Some lending apps following unfair recovery practices: Former RBI DG

Former RBI deputy governor R Gandhi on Wednesday said some lending apps have been indulging in wrongful recovery practices for loans, similar to methods adopted by microlenders in Andhra Pradesh in 2007 which plunged an entire industry into crisis.

Basic humane attitude and dignity ought to be followed by the recovery agents of these apps and not doing so will result in more challenges for the lenders itself, he said, speaking at an industry event.

The comments came hours after the RBI cautioned the general public against unauthorised digital lending platforms and mobile apps, saying there were reports of such entities adopting "unacceptable and high-handed recovery methods".

"That is a disturbing thing. Some app providers have gone much beyond the prescribed area of recovery. They are violating customers' dignity and basic principles are not being followed. That is definitely not good. I only hope that is by a small number of entities," Gandhi said.

Gandhi, a career central banker who retired a few years ago, said such practices are similar to the ones followed by the microfinance industry in Andhra Pradesh in 2007 which had a big impact on the sector as people eventually stopped paying en-masse in its largest market.

"The app-based lenders will have to be revisiting their methods that they have adopted for loan recovery," he emphasised.

Speaking on improving the performance of state-run lenders, Gandhi pitched for "withdrawal" of the Ministry of Finance's Department of Financial Services from the running of such banks and making them board-run institutions.

The process should start with the empowerment of the Banks Board Bureau, and the independent directors should be appointed by the respective bank boards to get the best accountability, he said.

There is a need for overhaul in the compensation packages as well, he said, adding that every bank should fix its own remuneration scales rather than reaching a consensus through industry lobby IBA.

A variable pay component should also be added to reward the officials for their output, he noted.

Once a dedicated project finance institution comes in, the necessity for lending decisions to be taken by bank boards will also go down and the board will only be focused on overall strategy, Gandhi said.