Loan Recovery Practices Must Uphold Dignity and Empathy, Says FM Sitharaman

 

FM Highlights Need for Respectful Recovery Practices by NBFCs

In a strong message to the financial sector, Union Finance Minister Nirmala Sitharaman emphasized that Non-Banking Financial Companies (NBFCs) must adhere to ethical, respectful, and empathetic loan recovery practices. Addressing the NBFC Symposium 2025 in New Delhi, the Finance Minister expressed concern over rising instances of aggressive loan recovery tactics, especially in the case of small-ticket loans, which often lead to public outrage and media scrutiny.

“Recovery practices of NBFCs must be fair, empathetic and respectful, in strict accordance with the RBI's Fair Practices Code,” she stated.

She also acknowledged that while the media has been criticized in the past for highlighting such issues, their reporting was justified, especially when it concerns cases where loans as small as ₹500 result in harsh recovery actions.

Aligning with RBI’s Fair Practices Code

The Reserve Bank of India’s Fair Practices Code mandates a balanced and humane approach to loan recovery. Sitharaman reminded NBFCs that they must not overlook borrowers’ dignity, particularly in financially vulnerable segments. She reiterated that:

  • Growth objectives must not override ethical responsibilities.

  • Loan recovery should not cause public humiliation or distress to borrowers.

  • There is a need for a stronger internal code of conduct across NBFCs that reflects the spirit of RBI's guidelines.

“It’s not part of your duty to be heartless,” she said, calling for a shift in mindset across the NBFC sector.


Addressing the Underperformance in Priority Sector Lending

Shifting the conversation to the inefficiencies in priority sector lending, the Finance Minister pointed out a systemic issue: large volumes of unused bank funds meant for priority sector lending are returned annually to refinancing institutions such as NABARD and SIDBI.

She questioned this process:

“Why should the priority sector lending money be coming back to the Secretary? It should be on the ground, with the people for whom it was meant,” Sitharaman noted.

According to her, this fund re-routing causes a delay of 6–8 months, reducing the impact and immediacy of public credit outreach efforts.

Proposal to Co-Opt NBFCs in Priority Sector Lending

To address this inefficiency, Sitharaman proposed a collaborative framework where NBFCs can serve as on-ground partners for banks. Given their extensive reach, especially in remote and underserved areas, NBFCs are well-placed to bridge the last-mile delivery gap.

She raised a direct question to the banking sector:

“Can the priority sector lending performance of the banks be improved if you co-opt the NBFCs as your partners in this?”

This proposal aims to reduce the delay in credit disbursement, increase rural and semi-urban financial inclusion, and optimize the use of available funds for public welfare.

A Call for RBI’s Guidance

Sitharaman also invited the RBI to provide regulatory clarity and support on how such a partnership between banks and NBFCs could be structured without compromising on prudential norms or credit quality standards.

She emphasized that the budgetary allocations made for citizens must reach them in the same financial year, ensuring timely and effective credit delivery.

Conclusion: Prioritizing People Over Profits

FM Sitharaman’s address serves as a crucial reminder to the financial sector that inclusive growth must be rooted in compassion, fairness, and accountability. With NBFCs playing a pivotal role in India’s lending ecosystem, their alignment with ethical standards and partnership with banks could significantly enhance credit outreach and financial inclusion.

This push for reform not only strengthens public trust in financial institutions but also reaffirms the government's commitment to ethical lending and citizen welfare.


Location: Pune, Maharashtra, India

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