjeet Singh, MD & CEO at CLXNS Technologies, a digital-first debt resolution company.

We have to have a central repository of blacklisted recovery agencies. We will talk to the IBA and banks to have such a centralised system

Biswa Ketan Das
CEO
Indian Institute of Banking & Finance

Meet the Mom-and-Pop Recovery Agencies

On a street bustling with people in Mumbai’s Ghatkopar suburb, shops line both sides of a narrow road. The area looks residential, with grocery stores, vegetable vendors, medical stores, etc. Behind a multi-storeyed building, there is an alley of kitchens and godowns where a modest, 250-sq. ft office of a recovery agent is located. The reception area sports a dusty whiteboard that hasn’t been updated for months. A range of information like loan portfolios, team sizes, and targets is scribbled on it in faded black ink. Three staff members are seen. “Our agents are on the field for recovery,” explains the owner, in his late 30s, who doesn’t want to be identified.

Thousands of such mom-and-pop recovery offices, mostly sole proprietorships, operate from dingy places. “They live hand to mouth,” says Nikhil K. Shetty, Director of Client Relations at Kenstone Capital Debt Consultancy. It’s an easy business to start and also shut down on the fly. BT’s investigation reveals that many agents are not housed at the addresses they have given to banks. Retired SBI officer Talla Lakshiminarayana, who ran Veerabhadra Associates from Secunderabad and has exited the business, blames weak documentation of personal loan agreements for this. G. Venkateswarlu of GVR Corporate Services, a Hyderabad-based recovery agency, says there is fierce competition in the market. “The banks are selective in giving business. Those who quote less or have recovered more in the previous assignment get the business,” he says.

Muzammil Patel
Co-founder
Acies

The industry has a high mortality rate, with most operating regionally or in a city; few national recovery agencies exist. Ketan Purohit, owner of Vadodara-based Pioneer Services, says the success rate is 15-16 per cent in recovering bad loans, but the high incentives cover the cost of tracing and chasing remaining borrowers. “There is an accelerated incentive structure, which serves as a carrot to recover a higher percentage,” he explains. This encourages unethical practices to earn more.

These smaller agencies don’t follow a corporate structure, forget governance framework or training facilities. Plus, digital agencies are now taking away softer recovery assignments of the 0-90 days bucket. “The model is to push calls via bots, send SMS and reminders, and manage collection,” says Shetty. So, the job of handling defiant borrowers is gradually shifting to local-level recovery agencies. “You won’t be able to collect any money if someone follows RBI’s rules,” admits a recovery agent. And that’s how tempers flare sometimes and situations spiral out of control. But field agents complain that they operate under constant pressure.

Lenders Under Scrutiny

A right to information (RTI) filed with RBI by BT reveals that Mahindra Finance’s borrowers’ agreements did not contain a repossession clause, and the company’s policy on the empanelment of repossession agents did not specify a standard set of documents to be collected for evaluation, such as a reference check, background check to assess credibility, experience in the repossession business, etc. RBI’s probe also reveals violations with regard to the fair practices code, outsourcing guidelines, and customer service. Mahindra Finance did not participate in the story.

Since only banks had to train and certify recovery agents, NBFCs had regulatory arbitrage for long. It was only in August 2022 that RBI corrected this anomaly. “The noise of unethical practices is coming from smaller NBFCs, which are freely working without training and certification,” says a consultant.

Lenders have also started putting pressure on recovery agencies in recent years. A south-based NBFC’s CEO takes a recovery update every day at 9 am. “If he is travelling or on his way to the airport, the call takes place at very odd hours, like 6 am,” says a recovery agent. Partly, the regulatory framework of special mention accounts (SMA) to spot stressed loans is the reason. As per the guidelines, an SMA-0 is an account where principal or interest payments are overdue for 30 days. SMA-1 is for dues for 30-60 days, and SMA-2 for 60-90 days. Beyond 90 days, a loan is classified as an NPA. “Banks transfer these accounts to recovery agencies in various buckets ranging from SMA-0 to NPAs,” says a market participant.

These loans are also transferred product-wise from mortgages to personal loans. Inside banks, teams track recovery of SMAs, bucket wise and product wise, with agents every day. All loans have to be recovered within a 30-day period. If one agency is unable to deliver, the lenders hand over the loans in the next bucket to another player, thereby pitting agencies against one another. “We are judged by investors and analysts every quarter by our stressed loan pool, slippages, and recovery progress. We have to be on our toes,” defends a banker.

