RBI guidelines for Personal Loan recovery

3 min read Feb 22, 2024

RBI guidelines for Personal Loan recovery are pivotal for ensuring a balanced and equitable approach to Personal Loan repayment issues. These guidelines, set by the Reserve Bank of India, aim to protect consumers by ensuring that the process of recovering outstanding loan amounts is conducted in a fair, respectful, and non-intrusive manner. This blog will break down these rules into simpler terms so you can understand how they work to protect you.

What is the loan recovery process?

The loan recovery process is an essential mechanism for financial institutions, designed to address situations where borrowers are unable to meet their loan repayment commitments.

It involves a sequence of regulated steps that lenders follow to recover the due amounts from defaulting borrowers. This process is carefully structured to balance the need for lenders to reclaim their funds while providing a fair chance for borrowers to settle their debts on manageable terms.

Understanding Personal Loan recovery

Personal Loan recovery, from customer’s perspective, is all about paying back the money you borrowed, including the interest and any extra fees, just as you agreed when you took out the loan.

Usually, you do this by making regular payments every month, called Equated Monthly Installments (EMIs), until the whole loan is paid off. But sometimes, people run into problems and can't make these payments, which means there needs to be a way to sort out these issues and get the loan repaid.

RBI guidelines for Personal Loan recovery

The RBI has laid down specific guidelines to streamline the Personal Loan recovery process, emphasising ethical practices and borrower protection:

• Fair practices code: This guideline insists that banks and lenders act ethically and clearly when collecting loan payments. It's about making sure that when you owe money, you're treated fairly and know what's happening every step of the way.
• Harassment prevention: The rules are strict here: no scaring or bullying people into paying their loans. Everyone deserves to be treated with dignity, ensuring that paying back money is done respectfully.
• Privacy and confidentiality: Your personal and financial info must be kept safe during the loan collection process. Lenders have to make sure no one else gets access to your private details, keeping everything confidential.
• Notice of default: If you're falling behind on payments, you'll get a clear warning explaining what's going wrong and how you can fix it before any serious collection efforts start.
• Recovery agents: The people who come to collect debts have to stick to the rules, behaving professionally and ethically at all times, ensuring they're fair and respectful.
• Fair recovery practices: This encourages methods that take into account your situation, aiming for solutions that work out well for both you and the lender.
• Debtor’s rights: You have rights during the loan recovery process, ensuring you're aware and protected, making sure you're treated justly.
• Settlement process: This sets out straightforward and fair ways to deal with unpaid loans, offering options like changing the loan terms or working out a payment plan.
• Grievance redressal: If you have complaints about how your loan is being handled, there's a system in place for you to express your concerns and get them resolved.

Axis Bank takes pride in aligning with the RBI's fair practices, offering Personal Loans that are tailored to the needs of individuals, ensuring that the repayment process is as smooth as the borrowing experience.

Ways of loan recovery

When a borrower defaults on a loan, the lender initiates recovery proceedings regulated by RBI to ensure the process is fair and respects the borrower's legal rights.

There are two paths for loan recovery:

1. Non-judicial route: This way involves negotiation, loan restructuring, or settling the debt directly with the borrower without any involvement of the court. It's faster and less costly for both sides.

2. Judicial processes: This way involves taking legal action through the courts when the amount owed is large. It ensures that the recovery process follows legal standards and procedures.

The detailed process of loan recovery

The approach to loan recovery often hinges on why the borrower couldn't make payments. Let's explore this with two different scenarios.

Scenario A:

Consider Mr. A, financially stable with a strong credit history. However, unforeseen events like COVID-19, led to job loss, making loan repayment challenging.

In such cases, the lender might propose several options:

• Extend repayment period to lower the monthly EMIs.
• Offer a moratorium, giving Mr. A, a break from payments for a set period.
• Proposing a 'haircut', forgiving a portion of the loan.

Note: Opting for a moratorium or 'haircut' may impact Mr. A's credit score. Extending repayment is often better for credit health.

Scenario B:

Consider Mr. B, with a weak credit score, faces high-interest rates and short repayment terms due to his risky profile, making loan repayment uncertain.

In case of default on repayment, he's less likely to be offered leniency through a moratorium or 'haircut'. For secured loans, if Mr. B defaults, the lender might sell the collateral to recover the owed amount, with Mr. B entitled to any surplus from the sale.

Failing these measures, the lender may resort to employing loan recovery agents to reclaim the owed sum.

RBI’s guidelines for loan recovery agents

Loan recovery agents often receive a bad reputation, perceived with apprehension and fear due to tales of harassment. However, such actions are illegal, thanks to detailed RBI regulations on loan recovery.

Under these regulations, agents are strictly prohibited from harassing borrowers. Key guidelines include:

• Banks must carefully choose recovery agents, with accountability for any grievances against them.
• Borrowers should be informed about the recovery agency's details in advance.
• Agents need to present an authorisation letter and a bank's notice when approaching borrowers.
• If a borrower files a complaint, banks cannot assign the recovery task to agencies until complaint's resolution, unless evidence disproves the complaint's merit.
• Banks must address borrower complaints regarding recovery efforts promptly.

Also Read: Personal Loan repayment guide: mastering the art of savvy finances

Conclusion

Understanding the intricacies of RBI guidelines for Personal Loan recovery is crucial for both borrowers and lenders. It ensures that the process is carried out ethically and efficiently, adhering to the guidelines set by regulatory bodies like the RBI. By staying informed and prepared, borrowers can navigate the repayment landscape confidently, and lenders can maintain a professional and fair approach.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.