Foreign Banks Cannot Engage Recovery Agents In India : Kerala HC [Read Judgment]

The High Court of Kerala has held that foreign banks or financial institutions cannot engage recovery agents in India to realize loan amounts defaulted by expatriates. 

This was because the guidelines and master circulars issued by the Reserve Bank of India recognized recovery agents only for Indian banks, reasoned the division bench of Justices K Vinod Chandran and V G Arun. 

"The guidelines and action contemplated for violation of the procedure prescribed in the guidelines would be applicable only with respect to banks and financial institutions registered in India. Does this mean that the services of recovery agents/collection agents can be utilised by foreign banks and financial institutions? Can such recovery agents act with impunity? Our answer to both questions is an emphatic 'No'. Any attempt to recover money from an Indian citizen, residing in India, can only be in accordance with the Indian laws, lest it would amount to a challenge to the administration of justice in our country and would violate the constitutional guarantee of equal protection of laws to every citizen of the country.", said the judgment authored by Justice V G Arun.

The Court added that it was open for the foreign bank or financial institution to initiate legal action for recovery, which can even be in pursuance of a judgment which the bank has  obtained from the foreign country. If failure on the part of the borrower to pay back the amount due to the bank amounts to a criminal offence in the foreign country, the bank can initiate criminal action against the borrower through the diplomatic channel.

However, the Court said :

"The engagement of recovery agents by foreign banks and financial institutions for realising the defaulted amount through threat, coercion and duress cannot, under any circumstance, be permitted".

The ruling came in a writ petition filed by Kollam resident Susheela who had returned after working as nurse in Saudi Arabia. She sought police protection against attempts by the recovery agent of Al-Rajhi Bank, Saudi Arabia, to intimidate her and compel her to pay the defaulted amount.

The petitioner said that two persons from a recovery agency named KGM Associates appointed by the bank had threatened her that unless she repaid the loan immediately, she would be arrested and taken to Saudi Arabia. KGM Associates was employed for "debt collection services" in Kerala by Mumbai-based Bilkish Associates Pvt Ltd, which has been appointed by Al-Rajhi bank to act on their behalf in India.

In a statement given to police, Bilkish Associates denied that it was acting as a recovery agent in India, and was acting as a "customer co-ordination centre" for the foreign bank.

The Court referred to the RBI circulars on recovery agents which held that banks and their agents should not resort to intimidation or harassment of any kind, either verbal or physical, against any person during their debt collection efforts, including acts intended to humiliate publicly or invade the privacy of the debtors family members and friends, making threatening and anonymous calls or making false and misleading representation.

"The strong-arm methods, for recovery from defaulters, adopted by the banks in our country, utilizing the services of collection agents (sic), had time and again invited severe criticism from various courts, including the Supreme Court", the Bench said.

The Guidelines mandate that recovery agents shall be engaged by banks only after a process of due diligence. Whenever recovery is entrusted with an agency, the bank should inform the borrower the details of the recovery agency. The need for appropriate training to the recovery agents is also highlighted in the guidelines.

However, these guidelines apply only to recovery agents employed by Indian banks, noted the bench. 

The State Police Chief informed the court that strict instructions had been given to all district police chiefs in the State to take urgent action to ensure that no unauthorised loan collection agents of foreign banks were functioning in the State.

Recording this submission, the writ petition was disposed of.

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