The whole lending process is now digital... but collection and recovery remain stuck in the past. As banks and NBFCs are working with more sophisticated clients‚ the number of complaints has increased

Manavjeet Singh
MD & CEO
CLXNS Technologies

There is also a new institutional framework of asset reconstruction companies (ARCs) that buys out NPA pools. But banks are generally not willing to sell them. “Very few financial institutions are willing to offload pools at 180 or 360 days. A typical portfolio coming to market would be somewhere from 700 to 1,000 days past due,” says Neeraj Mohan, MD & CEO at International Asset Reconstruction Company (IARC).

Public sector banks (PSBs) follow a tender process to empanel agencies, while private lenders opt for a partnership model. The assignment of NPAs by PSBs takes place at branch, zonal, regional, and central office levels. M.B. Hariawala, an ex-banker, started an agency in Mumbai but shut it recently because of payment delays. “People keep changing at PSBs. Payment decisions are stuck for months,” he complains. Banks, on condition of anonymity, argue that their primary responsibility is to focus on lending rather than creating resources to manage recovery agencies. “They hand over RBI’s code of conduct and other guidelines, which remain on paper. Their focus is on signing agreements and giving out ID cards to agents,” says a recovery agent.

The lenders, the first line of regulators for recovery agencies, are not doing regular audits to check on their infrastructure, people quality, and systems. For instance, RBI fined RBL Bank RS 2.27 crore for failing to guarantee that its recovery agents had undergone IIBF training before being hired. The bank also failed to ensure pre-employment police verification and failed to inform borrowers of the details of the recovery agency while forwarding the defaulting list. Clearly, the lending institutions share equal blame for the current situation on the ground.

The Crucial Link in the Chain

One and a half decades ago, RBI entrusted the IBA to run a certificate course in debt recovery in consultation with the IIBF. The governing council of IIBF includes SBI Chairman Dinesh Kumar Khara as chairman and the CEOs of other PSBs as members. Initially, IIBF asked the banks to impart the training. But the requirement was so large that the IIBF empanelled close to two dozen private institutes across the country. After training is completed by empanelled institutes, the IIBF conducts an examination. “We have trained 300,000 agents since the beginning. Last year, it was around 30,000-plus,” says Biswa Ketan Das, CEO of IIBF.

Since graduates don’t join recovery agencies to build a career, the industry ends up getting low-qualified workers. And, IIBF is now getting requests to reduce the minimum qualification from 10th standard. “We are not in favour of changing it at this moment. We are, however, re-looking at increasing the soft skills training,” promises Das. However, these ‘training facilities’ are nothing to speak about. In this digital age, most of them don’t even have a website. They also mirror the ramshackle infrastructure of recovery agencies. Swabhiman Academy of Banking and Finance in Mumbai, which claims to have 43 other centres, has its office located in a shop in Ghatkopar. There are also instances of institutes outsourcing the training work. In November 2021, IIBF had to issue a warning to its empanelled institutes. Plus, of the nearly 10,000 NBFCs in India, only two large ones—Bajaj Finance and HDB Financial—have taken accreditation from IIBF to train their own staff.

There are glaring gaps in training and the examination module as the focus is on banking terminology, products, penal charges, etc. “The debt recovery agent (DRA) course talks about how a cheque instrument and electronic clearing system work. The content is two decades old,” says a private banker on condition of anonymity. Das, however, says IIBF refreshes the training and tests every three years.

There is also a need to overhaul the content on soft skills for dealing with borrowers like women or senior citizens. “Today, 40 per cent of the training is on soft skills,” says N.K. Mishra, an ex-banker who runs the Chhattisgarh-based Abhiyan Academy. Currently, the training for DRAs takes place online, which also raises questions about the attentiveness of candidates. “You need different expertise or tools to teach online, especially soft skills. There are AI tools to see whether all students are attentive in the video. But these institutes don’t have the capital to deploy these,” says a consultant. There should be situational videos on how to behave with difficult or sensitive customers. “There are hardly any workshops or public seminars to discuss recovery issues,” complains a new-age tech player. IBA refused to participate in the story.

Most recovery agencies run like a one-man army. They have a hand-tomouth existence... [Digital recovery agencies are taking over softer assignments with] calls via bots‚ reminders‚ and collection

Nikhil K. Shetty
Director of Client Relations
Kenstone Capital Debt Consultancy

RBI’s Hands-Off Approach

The bank and recovery agency are in a principal-agent relationship. RBI insists that banks must ensure that these agencies or their employees are properly trained on the fair practices code. “The regulator holds the principal accountable for any wrongdoing by the agent,” says a banker (see box RBI’s Tough Stance). Experts suggest that many of RBI’s norms issued recently are mostly repetitions of previous ones, and the key is to implement them effectively.

