Recovery Mechanism for NBFC

The Ministry of Finance (Department of Financial Services) issued a notification dated February 12, 2021, which amended the “Department of Financial Services” notification dated 24th February 2020. As per the notification, the eligible amount for recovery of the loan was proposed to rupees twenty lakhs which was rupees fifty lakhs earlier, in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI ACT).

The amendment in the recovery of loans aims to improve the credit discipline of NBFCs by having a minimum asset size of rupees hundred crores.

What does Debt mean?

The term debt has been defined under Section 2 of “The Recovery of Debts Due to Banks and Financial Institutions Act, 1993” as:

Liability (including interest) due from any person, as claimed by a bank/ financial institution/ consortium of banks/ financial institutions during the course of any business activity undertaken by such institution, which is in cash/otherwise, secured/unsecured, or assigned or to be paid under a decree or order of a civil court or arbitration award or otherwise or under a mortgage and recoverable on, the date of the application.

It also includes unpaid liability (full or part) towards debt securities. Such liability is unpaid even after notice of 90 days served to the borrower by debenture trustee or other authority in whose favor a security interest is created for the benefit of holders of debt securities.

How is RBI directing NBFCs in regards to the recovery of debt?

• NBFCs must avoid undue harassment towards borrowers. Harassment can include instances where borrowers are disturbed in odd hours, rude behavior towards borrowers, use of muscle strength for recovery, etc.
• NBFCs must train their employees to deal with the customers in a proper manner. Employees must be trained to deal with appropriate behavior towards borrowers without the use of any coercive collection methods.
• Recovery must be done at the central designated place only. But if the borrower fails to appear at the designated place, the recovery staff can be allowed to reach the place of residence/work.
• NBFCs must frame the Code of Conduct for training, recruitment, and supervision of recovery staff. The code should provide eligibility for recovery staff, penalties to be imposed on recovery staff for contravening the code, training methods, etc.

What is the role of the recovery agent?

• The Recovery Staff must protect the integrity of the NBFC and must refrain from any actions that could damage the goodwill of NBFC in the market.
• Recovery Staff must respect the norms of customer confidentiality.
• Proper training mechanisms should be adhered to ensure that recovery staff manage their responsibilities with due care.
• Recovery staff must not perform any action that leads to harassment, be it verbal or physical towards customers.
• Staff must restrict themselves from threatening the borrower, public humiliation, or false/misleading representation.
• Recovery Staff are under an obligation to adhere to the Fair Practices Code as established by NBFCs.

The recovery of debts is not an easy process, it requires continuous efforts of highly trained personnel to deal with the customers and recover the amount due from them.