Mumbai, Nov. 30: Banks have been warned not to send out an army of thugs to collar loan defaulters and shake them down to pay back debts.

The RBI today said banks would have to learn to recover bad debts in a civilised manner and through a legal process. In the past, the RBI had issued a code of conduct for banks on loan recovery but it hasn’t been heeded, leading to harassment that drove some defaulters to death.

However, in the draft guidelines issued today, two factors could make a difference if the RBI keeps up the pressure.

First, the apex bank has advised banks to approach Lok Adalats for recovery of personal loans, credit card dues and housing loans of less than Rs 10 lakh.

The guideline, based on a court ruling, is expected to cover most cases of harassment. “If this advice is followed, this will solve the problem of 90 per cent defaulters,” said Vinod Chand, the general secretary of the Credit Consumers Association of India.

Another significant change relates to a guideline on accountability. The RBI has said banks facing strictures from high courts or the Supreme Court could be banned temporarily from hiring recovery agents. Banks with a record of persistent abusive practices could face a permanent ban on deploying agents.

Till now, some banks used to pass the buck to recovery agents, saying action — largely limited to suspension of the contract till the heat was off — would be taken against the recovery agency.

If courts slapped damages, the battery of lawyers at banks’ disposal would file appeals, effectively skirting payment for years. Some banks have paid up — the fine usually a modest amount compared with the crores the banks deal with — only to return to the arm-twisting ways.

The new guideline has laid down a clear-cut trigger that can invite action. The cut-off — strictures at the level of a high court — is still a long way for many borrowers but a beginning has been made.

Chand, the consumer association official, did not see promise in any of the guidelines other than that which keeps loans up to Rs 10 lakh out of the reach of recovery agents.

In the draft, the RBI has said banks should screen recovery agents. The process will also cover individuals hired by the agents.

The defaulting borrower will have to be given details about the recovery agents and their telephone numbers. This information will have to be passed on to the borrower when a default case is handed over to an agent.

The RBI also hinted at the possibility of extending the norms to non-banking finance companies.

It has urged the Indian Banks’ Association to formulate, in consultation with the Indian Institute of Banking and Finance, a certificate course for direct selling agents and recovery agents with a minimum 100 hours of training.

Once the course is introduced, banks will have to ensure within one year that all recovery agents undergo the training and obtain certificates from the institute. Service providers engaged by banks should employ only personnel who have undergone the training and obtained the certificate.