New Delhi: Warning the banks of penalties for unruly behavior of the recovery agents they employ, the finance ministry has sent an advisory to all the banks against using strong-arm tactics for recovery of loans. Keeping in view of the recent excess committed by the recovery agents the finance ministry has said that the banks shouldn't use the services of the agents who have been found guilty of using extreme methods to recover dues. This advisory has been sent in consultation with the Reserve Bank of India (RBI).

Earlier, RBI had threatened the banks of a legislation if they don't mend their ways regarding loan recovery procedures. The finance ministry however, stopped short of recommending any such legislation and ruled it out altogether. The officials said, "At this stage, existing mechanisms are adequate. No new legislation is required to ensure that banks behave themselves.”

Various legal and regulatory bodies had earlier expressed their strong concerns regarding the high-handedness of the recovery agents. The Supreme Court, RBI, High Courts, MRTPC etc. have all criticized the ways and means of such agents.

Almost every major bank has been on the receiving end of the critical remarks. After severe criticism, ICICI  had to offer an ex-gratia payment to a victim of loan recovery agents and recently the bank was also fined a whopping Rs. 55 lakhs for the excesses committed by the bank's recovery agents. Indian Bank's Association (IBA) had also asked the banks to follow the law of the land and use proper methods of loan recovery.

The small ticket loan segment has witnessed a default of more than 10 percent and ICICI Bank has almost Rs.2000 crores of its funds trapped under such small ticket loans. The banks fear that bringing in any such legislation will only increase the number of defaults, since willful defaulters will use it as an excuse for not to repay.