Debt collection has existed for as long as there have been debts, and even predates the history of money itself because it was a part of earlier barter systems. While the market for debt collection is enormous, the unethical loan recovery process has also been prevalent in India for a long time. At times, the Reserve Bank of India (RBI) has also expressed worry about an increase in unethical loan recovery methods, including bullying borrowers verbally and physically.
In an effort to combat these unethical methods, the central bank has published some debt collection rules too. The need of educating both debtors and lenders on adherence to these policies cannot be overstated.
Against this backdrop, let's look at the unethical loan recovery practices in India and what are the borrowers' rights in this regard:
What is the status of unethical loan recovery in India?
The unethical loan recovery practices in India is a widespread problem that affects many individuals who have taken loans from banks or other financial institutions.
According to Manavjeet Singh, MD and CEO at CLXNS, digital debt resolution company, the most common unethical practices used by loan recovery agents include harassment, intimidation, and violence against borrowers, as well as deceitful tactics such as misrepresentation of loan terms and concealing important information from the borrower.
"These practices violate the debtor's fundamental rights and can cause significant psychological and financial distress," Singh told CNBC-TV18.com.
What are the rights of a debtor when it comes to loan recovery?
Other rights, which Singh listed, are:
Borrowers have the right to be heard by the lender.
Borrowers have the right to decide the terms of contact. Time and place can be decided by the borrower. The lender has to contact only at the mentioned hours and location. The time can be between 7am to 7pm only.
Borrowers have the right to be treated with civility.
The lender has to share the details of the recovery agent with the borrower prior to sending the agent for recovery.
In case of auction of a secured asset the borrower has the right to receive a notice of details such as sale price, place and time of the auction.
Lenders are bound to refund any excess amount realised after recovering their dues in case of sale of an asset.What can borrowers do if they feel that their rights are being violated?
Borrowers can seek legal assistance in this case. They can press legal charges if the lender’s representative engages in misconduct such as yelling, physical intimidation or violence.
What could be the alternatives for lenders to ensure loan recovery while staying clear of unethical practices?
Lenders often hire a large team of loan collection agents, numbering in lakhs. Managing such a massive team can be challenging for lenders, and it is not uncommon for them to struggle with controlling these agents' behaviour.
To combat this issue, the government has introduced several regulations to protect borrowers' rights and prevent unethical practices. However, enforcing these regulations can be a challenge, especially for smaller lenders who may not have the resources or expertise to comply with the regulations fully.
Hence, Singh thinks that the technology can play a crucial role in improving loan recovery practices in India.
'With the advent of digital platforms and tools, lenders can now leverage technology to streamline their loan recovery processes and ensure compliance with regulations. For instance, many lenders are now using automated messaging, email and bot systems to remind borrowers of upcoming loan payments. These systems can send personalised messages to borrowers and provide them with options to pay their dues, such as online payment gateways, mobile wallets, or bank transfers," Singh told CNBC-TV18.com.
The updated loan recovery system not only reminds borrowers to repay their loans but also educates them on the consequences of defaulting. Borrowers are informed that failing to repay a loan can negatively impact their credit score, making it difficult for them to access credit in the future.
"The digital platform offers detailed information about how credit scores are calculated and how defaulting on a loan can damage a borrower's score. This results in a more positive relationship between borrowers and lenders, ultimately leading to more efficient loan recovery practices and a healthier lending industry overall," he added.
(Edited by : C H Unnikrishnan)
