India’s credit ecosystem has increased in scale over recent years. Both banks and NBFCs now serve a larger and more diverse customer base, from first-time digital borrowers to complex corporate groups. With this expansion has come higher stress in collections and recoveries. Dues recovery has become more and more difficult with changes in customer behaviour, fluctuating collateral values, and evolving legal situations.

This article will provide an exhaustive discussion of the Loan default recovery strategies for Indian banks and NBFCs in the year 2025.

Recovery Philosophy in 2025

Recovery is not simply to chase overdue debts, it is to maximise net present recoveries while staying within the bounds of lawful and principled behaviour. So, to guarantee the integration of this, there must be correct guidance. Institutions should emphasise early healing whenever possible.

Now, prudential rules allow for generous extension in both soft collections and our cities ‘leases. When risks mount and signs grow more unfavourable, escalation should be swift and resolute; this requires high-level legal opinions back of it. Enforcement should always be based on solid legal rights, particularly for loans secured this way.

Banks and non-bank financial companies (NBFCs) need to be cautious in the allocation of resources while focusing on costs. They must also take a zero-tolerance approach to recovery misconduct. From harassment and privacy violations to misrepresentation, anything that harms reputation should also draw regulatory punishment. The Reserve Bank of India (RBI) has repeatedly encouraged responsible behaviour on the part of employees, especially in digital lending and collections.

RBI System That Changes Recovery Process

RBI’s digital lending guidelines from September 2022 spelt out that lenders get their judgment, including responsibility, must extend to how validation is done or liability assessed. No actual recovery can proceed from unclear disclosures, protection of privacy through safe handling of personal information rather than selling it openly on the market, and equitably conducting business dealings with all parties involved. Lenders must therefore keep a keen eye on their partners and make sure they are honest.

In 2024, the RBI also proposed new guidelines for web aggregators as well as lending service providers to help provide clearer information about interest rates and a better comparison of loans. This will impinge on how recovery is done because borrowers now have more information about their rights than before.

RBI’s June 2023 circular permitted settlements–including in cases of fraud or wilful default, subject to governance conditions. Compromise settlements have become more flexible.

All policies must be Board-approved: cooling-off periods defined and reasons for compromise in every detail captured.

The central bank’s July 2024 Master Directions on Wilful Defaulters and Large Defaulters applied not only to banks but also middle and upper-layer NBFCs. Those Directions themselves laid down several points of procedure, recognised borrower rights, and defined the consequences for being put into this classification.

Operational Governance and Documentation

Corporations needed to establish committees for credit and collections, legal collections, compromise agreements, judgment of wilful defaulters, and supervision of vendors. Every committee must write very detailed minutes of its decision, building a clear path for audit trails to follow.

Of course, documents are still critically important. Every file that is in the process of recovering repayment ought to include loan agreements, documents to prove security, KYC documentation, insurance valuation reports, ledgers, notices of demand, and approval memos. Orders in cases of wilful default or fraud classification should be set out.

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