In a significant move aimed at modernizing loan recovery practices while safeguarding consumer rights, the Reserve Bank of India (RBI) has issued a draft circular proposing amendments to existing directions governing loan recovery and the conduct of recovery agents.
Issued on 20th May 2026, the draft framework introduces a technology-based recovery mechanism that would allow banks to restrict or disable certain functionalities of electronic devices purchased through loans in the event of prolonged repayment defaults.
The proposal seeks to strike a balance between helping lenders recover unpaid dues and protecting borrowers from unfair practices. Importantly, the RBI has laid down strict conditions, mandatory notice periods, and compensation provisions to ensure that borrowers receive adequate protection before any action is taken.
The proposed directions are scheduled to come into effect from 1st October 2026.
The draft circular allows banks to use technology-based mechanisms to restrict or disable selected functionalities of electronic devices such as smartphones and tablets purchased through loans. However, such measures can only be used when the financed device itself is linked to the loan under default.
The Reserve Bank of India (RBI) has clarified that lenders cannot arbitrarily disable devices. The authority to restrict functionalities can only be exercised under clearly defined circumstances and after following a prescribed recovery process.
If a borrower defaults on repayment of a loan used to purchase an electronic device, a bank may take possession of that device. However, this right must be explicitly included in the loan agreement.
The RBI requires banks to ensure that borrowers are fully informed about these provisions at the time of signing the loan contract.
The agreement must clearly specify the notice period that will be given before the bank takes possession of the device.
The contract should outline situations where the notice period may be waived.
Banks must define the procedure for taking possession of the device and the process for returning it if the borrower settles the dues.
The agreement must also include details regarding:
Before a bank can restrict any functionality of a borrower’s device, several conditions must be fulfilled.
The electronic device, whether a smartphone, tablet, or another eligible gadget, must have been purchased using financing provided by the bank.
The loan agreement must expressly and unambiguously authorize such action and clearly explain the sequence of events that may follow in the event of default.
The RBI has introduced a structured recovery timeline designed to give borrowers sufficient opportunity to regularize their accounts.
Once a loan becomes 60 days past due, the bank must issue a notice to the borrower and provide at least 21 days to clear the default.
After the expiry of the first notice period, the bank must issue a second notice and provide at least 7 additional days for repayment.
With the loan becoming 60 days past due, followed by the 21-day first notice and the 7-day second notice, borrowers effectively receive 90 days to remedy the default.
The RBI has clearly stated that banks cannot deploy any device restriction mechanism before the loan becomes 90 days past due.
A major safeguard built into the draft rules is the protection of essential mobile services.
The RBI has directed banks to adopt a graduated approach rather than immediately disabling devices completely.
Banks are prohibited from restricting or disabling:
This ensures that borrowers retain access to critical communication and emergency services even during recovery proceedings.
The RBI has emphasized that device restrictions must be reversed immediately once the borrower repays the loan dues.
Banks must restore full functionality within one hour of repayment.
If a bank wrongfully restricts a device or fails to remove restrictions after repayment, it must compensate the borrower.
Borrowers will receive compensation at the rate of Rs. 250 per hour until the issue is fully resolved.
In addition, once the loan is repaid in full, any technology-based mechanism installed to restrict device functionalities must be completely removed.
One of the most important aspects of the draft framework is its emphasis on privacy.
The RBI has categorically stated that banks cannot access, collect, use, retain, or exploit any data stored on a borrower’s mobile device for loan recovery purposes or for any other reason.
This provision seeks to prevent misuse of personal information and reinforces consumer data protection standards in digital lending.
Borrowers will continue to have the right to partially or fully prepay their loans at any stage.
Banks must establish a robust grievance redressal framework to address complaints related to:
This requirement aims to ensure accountability and quick resolution of borrower concerns.
The RBI's draft directions represent an effort to adapt banking regulations to the growing market for digitally financed consumer devices. As smartphone and gadget financing becomes increasingly common, lenders have sought more efficient recovery tools while regulators have emphasized the need for consumer safeguards.
By mandating multiple notices, preserving essential services, enforcing strict timelines for unlocking devices, and imposing compensation penalties on banks for non-compliance, the RBI has attempted to create a balanced framework that protects both financial institutions and borrowers.
The RBI’s proposed rules on restricting functionalities of loan-financed mobile devices introduce a structured and transparent framework for technology-driven loan recovery.
While banks may gain a new tool to address defaults, borrowers remain protected through mandatory notice periods, a minimum 90-day repayment window, safeguards for essential device functions, strong privacy protections, and compensation for wrongful actions.
Scheduled to take effect from 1st October 2026, the framework reflects the RBI’s effort to balance efficient loan recovery with consumer rights in an increasingly digital lending ecosystem.