Stricter Norms for Loan Recovery Agents on the Anvil

 Mumbai: In a bid to curb coercive recovery tactics used by recovery agents, the Reserve Bank of India (RBI) on Thursday proposed to tighten the rules on how banks recover loans from borrowers and use recovery agents, fair treatment of borrowers, due diligence, training, and a uniform code of conduct for the loan recovery process. The proposed draft, called RBI (Commercial Banks – Responsible Business Conduct) Second Amendment Directions, 2026, focusses on borrower protection, transparency, and preventing harassment during loan recovery.

The norms require banks to put in place a mechanism for identification of the borrowers facing repayment related difficulties, engaging with them and guiding them on the recourse available.

In cases where lenders have incorporated a possession clause in the loan contract, they have to bring it to the notice of the borrower at the time of execution of the loan contract. The contract should mention the notice period that banks will have to provide before taking possession of mortgaged / hypothecated assets, circumstances under which the notice period can be waived; the procedure for taking possession of the security; final chance to be given to the borrower for repayment of loan before the sale / auction of the security. The loan contract should also mention the procedure for giving the possession of the security back to the borrower; and the procedure for sale / auction of the security. The central bank said that banks have to ensure that the recovery of loans or enforcement of security interest shall be done only by following due process of law.

Under the new norms, banks have to document the time and number of calls made by its employee/recovery agent to the borrower/guarantor for recovery of loan dues. Further, the bank shall ensure that there is a recording of the content/text of the calls made by the employee/recovery agent to the borrower/guarantor and vice-versa. Banks have to inform the borrower/guarantor that the conversation is being recorded.

"A bank shall ensure that the recovery targets or the structure of incentives in the contract with the recovery agent do not induce adoption of harsh recovery practices," said the RBI.

Banks have to put in place a management structure to monitor and control the activities of its recovery agents and ensure that they refrain from actions that could damage its integrity and reputation.

If a grievance has been lodged by a borrower, the bank shall not forward the concerned recovery case to an employee / recovery agent till it finally disposes off the grievance. However, where the bank is convinced, with appropriate evidence, that the borrower is making frivolous / vexatious complaints to avoid recovery, it may continue with the recovery proceedings even if a grievance is pending with it, said the RBI.

The proposed norms state that "an employee / recovery agent shall avoid inappropriate occasions such as bereavement in the family or such other calamitous occasion, or marriage functions, festivals, etc. for making calls / visits to collect / recover loan dues."

Currently, different sets of instructions are applicable to different categories of Regulated Entities (REs) with respect to the engagement of recovery agents and conduct related aspects of loan recovery. The proposed amendments aim to bring all regulated entities under a single, comprehensive set of rules

Feedback on the draft amendment directions may be submitted by regulated entities and members of the public/other stakeholders on or before March 6, 2026, and the directions will come into effect on July 1, 2026. The draft came after Finance Minister Nirmala Sitharaman announced the expected reforms in loan recovery during her Budget 2026 speech early this month.