Concerned over growing litigations against banks and high-handedness of recovery agents, the Reserve Bank on Tuesday issued strong warning to banks to check such practices or be barred from engaging such services.

"I am hopeful our threat would work," RBI Governor Y V Reddy told reporters after unveiling the busy season credit policy for 2007-08.

An urgent need has risen to review the "policy, practice procedure" involved in the engagement of recovery agents by banks in India, he said, adding that banks are urged to follow prescribed specific considerations while engaging them. 

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The directive to banks follow a series of complaints received by the apex bank regarding abusive practices followed by the recovery agents.

"This invites serious supervisory disapproval, which includes imposing temporary or permanent ban if such practices persisted," he said.

Reddy said an operational circular in this regard will be issued by November 15. "Banks that give loans, no doubt have a right to recover them but when they use less than proper means we become responsible for system as a whole to ensure such abusive practices are prevented," Reddy said.

He also said banks would have adjustments and safeguards in place to prevent such practices. Reddy directed banks to use their own staff to recover loans if their agents were found to be adopting abusive practices in certain areas.

In response to the tough stand of RBI on recovery agents, State Bank of India [Get Quote] chairman and managing director O P Bhatt said such practices should not be allowed in the civil society and the apex bank has decided to nip it in the bud.

Public sector major Bank of Baroda [Get Quote] CMD Anil Khandelwal said the bank was against such coercive methods of recovery.

Private sector lender ICICI Bank [Get Quote] joint managing director Chanda Kochhar too said the there should be a clear policy and procedure for recovery agents. She said the bank internally had a strong and fair process and follow proper guidelines for such agents.

The Monetary and Credit Policy 2007-2008