Difficult for financial institutions to lend if recovery agencies are not permitted, says former finance secretary

The Reserve Bank of India has barred Mahindra Finance from employing the services of third-party agents for any recovery or re-possession until further orders.

The clampdown comes after the tragic incident in Hazaribagh wherein a 27-year-old pregnant woman was crushed to death under the wheels of a vehicle being driven by a Mahindra Finance recovery agent. The incident has turned the spotlight on the behaviour of recovery agents as well.

TT Srinivasraghavan, former MD of Sundaram Finance, said most non-banking financial companies (NBFCs) have very detailed contracts which they sign with recovery agents, in which they clearly spell out what can and cannot be done. "So in terms of what is there, in terms of the framework, I don't believe there is a lot more than needs to be done," he said.

He said there is a well-enunciated system in terms of practices to be followed, in terms of recovery and re-possession.

If recovery agencies are not permitted, it would be very difficult for any financial institution to do lending, said former Finance Secretary DK Mittal. "That is a standard process. So, what needs to be done is to ensure that the person who are involved are debarred from participating in any process of recovery in any financial institution. So they are punished heavily and the banks and the agency which are doing it should be penalised to pay damages to the person whose family member had died," he said.

Srinivasraghavan said NBFCs are running out of options when it comes to asset recovery. "If you look at the remedies that are available to lenders in general — NBFCs in particular — increasingly, there has been more and more fetters on NBFCs being able to recover their loans. On arbitration, the Supreme Court has recently held that old arbitration clauses are no longer valid, they made that a little more complicated. So if you look at the avenues open to lenders, to recover their dues in a rightful manner, they have been fettered more and more," he said.

He believes that in order for incidents such as the Hazaribagh one to be prevented, the system as a whole, both legal and regulatory, needs look at ways in which where lenders have better recourse for their primary security. "In asset financing, primarily what the lenders rely on is the asset. So if there is a default, the only remedy open to them is to take back their asset, try and dispose it off and recover what they can," he said.

Srinivasraghavan said that if due process has been followed, the right to recover is well within the lender's grasp. "It is an inherent right, which the lender has. Of course, due process has to be followed, a notice has to be served — that is all clearly spelled out, enunciated. But due process has been followed. The right to repossession is something that is inherent in every lender's agreement, and so it should be," he said.