RBI's new loan recovery norms: NBFCs may incur extra cost to train agents

From a customer perspective, the stricter norms are welcome, industry executives said

The Reserve Bank of India’s (RBI) proposed stricter norms on loan recovery — whether undertaken in-house or through outsourced agents — are expected to raise compliance costs for non-banking finance companies (NBFCs), given a significant number of these lenders, barring the larger ones, rely on third-party recovery agencies, and aligning such agents with the central bank’s proposed framework would entail additional training and monitoring expenses.

 

“The cost may go up for those that are outsourcing recovery activities to a third party. Every outsourcing agent must be trained and certified, and adhere to the governance standards of the bank or NBFC. This increases the cost for the lender. If an NBFC does not have its own in-house team, the compliance burden will be higher. However, from a customer’s perspective, these guidelines are welcome,” said a senior executive at one of the largest NBFCs in the country.

 

Large non-banking financial companies (NBFCs), including Shriram Finance and Sundaram Finance, undertake their recovery operations in-house rather than outsourcing them to third-party agencies.

 

In its draft circular, RBI proposed barring lenders and their recovery agents from adopting harsh or coercive practices to ensure fair treatment of borrowers.

 

The draft norms prohibit the use of abusive or threatening language, excessive or anonymous calls, inappropriate messages, harassment of borrowers or their associates, public humiliation, threats of violence, and misleading representations about debt obligations or consequences of non-repayment.

 

The central bank has mandated that recovery agents undergo training and obtain certification from the Indian Institute of Banking and Finance (IIBF) under its debt recovery agents’ programme. NBFCs are required to put in place a comprehensive Code of Conduct for recovery agents and employees, who are engaged in loan recovery, and secure undertakings from them to abide by these standards before assignment.

 

Under the draft norms, RBI has asked NBFCs to document the time and number of calls made by employees or recovery agents to borrowers or guarantors, and ensure that all such calls are recorded. Recovery agents may interact only with the borrower or guarantor and must refrain from contacting relatives or other associates.

 

Executives noted that recovery agent’s compensation is often linked to success rates, which in some cases has led to aggressive practices. However, they added that industry practices have evolved over the past two to three years, with the RBI already nudging lenders to strengthen oversight and training of agents.

 

Another NBFC official said the draft largely formalises existing expectations. “The RBI has given formal colour to earlier guidelines and placed greater onus on lenders to train and monitor collection agents. Most companies have already started complying, so the impact on cost structures may not be significant. However, documentation and accountability requirements could raise compliance costs, particularly for firms relying heavily on outsourced agents,” the official said.

 

Recovery-related calls and visits would be permitted only between 8 am and 7 pm. Lenders must also honour a borrower’s request to avoid contact at specific times under normal circumstances. Agents have been directed to avoid recovery attempts during inappropriate occasions such as bereavement, family emergencies, marriages, or festivals.

 

The norms could also affect fintech-focused NBFCs, which largely rely on automated collection tools but sometimes outsource recovery work. The proposed guidelines are slated to come into effect from July 1. The RBI has invited feedback on the draft by March 4.