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Recovery mechanism and tools in NBFCs India



The Reserve Bank of India often issues master directions and notifications regarding the working of NBFCs. Hence, it helps NBFC adhere to the public interest and safeguards itself when borrowers fail to repay and restore their financial assets in the event of the same. 

Thus, it includes the recovery of NPAs, and the Ministry of Finance has notified [1], dated 24.02.2020 in the Budget Speech, announced that NBFCs have assets worth Rs. 100 crores instead of Rs. 500 crores or loan amount from existing Rs. 1 crore to Rs. 50 lakhs[3] shall be qualified for debt recovery under the SARFAESI. 

This blog will look at the recovery mechanism and tools regarding NBFCs’ debt recovery. 

Objective and Aim of Recovery Policy

In securing debts, recovery policies and debt recovery monitor the fairness and transparency in repossession, valuation, and realization of security — ultimately, making sure it must be compatible with the law. Further, it includes: 

  • To slippage of accounts with regards to the NPA level of the company and accelerating recoveries in the existing NPAs. 
  • To take a proactive approach which could involve restructuring loans if it finds that borrower’s intent was positive. 
  • To update the identification and reporting system and provide direction for accounts showing signs of slippage in the ‘NPA’ category. 

Compromise and Settlement regarding NPAs are as follows:

  • It ensures recovery of dues to the maximum extent possible at minimum expense and within the shortest possible time frame. 
  • While conducting it, a proper distinction will have to be made between willful defaulters and defaulters due to circumstances beyond their control. 
  • In the case of the wilful defaulter, tough action has to be taken; in the latter case, a moderated view will be required. 
  • Moreover, while arriving at a negotiated settlement, the advantage available to the MFI for prompt recycling of funds should be weighted, such as if recovery is following legal or other protracted courses of action. 
  • The settlement only allows if the account has been classified as loss assets. However, in case of genuine reasons, settlement can be made in the case of a Non Performing Assets account too. 

How is RBI directing NBFCs regarding the recovery of debt?

The recovery of debts is not easy; it requires continuous efforts of highly trained personnel to deal with the customers and recover the amount due from them. The reason why RBI has enforced them and what it includes: 

  • NBFCs must avoid undue harassment toward borrowers. It can count instances where borrowers are disturbed at odd hours, rude behavior towards borrowers, use of muscle strength for recovery, etc.
  • That’s why it’s necessary that NBFCs must train their employees to deal with customers without any coercive collection methods.
  • Further, recovery must be made at the central designated place, and if the borrower fails to appear, the recovery staff can be allowed to reach the place of residence.

Mainly recovery is made through the following aspects:

1. Lok Adalats

The Lok Adalat is one of the alternative dispute redressal mechanisms set up by the government. 

2. Debt Recovery Tribunals (DRTs)

Enforced in I993, the Act made provisions for speedy redressal to lenders and borrowers through the filing of Original Applications, also known as OAs, in the Debt Recovery Tribunals (DRTs) and appeals in Debts Recovery Appellate Tribunals (DRATs). 


The Act of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002, or SARFAESI Act, was formed after committees constituted by the government carried out the considerations. This Act aims to reduce the mounting stress on the banks due to the increase in NPAs.

The Act aims to achieve recovery of NPAs in three significant ways, which are the following:

  • Securitization:

Section 7 of the SARFAESI Act allows institutions to raise finances by selling assets or income streams.

  • Asset Reconstruction: 

Section 9 of the SARFAESI Act helps banks reduce the burden of NPAs on banks as when a Securitization company or Reconstruction Company takes over the NPA, the banks and financial institutions can get returns on the NPA, which reduces the stress of bad loans on banks and other institutions.

  • Enforcement of Security Interests:

Section 13 of the SARFAESI Act helps to secure creditors and assist in taking possession of the asset.

4. Insolvency And Bankruptcy Code (IBC)

Previous to the Insolvency and Bankruptcy Code of 2016, there were multiple laws and institutions that were overlapping in jurisdiction and functioning, which led to a lot of confusion. To overcome these hurdles, the government introduced the IBC. 


  1. How does NBFC recover the money?

The NBFC recovers loans in compliance with the SARFAESI Act. It must conduct with fairness and transparency in repossession, valuation, and realization of security. 

  1. What are RBI guidelines on recovery agents?

The NBFCs should ensure that agents for debt collection must refrain from action/s that could hamper the integrity and reputation of the bank or the borrowers and has no rights to intimidate or harassment of any kind against any person in their debt collection process.

  1. Who controls NBFC in India?

The Department of Non-Banking Supervision (DNBS), under RBI, is responsible for regulating and supervising NBFCs under Chapter III B & C and Chapter V of the RBI Act, 1934.

How we can help!

Engaging with NBFC recovery loans can be complex and hefty. And this might hamper another crucial aspect related to earning higher ROIs. 

We at NBFC Advisory, with 15+ years of experience in advisory and counseling, will help you design a business plan, checkpoints, and loan products of lending, which shall reduce the NPA. 

With insights and strategic deployment —our team of professionals is a one-stop solution, so you never miss an opportunity.

Book a call today!

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