RBI Proposes To Let Lenders Restrict Smartphone Functions In Case Of Default

The Reserve Bank of India (RBI) has issued amendment directions to revise ‘Conduct of Regulated Entities in Recovery of Loans and Engagement of Recovery Agents’ as part of a wider revamp of loan recovery norms.

The proposed changes include provisions allowing financial institutions like banks, NBFCs, among others, to deploy tech-based mechanisms which restrict or disable some of the functionalities of a financed mobile device such as mobile phone, tablet, etc, to recover loan dues from the borrower in cases of default.

The proposal seeks to formally regulate a practice already being used by some fintech lenders and smartphone financing companies.

According to the draft norms, lenders can impose restrictions only if the loan was specifically taken to purchase that device. The loan agreement must explicitly mention the possibility of such restrictions, along with timelines for repayment, stages of escalation, grievance redress mechanisms and the “graduated approach” that lenders would follow before restricting device functionalities.

However, the RBI has barred lenders from fully blocking access to essential services. Incoming calls, internet access, emergency SOS features and government or public safety notifications must remain functional even after restrictions are imposed.

Further, lenders cannot immediately lock device features after a missed payment. Restrictions can only begin once default exceeds a period of 90 days.

Lenders are required to issue a notice before taking the action after 60 days of overdue, giving borrowers at least 21 days to repay dues. A second notice with an additional seven-day window would also be mandatory before restrictions can be activated.

The central bank has also mandated that lenders restore blocked functionalities within one hour of repayment. In cases where restrictions are not removed on time or are wrongly imposed, lenders would have to compensate borrowers at the rate of ₹250 per hour until the issue is resolved.

The RBI has also prohibited lenders from accessing, storing or using any personal data available on the borrower’s device under any circumstances.

The draft directions are part of a broader overhaul of loan recovery practices across banks, NBFCs and other regulated entities. The RBI initially issued the draft for public comments on February 12. The amendments have been made post receiving public feedback on the recommendations. Now, the apex bank is seeking public comments on the directions till May 31. The proposed framework is slated to come into effect from October 1, 2026.

Important to highlight that the RBI has formally defined “recovery agencies” and “recovery agents” under its regulatory framework for the first time. Business correspondents engaged in recovery activities would also fall within the scope of these rules.

The draft norms require recovery agents to undergo certification through the Indian Institute of Banking and Finance or affiliated institutes before they can be deployed.

Banks would also need to publicly disclose empanelled recovery agencies across their websites, mobile apps and branches, including details such as operating regions and tenure of engagement.

Further, lenders would not be allowed to assign recovery cases if a borrower complaint related to loan dues or recovery practices remains unresolved.

The draft rules also introduce tighter conduct standards for recovery staff. Recovery agents would be barred from contacting borrowers outside 8 AM to 7 PM, using abusive language, threatening borrowers, harassing family members or publicly shaming defaulters on social media.

Additionally, banks would be required to maintain records of recovery-related calls, including timestamps, frequency and call recordings, for at least six months.

The move comes amid growing smartphone penetration in India. Smartphone penetration in India hovers around 50% of the total population, representing roughly 650 to 690 Mn active users. As per Ministry of Statistics (MoSPI) data, approximately 85% of Indian households possess at least one smartphone, with youth adoption driving the highest engagement in both rural and urban areas

However, as per research reports, a large number of smartphone purchases have come via credit over the past years, with brands often using affordability schemes to encourage users to upgrade their cell. The overhauls bids to safeguard lenders from persistent defaults. 

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