M&M Finance breaks own code, RBI guidelines as recovery agent kills borrower's pregnant daughter

Has Mahindra & Mahindra Financial Services, which has a loan book of ₹63,099 crore, violated the Reserve Bank of India's guidelines on recovery agents, and its own board-approved principles under the business responsibility policy, following the incident of its third-party recovery agent running over a borrower's pregnant daughter while seizing the tractor?

The gruesome incident took place in the district of Hazaribagh, Jharkhand, on September 15, when the 27-year-old woman was trying to stop a loan recovery agent from seizing her father's tractor over loan dues. The local police have filed a murder case against the loan recovery agent and a manager of the private lender, which has the biggest market share in tractor financing.

As per an agency report, the farmer had borrowed ₹1.3 lakh from Mahindra Finance to buy a tractor and since he had defaulted, his tractor was seized. The loan recovery agent was allegedly driving away with the tractor parked at a petrol pump, prompting the farmer to run after the vehicle. During the melee, the farmer's pregnant daughter, who tried to intervene, came under the tractor's wheels.

For the NBFC, the east (including Jharkhand) makes up for 25% of its business assets, as of June 2022, and 20% of its disbursements.

While such instances of recovery agent's high handedness are rife in the microfinance space, it is rare to see such an approach from an established NBFC, that too just a month after the central bank came out with a circular on August 12. The note states that the "Reserve Bank of India has from time to time advised regulated entities (REs) that the ultimate responsibility for their outsourced activities vests with them and they are, therefore, responsible for the actions of their service providers including recovery agents." The circular states that "any violation in this regard by REs will be viewed seriously."

It is to be seen how the central bank will react to this incident.

While Mahindra Group chairperson Anand Mahindra was quick to tweet his condolences to the bereaved family, Anish Shah, managing director and chief executive officer of Mahindra Group, parent of the non-banking finance company, also put out a statement stating that the company will investigate the incident from all aspects and review the practice of "using third-party collection agencies that have been in existence."

The incident has clearly violated most of the company's own BR Policy principles which state the following:

Principle 1 Business should conduct and govern themselves with Ethics, Transparency and Accountability.

Principle 3 Businesses should respect the interests of and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalised.

Principle 5 Businesses should respect and promote human rights.

Principle 8 Businesses should support inclusive growth and equitable development.

Principle 9 Businesses should engage with and provide value to their customers and consumers in a responsible manner.

While the management has stated that it will relook into its recovery mechanism, the episode comes amid a rapid decline in Mahindra Finance's gross stage 3 loans – delinquent for over 90 days – from 15.9% in Q1 FY22 to 8% in Q1 FY23. In fact, in its Q1 FY23 presentation, Mahindra Finance has stated that collection efficiency at 94% is the historical highest for the first quarter.

The presentation also mentions that despite seasonal volatility, the company was able to limit increase through "focused collection efforts, including timely repossessions." The NBFC, incidentally, is well capitalised with the highest capital adequacy at 25.9% and a coverage ratio of 58.1%.

Incidentally, the company's annual report states that the company's "Human Rights Policy Statement" applies to all employees and is expected to be reciprocated by other stakeholders including partners, suppliers, vendors and contractors, as the company's commitment to human rights.

The company had introduced a mandatory e-learning module on human rights on the internal learning platforms. The 40-minute module elaborates on human rights and the importance of respecting them for business development and has been especially customised for its employees and linked to its policies.

The annual report also mentioned that no stakeholder complaints have been received in the past financial year with respect to human rights.

Did someone say ESG?