RBI tightens norms on loan recovery to protect borrower rights

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Picture Courtesy: Money Control

Context:

The Reserve Bank of India has issued draft guidelines titled Commercial Banks – Responsible Business Conduct (Second Amendment) Directions, 2026 to regulate the conduct of loan recovery agents. The norms will come into force from July 1, 2026 after public consultation.

Key Highlights of RBI draft norms on loan recovery agents:

Conduct Restrictions

• Prohibits abusive, threatening, or intimidating language.
• Bans harassment, including excessive calls, anonymous calls, or contacting borrowers outside prescribed hours.
• No inappropriate messages via mobile or social media.
• Recovery agents cannot publicly humiliate borrowers or contact their relatives, friends, or colleagues to pressure repayment.
• Strict prohibition on threats of violence or harm to reputation, assets, or family.
• Disallows false or misleading information about loan dues or consequences of non-repayment.

Institutional Safeguards

• Banks must establish a dedicated grievance redressal mechanism for recovery-related complaints.
• Mandatory board-approved policy on:
• Engagement and due diligence of recovery agents
• Code of conduct and permitted activities
• Performance evaluation standards
• Procedures for taking possession of security
• 

Picture Courtesy: Money Control

Challenges in implementing RBI’s recovery agent norms:

• High level of stressed assets increasing recovery pressure: With India’s banking system still carrying stressed loans, gross NPAs stood around 3% of total advances in 2025 (RBI Financial Stability Report) banks face strong pressure to accelerate recoveries, which may indirectly encourage aggressive practices despite regulatory safeguards.
• Widespread use of outsourced recovery agents: Banks and NBFCs rely heavily on third-party agencies working on commission-based incentives, making supervision difficult across thousands of field-level agents operating in diverse regions.
• Low financial literacy and borrower awareness: According to the RBI’s Financial Literacy Survey (2019), only about 27% of Indians are financially literate, meaning many borrowers remain unaware of their rights or grievance redressal mechanisms against harassment.
• Rising retail and digital lending exposure: Retail loans account for nearly 30%+ of bank credit, and the rapid growth of digital lending apps has increased instances of phone-based and social media harassment, which is harder to monitor.
• Grievance redressal capacity constraints: The Banking Ombudsman (now integrated under the Integrated Ombudsman Scheme, 2021 of the Reserve Bank of India) receives lakhs of complaints annually, indicating the risk of delays and administrative burden as recovery-related complaints rise.
• Monitoring digital misconduct: Recovery communication through WhatsApp, SMS, and social media creates evidentiary and jurisdictional challenges in tracking anonymous or automated harassment.
• Balancing consumer protection with credit discipline: Stricter recovery restrictions may slow down enforcement, potentially increasing recovery time and affecting credit culture, especially in unsecured retail lending.

Key measures for effective implementation of RBI’s recovery agent norms:

Strengthening supervisory technology and audit systems: Banks should deploy call recording, AI-based monitoring, and geo-tagged field visit reports to track recovery interactions, while periodic third-party compliance audits can ensure adherence to the guidelines issued by the Reserve Bank of India.

Professionalisation and certification of recovery agents: A mandatory training and certification framework through the Indian Institute of Banking & Finance (IIBF) or similar bodies can improve professionalism, given that a large proportion of agents currently operate on commission without formal training.

Improving borrower awareness and financial literacy: Banks should provide SMS/email-based rights charters at the time of loan sanction and integrate awareness campaigns with the RBI’s Financial Literacy Centres, especially since national financial literacy levels remain below 30%.

Strengthening grievance redressal and accountability: Dedicated recovery grievance portals with time-bound resolution (e.g., 30 days), escalation to the Integrated Ombudsman Scheme, 2021, and penalties for repeat violations can enhance borrower confidence.

Regulating digital and fintech-linked recovery practices: Clear protocols for digital communication, data privacy, and consent-based contact are essential as retail and digital lending expands rapidly, particularly in unsecured personal loans.

Conclusion:

The draft recovery conduct norms of the Reserve Bank of India mark a significant step toward balancing credit discipline with borrower dignity in India’s expanding retail credit ecosystem. As retail loans now account for over 30% of bank credit and financial inclusion deepens, ensuring ethical, transparent, and non-coercive recovery practices is critical for sustaining public trust in the formal financial system. Effective implementation—through strong supervision, borrower awareness, and accountability—will not only curb harassment but also promote responsible lending, financial stability, and a healthy credit culture in the long run.

Source: The Hindu and Money Control