Can you punish others for your failure? You may not. However, banks and other financial institutions certainly can. Banks bogged with bad loans often choose the unethical way to hire corporate goons to recover dues from the retail borrowers. In sophisticated language, these goons are called loan recovery agents. Initially, some large private and foreign banks utilised services of recovery agents who use all ruthless tactics to recover loans. However, the public sector banks too fell in love with bad boys of the banking system. Banks that often set high loan recovery targets, leave no stone unturned to harass defaulting borrowers by involving agents who have little respect for civilised behaviour. From time to time, the RBI has appealed to banks to observe due diligence in selecting recovery agents. However, nothing has changed substantially at the grassroots level. But the multitude of sins of recovery agents seems to be finally shaking back on them.

Recently, the Kerala High Court lashed out on the illegitimate relationship of recovery agents and banks. The honourable court was hearing a case of an agency (Smart Security and Secret Service Agency) which dragged the State Bank of India into litigation. The former accused the latter of breaching the agreement of paying 5% commission of the amount the former recovered. The trial court had passed the judgment in favour of the agency.

The SBI was reluctant to pay the commission because, as it described, the borrower himself had approached the bank to settle dues by selling the mortgaged property, on the same day on which bank appointed the recovery agency. The bank claimed the recovery agent had played no role till then. However, the trial court felt otherwise. The SBI had moved the high court challenging the decision of the trial court.

Coming in with an unprecedented move, Kerala High Court dismissed the case. Justice PB Suresh Kumar noted his observations saying, “I have no hesitation to hold that the agency created by the bank for realisation of loan dues….is an agreement opposed to the public policy and hence not enforceable.” He termed the engagement of recovery agents as not only unlawful but also unethical.

The stance of Kerala High Court should act as an eye-opener to banks and recovery agents. The majority of loans (by volume as well as by value) that have turned bad have been the corporate loans. Banks haven’t used these bullies against corporate in a big way. They have always threatened individuals who usually don’t like missing the loan repayment, with few exceptions. Growing NPAs expose the lapses in risk assessment processes of banks. But banks conveniently prefer to ignore them.

Individual borrows do not receive any restructuring programme despite providing collaterals. India knows how royally the banks treat their willful defaulters. In all likelihood, the Kerala High Court has set the precedent for similar cases that other courts will hear in future.

PersonalFN believes you should do a comprehensive assessment of your loan repayment ability before applying for a loan. In the worst case, if you have to face the recovery agents, don’t be afraid to talk tough. The law protects you against ill-handling of bankers and their friends in sins.
 

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