All banks instructed not to take harsh steps to recover loans: FM Sitharaman tells Lok Sabha

All banks - private and government - have been instructed to not take any harsh steps to recover loans, Finance Minister Nirmala Sitharaman informed the Lok Sabha on Monday. Sitharaman said she had heard complaints about how mercilessly loan repayments had been followed up by some banks.

Also read: Dark underbelly of the consumer loan recovery business and the regulatory gaps that they exploit

"The government has instructed all banks, both public and private, that harsh steps should not be taken when it comes to process of loan repayments and they should approach the matter with humanity and sensitivity in mind," she said while responding to a question in the House.

In August last year, the Reserve Bank of India (RBI) tightened norms for digital lending to prevent charging of high-interest rates by certain entities and also check unethical loan recovery practices. Under the new norms, all loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the regulated entities (like banks and NBFCs) without any pass-through/ pool account of the Lending Service Providers (LSPs).

Earlier this year, the central bank directed digital lending entities to disclose upfront the names of their empanelled agents authorised to contact borrowers in case of default of loan, and also intimate the details to customers before initiating the recovery process.

The RBI issued a set of frequently asked questions (FAQs) on 'Digital Lending Guidelines'. On recovery agents, the FAQs said: "At the time of sanction of loan, the borrower may be conveyed the name of empanelled agents authorised to contact the borrower in case of loan default."

"However, if the loan turns delinquent and the recovery agent has been assigned to the borrower, the particulars of such recovery agent assigned must be communicated to the borrower through email/SMS before the recovery agent contacts the borrower for recovery.”

The bank regulator also said that in case of delinquent loans, regulated entities (REs) like banks and NBFCs, can deploy physical interface to recover loans in cash, where absolutely necessary.