RBI Proposes Uniform Recovery Norms Across All Lenders

Tejasvi Thakkar and Simrat Singh | Finserv@vinodkothari.com 

Introduction

Pursuant to the RBI’s stated intent in the Statement on Developmental and Regulatory Policies to harmonise the conduct of Regulated Entities in relation to loan recovery, comprehensive draft instructions have been proposed, to be effective from July 1, 2026, consolidating and rationalising the existing scattered provisions. The instructions are applicable to all NBFCs, excluding Mortgage Guarantee Companies, Core Investment Companies, NBFC-Account Aggregators, Standalone Primary Dealers, Non-Operating Financial Housing Companies, and NBFCs not having any customer interface. The key requirements of the proposed framework are summarised below:

Key highlights

Policy Requirement

REs shall formulate a separate policy on recovery of loan dues, engagement of recovery agents and taking possession of security. The policy shall, inter-alia, cover:

• Eligibility and due diligence criteria for engagement of recovery agents.
• Specified recovery activities permitted to be carried out.
• Code of Conduct requirements.
• Performance evaluation standards, inspection and control mechanism.
• Procedures and penal actions in case of non-compliance by recovery agents.
• Recovery procedures in case of demise of borrower.
• Mechanism to identify borrowers facing repayment difficulties and provide guidance on recourse options
• Incentive structures not inducing harsh recovery practices..
• Enforcement and possession framework including legal action not to be adopted as the first resort.

Issue: Whether this can be combined with the policy on Code of Conduct for DSAs/DMAs?

Our view: Since the present requirement specifically deals with recovery conduct, possession and enforcement of security interest, and engagement of recovery agents, the same should ideally be maintained as a separate policy. The DSA/DMA CoC policy deals largely with sourcing-stage conduct such as mis-selling and consequent compensation-related aspects. However, where there are overlapping requirements, NBFCs may structure the same within a broader conduct framework, divided into separate sections. However, it should remain distinct from the outsourcing policy.

Due diligence (DD) requirements

1. Frame and implement a due diligence framework in line with the RBI Outsourcing Directions, 2025.
2. RE to ensure that recovery agencies shall undertake due diligence and verification of their employees/representatives at the time of engagement and on a periodic basis. Policy to specify such periodicity and scope of verification.

Training Requirements 

3. Recovery agents shall mandatorily possess certification from the Indian Institute of Banking and Finance (IIBF) for debt recovery agents. (Aligned with the HFC Master Directions)
4. Existing agents without certification shall obtain the same within one year from issuance of directions

Code of Conduct for recovery Agents

5. REs shall put in place a CoC for recovery agents and employees engaged in recovery and obtain undertakings for adherence.
6. The CoC shall include, inter alia:
   1. Fair and respectful treatment of borrowers.
   2. Sharing only limited borrower information necessary for recovery and preventing misuse.
   3. Mandatory documents to be carried (ID card, copy of recovery letter etc)
   4. Permissible hours of contact
   5. Place of contact rules
   6. Restriction on contacting third parties
   7. Detailed prohibition of harsh practices
   8. Borrower information confidentiality
   9. No recovery action where grievance is pending, unless found to be frivolous
   10. Recording of recovery calls with due borrower intimation.

Issue: Whether the CoC prescribed earlier under HFC Directions stands subsumed?

Our view: Yes. The earlier HFC provisions largely stand harmonised and subsumed within the present draft framework, except for certain differences which have been captured in the Annexure below.

Recovery agents shall be required to carry recovery notice, identity card and authorisation letter, and shall adhere to the following conduct requirements:

• Interact only with the borrower / guarantor and not approach relatives or other contacts; maintain civil behavior;
• Contact / visit borrowers only between 08:00 hours and 19:00 hours;
• Honour borrower’s request to avoid calls / visits at particular times in normal circumstances;
• Contact borrowers ordinarily at the place of their choice, failing which at residence, and thereafter at place of business / occupation.
• Avoid calls / visits during inappropriate occasions such as bereavement, calamities, marriage functions, festivals, etc.
• In case of microfinance loans, undertake recovery at a mutually decided designated place, with field visits permitted only upon repeated non-appearance.
• Ensure only duly authorised representatives visit borrower’s premises for recovery activities.
• Ensure any written communication to borrowers has RE’s approval.
• Promptly issue proper acknowledgement / receipt for collections made.
• Refrain from harsh practices, including use of abusive language, excessive or anonymous calls, intimidation or harassment, threats of violence, misleading representations, or intrusion into borrower’s privacy.

