How do coercive loan recovery practices affect the trust between citizens and financial institutions?

Coercive loan recovery practices involve the use of threats, harassment, or forceful tactics by lenders or their agents to recover dues from borrowers. These unethical methods have far-reaching consequences on the relationship between citizens and financial institutions, as well as on the broader financial ecosystem.

• Erosion of Trust: When borrowers face harassment, they lose faith in the fairness and safety of dealing with financial institutions. This can deter people from accessing formal credit channels.
• Reluctance to Borrow: Fear of coercive recovery discourages genuine borrowers from taking loans for productive purposes, which can hamper economic growth and financial inclusion.
• Stigma and Social Impact: Aggressive recovery practices often lead to social stigma, mental stress, and, in extreme cases, suicides. This damages the social fabric and increases public resentment towards banks and NBFCs.
• Growth of Informal Lending: As trust in formal institutions declines, people may turn to informal moneylenders, who may charge higher interest rates and offer even fewer protections.
• Regulatory Backlash: Repeated reports of coercion prompt regulators to impose stricter norms on recovery practices, which may increase compliance costs for institutions and reduce credit availability.
• Negative Perception of Financial Sector: Such practices tarnish the image of the entire financial sector, affecting investment, savings, and the willingness of citizens to engage with banks.