As Indian banks grapple with rising stress in their retail lending portfolios, particularly concerning unsecured loans, there has been a notable surge in the demand for recovery agents. This trend underscores the challenges financial institutions face in managing credit risk amid an expanding credit landscape.
Escalating Demand for Recovery Agents
Data from TeamLease Services indicates a significant uptick in the employment of recovery agents within the banking, financial services, and insurance (BFSI) sector. In July 2024, the BFSI sector employed approximately 77,000 outsourced staff, with 6,000 designated as recovery agents. By December 2024, the total outsourced workforce had grown to 82,000, with recovery agents increasing by nearly 50% to 8,800.
This rise is attributed to the proliferation of unsecured loans, such as credit cards and personal loans, which have led to higher delinquency rates. Consequently, banks are not only hiring more recovery agents but also redeploying sales staff to assist in collection efforts. Krishnendu Chatterjee, Vice-President and Business Head at TeamLease Services, noted, “Unsecured loans have gone up, and the resultant delinquency rates have also increased, due to which demand for collection profiles in the retail lending space… has increased in the past six months.”
Regulatory Concerns and Measures
The Reserve Bank of India (RBI) has expressed apprehension regarding the escalation in unsecured lending. In its annual “Trends and Progress of Banking in India 2023-24” report, the RBI highlighted the steady increase in the share of unsecured loans in total credit, which reached 25.5% by March 2023 before slightly declining to 25.3% a year later. To mitigate potential risks, the RBI introduced stricter norms in November 2023, mandating higher risk weights for unsecured personal loans, credit cards, and lending to non-banking financial companies (NBFCs) by 25 percentage points.
These regulatory measures aim to curb the build-up of risk in unsecured lending segments, prompting banks to enhance their vigilance and risk management practices.
Implications for the Banking Sector
The increased reliance on recovery agents reflects the challenges banks face in maintaining asset quality amid growing unsecured loan portfolios. In the quarter ending September 2024 (Q2FY25), several private sector banks reported significant slippages into non-performing assets (NPAs) from unsecured loans, particularly credit cards. An official from a private sector bank observed, “There has been a significant surge in demand for collection (recovery) agents in the last six months as the credit environment has turned challenging for unsecured segments.”
The increased demand for recovery agents has also led to competitive remuneration, with collection agencies deploying manpower to banks offering better pay. A banker from a mid-sized private bank noted, “Collection agents are outsourced, and these agencies are also deploying their manpower more into banks where they get better remuneration, which is driving up pay for these agents.”
Balancing Recovery Efforts and Ethical Practices
While the deployment of recovery agents is essential for managing delinquent accounts, it raises concerns about ethical practices and borrower rights. The RBI has issued guidelines to ensure that recovery agents do not resort to intimidation or harassment. In August 2022, the RBI directed that recovery agents should not contact borrowers before 8 a.m. or after 7 p.m., emphasizing the need for humane and respectful treatment of borrowers.
Instances of aggressive recovery tactics have led to regulatory penalties. For example, in September 2024, HDFC Bank faced a ₹1 crore penalty for violating guidelines related to the engagement of recovery agents, highlighting the importance of adherence to regulatory norms.
Future Outlook
As the Indian banking sector continues to expand its retail lending portfolio, particularly in unsecured segments, the emphasis on robust risk management practices becomes paramount. The surge in demand for recovery agents underscores the need for banks to balance growth with prudent lending practices and ethical recovery methods.
The RBI’s proactive stance in monitoring and regulating unsecured lending serves as a reminder for financial institutions to strengthen their internal surveillance mechanisms and adhere to guidelines that protect borrower rights. Maintaining this balance is crucial for the sustainable growth of the banking sector and the broader economy.
Anantha Nageswaran is the chief editor and writer at TheBusinessBlaze.com. He specialises in business, finance, insurance, loan investment topics. With a strong background in business-finance and a passion for demystifying complex concepts, Anantha brings a unique perspective to his writing.
