Banks can’t use Musclemen for loan recovery – Kerala HC to RBI

For decades, banks across the country have resorted to strong-arm tactics through loan recovery agencies. These recovery agents adopt threatening and menacing behaviour to recover money on behalf of its clients like banks and other lenders.

Kerala High Court issued guidelines to Governer, RBI to ensure threatening practices of loan recovery are immediately stopped by banks and other financial institutions.

 Smart Security and Secret Service Agency vs State Bank of India

The court was considering the case of Smart Security and Secret Service Agency vs State Bank of India. Facts of the case are that the Bank failed to pay the promised commission of 5% to the said agency as the commission for recovering the loan from bank’s borrower. The agency had signed an agreement with  the bank that bank would pay 5% of the money recovered as commission if the borrower paid the amount after being followed by the agency.

The Judge made very strong observation on the methods adopted by the banks for the recovery of loans.

“In a democratic country having a well-established independent judiciary and having various law, if muscle men are engaged to recover due to the Bank, there is no doubt that it will create lawlessness. True, all these attempts are made on the pretext that the justice delivery system prevalent is a slow process. But, lawlessness cannot be encouraged on that ground. In a country governed by rule of law, the recovery of loans by banks and other financial institutions cannot be done otherwise than by due process of law. Taking resort to strong arm tactics is not only unlawful but also unethical and opposed to public policy as also against protection of public interest. I have, therefore, no hesitation to hold that the agreement created by the Bank in favour of the plaintiff (agency) for realisation of loan dues of the borrowers of the Bank is an agreement opposed to public policy and hence not enforceable.”

The high court said it cannot be believed that the bank only intended that the agency would do normal followup with loan defaulters rather than pressurizing or harassing them. If it was normal followup, the bank’s officials could have done it themselves and wouldn’t have offered a fabulous commission of 5 per cent of total loan dues. Moreover, by including a clause in the agreement that cautions the agency from resorting to anything that would result in adverse publicity, the bank was conscious that the acts authorized to be performed by the agent are likely to do so, the court pointed out.

The court further directed that a copy of the judgment be forwarded to Governor of the Reserve Bank Of India to ensure that mode of recovery as permitted in the instant case is not resorted to in future by banks and other financial institutions.

Who are Collection Agents? 

A collection agency is a business that pursues payments on debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. The term collection agency is usually applied to third-party agencies, called such because they were not a party to the original contract. The creditor assigns accounts directly to such an agency on a contingency-fee basis, which usually initially costs nothing to the creditor or merchant, except for the cost of communications.

The agency will then take a percentage of the debt that is successfully collected upon successful collection.

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