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The Reserve Bank of India has issued comprehensive directions governing the conduct of Small Finance Banks (SFBs) regarding loan recovery and the engagement of recovery agencies. SFBs are required to establish formal policies covering recovery processes, due diligence for agencies, and codes of conduct for employees and agents. The directions mandate IIBF certification for recovery agents, strict disclosure protocols for borrower information, and specific limitations on recovery-related communications and visits. The notification introduces a framework for technology-based recovery mechanisms, including conditions for restricting mobile device functionalities in cases of default, and establishes a dedicated grievance redressal mechanism. These measures aim to prevent harsh recovery practices and ensure fair treatment of borrowers.
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RBI/2026-2027/224 DOR.MCS.REC.No.194/01-01-033/2026-27 August 6, 2026
Reserve Bank of India (Small Finance Banks - Responsible Business Conduct) Fourth Amendment Directions, 2026
Certain instructions on matters related to engagement of recovery agents by Small Finance Banks (SFBs) have been issued to SFBs under the Reserve Bank of India (Small Finance Banks – Responsible Business Conduct) Directions, 2025. The extant instructions have since been reviewed and it has been decided to issue comprehensive instructions on conduct related matters in recovery of loan dues and engagement of recovery agencies to all SFBs (hereinafter referred to collectively as “SFBs” and individually as an “SFB”) under the aforesaid Directions.
In exercise of the powers conferred by Sections 21 and 35A of the Banking Regulation Act,1949, the Reserve Bank, being satisfied that it is necessary and expedient in public interest so to do, hereby issues the Amendment Directions hereinafter specified.
Short Title and Commencement
(1) These Directions shall be called the Reserve Bank of India (Small Finance Banks - Responsible Business Conduct) Fourth Amendment Directions, 2026.
(2) These Directions shall come into effect from January 1, 2027.
(1) In paragraph 4, the following definitions shall be inserted after sub-paragraph 4(24), namely:
“4(24A) Recovery agency means an entity or individual (other than SFB’s own employees) who has been engaged by an SFB, irrespective of the contractual designation / nomenclature used for such engagement, under an outsourcing arrangement to assist in recovery of loan dues from a borrower in default, including taking possession of a security.
Illustration: A Business Correspondent (BC) involved in recovery related activities on behalf of an SFB shall be treated as a recovery agency for the purpose of these Directions.
4(24B) Recovery agent means a representative of a recovery agency who is involved in recovery related activities, on behalf of an SFB, at the point of customer interface.
Explanation: Wherever an individual is directly engaged by an SFB under an outsourcing arrangement for recovery / possession related activities, instructions applicable to recovery agency as well as recovery agent shall apply to such an individual.”
(2) In Chapter VIII on ‘Responsible Lending Conduct’, the paragraphs 408 to 416 and 442 to 454 shall be deleted. Further, the following section and paragraphs shall be inserted after paragraph 454, namely:
“L. Conduct of SFBs in Recovery of Loan Dues and Engagement of Recovery Agencies
454A. The provisions under this Section shall apply to recovery of loan dues by an SFB from borrowers in default, including taking possession of a security.
Provided that, wherever explicitly specified, these provisions shall also apply, mutatis mutandis, to collection of dues in the normal course from the borrowers who are not in default.
454B. The provisions under this Section shall be without prejudice to any statutory rights available to an SFB, and / or obligations, relating to enforcement of security under any statute, as well as provisions relating to specific recovery actions such as one-time settlement contained in other relevant Directions.
454C. ‘SFB employees’, for the purpose of this Section, shall include those employees of an SFB who are deployed for recovery of loan dues, including taking possession of a security.
L.1 Policy
454D. An SFB shall put in place a policy on collection / recovery of loan dues, including taking possession of a security, by its own employee or recovery agent. The policy shall, inter alia, cover aspects related to trigger(s) for initiation of recovery process, graded actions as per an escalation matrix for loan recovery, code of conduct for employees and recovery agents, recovery of loan dues in case of demise of borrower, a structured framework for handling cases involving financial distress including documented pre-escalation engagement and guidance regarding available resolution options, etc.
454E. Further, with regard to engagement of recovery agencies, the policy shall cover, inter alia, eligibility and due diligence criteria for engagement of recovery agencies, performance evaluation standards, inspection / audit, and control mechanisms to ensure compliance with statutory / regulatory requirements, procedures to be followed / penal actions to be taken in case of non-compliant recovery agencies and / or their agents, etc.
454F. The policy shall also incorporate provisions relating to compensation to the borrowers / guarantors for loss arising on account of recovery related actions of the SFB or recovery agencies not consistent with these Directions.
454G. An SFB, deploying a technology-based mechanism for recovery of loan dues in terms of instructions issued at paragraph 454S below, shall incorporate the related aspects under the policy on collection / recovery of loan dues, including but not limited to the restrictions that shall be applied in a gradual manner on a financed mobile device in case of default by the borrower, timelines for issuing notice to the defaulting borrower, role and responsibilities of third party service provider (if the mechanism is not developed or maintained by the SFB), etc.
L.2 Engagement of recovery agencies for recovery of loan dues
L.2.1 Due diligence
454H. An SFB engaging recovery agencies shall put in place a due diligence process for their engagement, which shall conform to the instructions issued by the Reserve Bank in the Reserve Bank of India (Small Finance Banks – Managing Risks in Outsourcing) Directions, 2025, as amended from time to time. An SFB or the recovery agencies engaged by it shall carry out verification of the antecedents of the recovery agents at pre-engagement level and subsequently, on an ongoing basis at a pre-defined periodicity as specified in the SFB’s policy.
L.2.2 Training
454I. An SFB shall ensure that the recovery agency engages only those agents who have obtained the certificate from Indian Institute of Banking and Finance (IIBF) after completing the training programme for Debt Recovery Agents offered by IIBF or any other institute having a tie-up arrangement with IIBF.
L.2.3 Code of Conduct for recovery agents and SFB employees
454J. An SFB, based on the instructions mentioned in these Directions, shall put in place a code of conduct for recovery agents and its own employees. Where a recovery agency has been engaged, the SFB shall obtain an undertaking from the recovery agency that its recovery agents agree to abide by the code of conduct.
L.3 Responsibilities of an SFB
L.3.1 Disclosure of information on recovery agencies
454K. An SFB shall make available an up-to-date list of recovery agencies empanelled with or engaged by it on its website. Such list shall include the name and other details of the recovery agencies such as type (corporate / individual), correspondence address, the period of engagement and purpose of engagement (recovery / possession of security). The SFB shall update the list within seven calendar days of any modification to the list. However, in the event of termination of the agreement with a recovery agency for any reason, the SFB shall promptly update such list.
454L. While forwarding a case to any recovery agency for recovery of loan dues through in-person visit to the place of the borrower / guarantor, the SFB shall intimate the details of the recovery agency to the borrower / guarantor at least one day prior to the first visit.
454M. In case of change of the recovery agency during an ongoing recovery process, the SFB shall immediately notify the borrower / guarantor of the change.
