Banks will now be responsible for the recruitment of employees by their recovery agencies.

The Reserve Bank of India [Get Quote], in its draft guidelines on recovery agents engaged by banks, said, "Banks should have a due diligence process in place for engagement of recovery agents, which should be so structured to cover, among others, individuals involved in the recovery process."

The central bank has stipulated that any violation of the guidelines would be viewed seriously. It may consider imposing a ban on a bank from engaging recovery agents in a particular area. In case of persistent breach of the guidelines, RBI may consider extending the period of ban or the area of ban.

Similar supervisory action could be attracted when the high courts or the Supreme Court pass strictures or impose penalties against any bank or its directors/officers/agents with regard to policy, practice and procedure related to the recovery process.

These guidelines come against the backdrop of the rise in the number of litigations against banks for engaging recovery agents in the recent past. The central bank is of the view that the adverse publicity could result in serious reputational risk for the banking sector as a whole. The draft guideline is open for public comments until December 30.

RBI has further suggested that banks should inform the borrower the details of recovery agents engaged while forwarding default cases to the recovery agents. The recovery agents should call the borrowers only from telephone numbers notified to the borrower.

Banks would also have to put in place a mechanism where the borrowers' grievances with regard to the recovery process can be addressed. In its draft guidelines, RBI has stated that the banks set very stiff recovery targets or offer high incentives to recovery agents.

This induces the recovery agents to use intimidatory and questionable methods for recovery of dues. It has thus directed banks to ensure that the contracts with the recovery agents do not induce adoption of uncivilised, unlawful and questionable behaviour or recovery process.

The RBI has also advised banks not to resort to undue harassment, which includes persistently bothering the borrowers at odd hours and use of muscle power for recovery of loans.

Dos & Don'ts

• Banks to follow due diligence for recruiting recovery agencies and their employees.
• Borrowers to be given telephone number and other details of recovery agents.
•  Recovery agents to call only from notified numbers.
• Banks to have redressal mechanism for borrower complaints.
• Banks to strictly follow recovery code