Banks cannot use muscle power to recover loan amount, says Madras High Court

If banks have to recover outstanding loan amount, the same has to be recovered in accordance with the procedure established by law. Coercive method of recovery by private agents, if appointed by banks, is not permissible. The banks certainly cannot use muscle power to recover the loan amount, the Madras High Court observed on Friday.

If banks have to recover outstanding loan amount, the same has to be recovered in accordance with the procedure established by law. Coercive method of recovery by private agents, if appointed by banks, is not permissible. The banks certainly cannot use muscle power to recover the loan amount, the Madras High Court observed on Friday.

Disposing of a public interest litigation petition alleging coercive methods being used against farmers, the first Division Bench of Chief Justice S.V. Gangapurwala and Justice P.D. Audikesavalu wrote: “No muscle power can be exercised by the agents. If coercion is employed, then certainly the agriculturists will have every right to approach the police authorities.”

The judges recorded the submission of advocate Chevanan Mohan, representing Reserve Bank of India, that the Central bank had already issued ‘Guidelines on Fair Practices Code for Lender’ making it clear that all banks must resort to only legal means to recover dues and take serious note of complaints received against recovery agents.

He said that RBI had also warned banks that it might consider imposing a ban on a bank from engaging recovery agents if it receives complaints about the agents. Further, the banks had been asked to periodically review their recovery mechanism and give their feedback / suggestions for improvement in the guidelines.

Mr. Mohan said, though RBI had permitted banks to engage recovery agents, it had been made clear that the antecedents of people employed by such recovery agencies must have been verified by the police and they must have been trained. Banks had also been warned against giving high incentives that may tempt agents to resort to unethical means.

“As per the guidelines, banks should inform the borrower the details of the recovery agency. The agency, in turn, must issue identity cards and an authorization letter which should be shown to the borrower during the recovery process. The authorisation letter must carry the telephone number of the recovery agency,” the counsel said.

After recording his submissions and the RBI guidelines in their entirety, the Division Bench said, they would take care of the grievance of the PIL petitioner S. Rajanikanth, an advocate, who had complained of banks harassing farmers and employing coercive methods even to recover farm loans.