Currently, there is no framework for ensuring governance as lenders enrol all kinds of small proprietorships. There is no board-level policy specifically for the appointment of recovery agents. BT’s investigation found that regional offices of PSBs are entrusted with the task of calling for expressions of interest for the empanelment of recovery agencies. The senior executives of the regional office vet the proposals from recovery agents, which are then put up before the regional head for approval. “There is no information utility or centralised body to check the antecedents of recovery agents,” says a player. It is also not humanly possible to check with the other 50 banks about the performance of a recovery agency.

The biggest abnormality—there is no standardisation in eligibility criteria for selecting a recovery agency. For instance, IDBI Bank’s eligibility criteria says the promoter should be at least a graduate. “How will you ensure governance or compliance with a graduate at the top?” asks a consultant. Union Bank of India has a progressive criterion that says at least one-third of the partners, directors, and employees should be chartered accountants or advocates or should have worked in judicial, police, tax, and revenue recovery departments of the government or banks for at least 10 years.

Harish Parmar
Founder
SingleDebt

Another chink in the armour: there is no monitoring of blacklisted agencies. Fullerton India, an NBFC majority owned by Sumitomo Mitsui Financial Group, terminated the services of Om Sai Management Services, a recovery agency in Dum Dum, Kolkata, for process violations in February 2023. But it figures in the list of recovery agencies on Bank of Baroda’s list. When BT called the Om Sai office in Kolkata, the person in charge rattled off the names of big private banks that the agency is still working with. Then, IDFC First Bank suspended Ludhiana-based Balak Associates in January 2020 for dishonest work ethics. It also figures in the terminated list of ICICI Bank as of June 2022. But Balak figures in the list of recovery agencies for Home Credit Finance. The consumer finance NBFC responded by saying that “agency empanelment is a detailed exercise encompassing diligent checks on background verification of the vendor, which include KYC checks, market reputation, and infrastructure capabilities.”

There are rampant cases of a terminated agency changing its name and directors to restart in a new avatar. For instance, SBI requires its branches and operating units to report blacklisted agencies to the concerned business group, which in turn would send this information to IBA on a monthly basis for circulation to member banks for action at their end. But when BT did an RTI with SBI asking for the names of recovery agencies suspended in the past two financial years, the bank said that the information sought is not compiled and maintained centrally. Das of IIBF agrees on the need to have a central repository of blacklisted agencies. “We will talk to IBA and banks to have such a centralised system,” he says.

Agenda For Change

The retail debt resolution industry has been rapidly evolving from traditional recovery agencies, ARCs to new-age digital players. “Unlike earlier days, skip tracing is possible today on the strength of tech because of the customer’s digital footprint,” says Ravinder Beniwal, Deputy CEO of IARC. The tech-savvy large agencies are focussed on training & development and compliance. ARCs are also setting up tech platforms in partnership with technology companies. “We are not going to own the platform, but it will be based on a subscription-based model,” says Pallav Mohapatra, CEO & MD at Arcil, an ARC. “Selling to ARCs makes sense as they are regulated institutions with infrastructure and quality people, and their reputation comes first,” says Sanjay Agarwal, Divisional Head-Retail Assets Business at Edelweiss ARC.

Some players are planning to aggregate traditional agencies a la OLA. “We compound our reach by working with conventional resolution agents, controlled and managed via our proprietary governance technology. This is important from a governance, training, and responsibility point of view,” says Kunal Shah, founding team member, Group CFO & Head-Retail Services, TruBoard Partners. He adds that regulators need to take a different approach to defaulters. “It’s important to differentiate between delinquent and standard customers. The sharing of customer-level data by lenders should be guided by a differentiated approach,” he says. Currently, RBI doesn’t allow the sharing of defaulting customer data.

“We have had a lot of attempts at data mutualisation in the corporate space, right from the central repository of information on large credits (CRILC) data to reporting defaults. We haven’t had enough mutualisation efforts on the consumer side,” says Patel from Acies. Currently, agents are groomed to bring back the money with no power to restructure or offer a tailored repayment plan. Patel suggests that a more likely resolution would happen where a recovery agent understands how to restructure cash flows. On the recovery side, there is a need for a framework similar to how agency models in insurance are regulated. “It should be more of a financial planning skill with more skin in the game for a continuing payout on the debt restructured by the recovery agency,” advises Patel.

While sympathy often lies with the defaulter in our society, new recovery tools and tech are also tightening the noose around rogue borrowers. “If there is a notorious customer, then the agency should flag this to the principal, and legal remedies should be explored,” suggests a retired central banker. According to lenders, the customer escalation rate (those disputing) of the total defaulting customers is less than 5 per cent. “Social media has also corrupted their minds,” says a player (see box Borrowers’ Bible).

Despite the hurdles, recovery agencies continue to play an essential role in the financial system. Ultimately, those borrowers who misuse the banking system will have to face the consequences of their actions. Because, EMI liya hai to chukana padega.