Microfinance Loan Recovery Dilemma: Can Managers Be Held Accountable for Unpaid Installments?

Microfinance Loan Recovery Query

We are from a microfinance company where we provide loans to villagers in small amounts and recover them weekly as per installment. If the branch manager and area manager are unable to recover the installments from the customers, is it possible to recover the overdue amount from the branch manager and area manager?

Rajneesh Kumar Kesarwani,

Generation of Non-Performing Assets (NPAs)

Generation of Non-Performing Assets (NPAs) is a collateral issue that both the banking and non-banking industries must contend with. NPAs are often generated unwittingly. To address this challenge, you may consider implementing additional filters to assess the creditworthiness of prospects. Training your staff to understand the psychology of future customers can also be beneficial. It is important to analyze whether any patterns emerge from loan defaulters.

Provisioning for NPAs

Secondly, you need to make some provisions to absorb NPAs. Recovering NPAs from managers could demotivate them and deter other staff from taking up these positions, potentially impacting your business.

Challenges Across Industries

Every business faces its own set of challenges. Manufacturing organizations deal with non-moving inventory, IT companies face the issue of software engineers on the bench, and passenger airlines or bus operators struggle with low seat occupancy.

Imposing Fines and Penalties

Yes, employers have the right to impose fines and penalties on defaulting employees. However, to prove misconduct, a domestic inquiry must be conducted. If misconduct is proven, the punishment can include the forfeiture of salary and wages. It is crucial to check whether the recovered amount needs to be deposited in the Labour Welfare Fund (LWF) and whether it can be shown as income by the company.

Any deductions, other than statutory deductions, are illegal. Therefore, it is essential to follow the principles of natural justice before awarding any punishment. Make decisions judiciously.

Thanks,

Dinesh Divekar

Further to Dinesh Sir's post, fines cannot exceed 3% of the gross salary of the month. I don't know whether the quantum of NPA is so low as to fit within 3% of the gross salary.

Illegal Deductions Under the Payment of Wages Act

In most cases, I would say that this recovery is an illegal deduction under the Payment of Wages Act (please see sections 6 and 7). However, please remember that the act is currently restricted to those with a salary of less than 18,000 a month. For others, it may just be a moral standard.

Considerations for NPA Recovery

If they are going to recover NPA from you as a standard practice irrespective of the cause, then you probably need to change your job.

Dear Rajneesh Kumar,

Your microfinance company granted loans to villagers. The amount granted in the loan is paid back in weekly installments by the loanee. These installments are collected by your branch manager and area manager.

Your allegation is that the branch manager and area manager are not able to recover the installments from the customers. Your question is, is it possible to recover the overdue amount from the branch manager and area manager? The answer is no.

However, you can hold them responsible under two conditions: (i) if there is a clause in the service condition stating that the person shall be held responsible for any irrecoverable amount from the loanee, and (ii) where the employee collected the amount but did not deposit it with the company.

A person cannot collect the amount from the loanee by force as it amounts to a criminal offence. To ensure the safety of your loans, the company should consider making changes to its loan terms or taking collateral mortgages by reviewing cases where people are not paying back the installments.

You can take action against your branch manager and area manager for bad debts due to their irresponsible behavior, lack of initiative, or failure to visit the loanee for installment collection, provided they are found responsible for such losses. Recovery may be possible in such cases, or otherwise not.

Thank you.