Banks and financial institutions provide loans to help those in need of urgent funds. But there are times when people fail to repay the loan on time on account of numerous reasons. In such loan default cases, banks resort to the loan recovery process to make sure they retrieve the loan amount. Recovering loans is also important for banks and financial institutions as it helps them maintain stability and ensure the availability of funds for further lending.
In this article, we will learn about the Reserve Bank of India’s (RBI) loan recovery regulations and understand why it is necessary to set rules for loan recovery.
What is the Loan Recovery Process?
Let’s first understand the loan recovery process. In simple words, loan recovery involves reclaiming funds from borrowers who have defaulted on their payments for personal loans, home loans, car loans, etc. But it is not as simple as it seems. Loan recovery involves various steps so that the outstanding loan amount along with the interest can be retrieved. The major steps taken by banks and financial institutions for loan recovery include:Step 1: Communication and Reminder The banks start by sending reminders and notices to the borrowers who have defaulted on payments. It is done to inform the borrowers about the consequences of non-payment.
Step 2: Negotiation and Resolution Now when the notices have been sent and the payment is still pending, banks start negotiating with the borrower to reach a resolution. This step may include restructuring the loan, adjusting the interest rate, etc.
Step 3: Legal Action If the borrower still fails to make the payments even after negotiation, banks start taking legal action. They may file a lawsuit against defaulters through legal proceedings.
Step 4: Asset Seizure If nothing mentioned-above works out, then the banks may seize the collateral provided by the borrower as the last resort.
Why Are RBI Rules & Regulations Needed?
RBI rules and regulations are important for many reasons:
To Ensure Fair Practices
RBI has laid down certain rules and regulations for loan recovery so that the loan recovery process is always conducted fairly and transparently, thereby, protecting the rights of both lenders and borrowers.
To Maintain Financial Stability
By establishing loan recovery guidelines, RBI helps maintain the stability of the financial system.
To Protect Borrowers’ Rights
With rules and regulations, RBI protects the rights of borrowers by preventing harassment by lenders during the process.
RBI Guidelines For Loan Recovery
Now, let’s talk about the major RBI guidelines for loan recovery:
- RBI instructs banks to classify assets as performing or non-performing based on specified criteria. This classification helps banks identify defaulting borrowers and take appropriate action for recovery.
- Banks are required to form a strong loan recovery policy that outlines the entire procedures and strategies for recovering loans from defaulting borrowers.
- Banks are also required to adhere to a Fair Practices Code (FPC) while dealing with borrowers. The FPC has been introduced to ensure transparency, fairness, and ethical conduct in the loan recovery process.
Also Read: 6 Dos and Don’ts While Applying for an Instant Loan