Grievance redressal mechanism

• Establish a dedicated recovery-related grievance redressal mechanism.
• Provide complete details of the Grievance Redressal Officer and the mechanism in all recovery communications and loan agreements.
• Define criteria for identification and closure of frivolous complaints with appropriate internal oversight.

Responsibilities of REs

REs shall:

• Prominently display an up-to-date list of empanelled recovery agents on all customer interface channels. Details to be provided
  • names of agents, 
  • details of individuals engaged and 
  • period of engagement.
• Promptly intimate the termination of recovery agents to prevent unauthorised interaction.
• Inform borrowers of the details of the recovery agent at the time of forwarding cases for recovery through written communication (letter, SMS or email), and immediately notify any change in the recovery agent during the recovery process.

Possession of mortgaged / hypothecated assets

Loan agreements shall contain a legally enforceable possession clause, clearly disclosed at the time of execution. The agreement shall, inter alia, specify:

• Notice period and circumstances for waiver;
• Procedure for taking possession of security;
• Final opportunity to the borrower for repayment prior to sale/auction;
• Procedure for restoration of possession;
• Transparent process for sale or auction of the secured asset.

Periodic review, monitoring and control

REs shall put in place a management structure to monitor and control the activities of recovery agents and ensure that such agents refrain from actions that could harm the RE’s integrity and reputation. Accordingly, the RE should ensure:

• Appropriate monitoring and conduct provisions shall be incorporated in agreements with recovery agents.
• Remain fully responsible for the actions of recovery agents.
• Undertake periodic review of recovery mechanisms to learn from experience and effect improvements.

For Housing Finance Companies:

Most of the proposed requirements are not entirely new in substance for HFCs, as they were already reflected in the Guidelines for Engaging Recovery Agents under paragraph 170 of the RBI HFC Directions, 2025. The proposal now is to delete those HFC-specific guidelines and require HFCs to comply with the proposed Directions.

However, while the underlying principles remain largely consistent, the proposed Directions significantly strengthen and formalise the recovery framework. The approach shifts from principle-based guidance to a more structured, prescriptive, and compliance-oriented regime. The key changes are as follows:

1. Mandatory written recovery policy: Under the HFC Directions, compliance was required with paragraph 170, but there was no express requirement to frame a consolidated written policy governing recovery of loans, engagement of recovery agents, and repossession of security. The proposed Directions now mandate a formal, documented recovery policy. Such policy must specifically cover eligibility criteria for engagement of agents, due diligence standards, performance evaluation parameters, inspection and audit mechanisms, and penal actions for non-adherence. This marks a shift from guideline-based adherence to a structured governance framework.
2. Borrower distress identification mechanism: The HFC Directions required utilisation of credit counsellors in cases where a borrower was considered to “deserve sympathetic consideration,” which was discretionary and reactive in nature. The proposed Directions introduce a mandatory mechanism to identify borrowers facing repayment difficulties, engage with them, and provide guidance on available recourse. The regulatory trigger is the existence of repayment difficulty itself, rather than a subjective assessment of sympathy, thereby institutionalising borrower engagement.
3. Explicit data governance controls: While the HFC Directions required training of recovery agents on respecting customer privacy, the proposed Directions go further by mandating that only limited borrower information be shared with recovery agents and that adequate safeguards be put in place to prevent misuse or unauthorised transfer of customer data. This introduces clearer data governance and accountability obligations.
4. Restriction on initiating legal action as first resort: The HFC Directions did not prescribe any sequencing rule regarding enforcement remedies. The proposed Directions now expressly provide that legal action for recovery or enforcement of security shall not be initiated as a first resort, thereby imposing a structured progression in recovery measures.

Conclusion

Recovery is as vital to lending as disbursement, if not more. Credit often begins with a courteous engagement by the lender, but too often, the standards of professionalism seen at the time of sanction weaken at the stage of enforcement. The right to recover is unquestionable; harassment is not. The proposed Directions seek to correct this imbalance by requiring lenders to uphold the same standards of fairness, transparency and discipline during recovery as at the time of origination.

See our other resources:

1. Regulator’s February Bonanza: RBI’s  Sweet Surprises for NBFCs;
2. From Consent to Compensation: RBI’s Draft Directions for REs on Sales Practices;
3. Vehicle financiers must follow SARFAESI process for repossession: Patna High Court;
4. A Guide to Accounting of Collateral and Repossessed Assets.