On 20th May 2026, the RBI issued a draft circular amending the directions on the conduct of banks in the recovery of loans and the engagement of recovery agents. The amendments provide for enabling banks to deploy technology-based mechanisms that restrict or disable certain functionalities of a mobile device purchased through a loan. Restrictions or the disablement can be deployed to recover loan dues from a borrower in the event of a loan default. In this article, we will understand the circumstances in which a lender can deploy these mechanisms.
Taking possession of the device
If a borrower has bought an electronic device, such as a mobile phone or tablet, on a loan, and has defaulted on repayment, bank can take the possession of the device. The bank must incorporate the possession clause in the loan contract/agreement. The bank must ensure that the possession clause is legally valid and is clearly brought to the borrower’s notice at the time of executing the loan agreement. The loan agreement must contain provisions regarding:
- Notice period before taking possession
- Circumstances under which the notice period can be waived
- Procedure for taking possession of the device
- Final chance to be given to the borrower for loan repayment before the device sale/auction
- Procedure for giving the device possession back to the borrower
- Procedure for device sale/auction
Deployment of a technology-based mechanism for loan recovery
As a recovery tool, a bank can deploy a technology-based mechanism that restricts or disables any functionalities of a borrower’s electronic device. However, deployment can be done only when the borrower has purchased the device through a loan, and the bank wants to recover the loan. The bank may restrict or disable the device functionalities only when the following conditions are satisfied.
- The bank has financed the device (mobile, tablet, etc.) purchase through a loan.
- The loan agreement expressly and unambiguously permits such an action and the sequence of events that will follow.
- When the loan becomes 60 days past due, the bank must serve a notice to the borrower. The borrower must be provided at least 21 days to cure the loan default.
- After the expiry of the above notice, the bank must serve a second notice to the borrower. The borrower must be provided at least 7 days to cure the loan default.
With the loan becoming 60 days past due, first notice with 21 days, and second notice with 7 days, the borrower will get 90 days to cure the loan default. Till the loan has become 90 days past due, the bank shall not deploy the mechanism to restrict or disable the borrower’s device functionalities.
While deploying any technology-based mechanism, the bank shall adhere to the following.
- A graduated approach must be adopted rather than disabling the device, ab initio
- The bank shall not restrict or disable essential functionalities, such as access to the internet, incoming calls, emergency SOS features, and receipt of emergency Government or public-safety notifications.
Loan repayment
On loan repayment, the bank must expeditiously reverse the restrictions on the device functionality. The bank must do it in one hour in any case. In the event of wrongful restriction or delay in reversing the restriction on the device functionality after loan repayment, the bank must compensate the borrower. The compensation will be at the rate of Rs. 250 per hour till the wrongful action is remedied. On full loan repayment, the technology-based mechanism deployed for restricting the device functionalities must be uninstalled.
The borrower has the right to prepay the loan, either partially or fully, at any stage. The bank must have a robust grievance redressal mechanism to resolve borrower grievances regarding delays and issues in unlocking of mobile device functionalities.
A bank shall neither access nor use nor obtain or retain the data stored in a borrower’s mobile device for loan recovery or any other purpose under any circumstances.
Impact on borrowers
The RBI directions clearly specify the limited circumstances within which a bank can deploy a technology-based mechanism to restrict or disable any functionalities of a borrower’s mobile device in the event of a loan default. The directions also specify the steps the bank must take (serving 2 notices to the borrower) for loan recovery, giving the borrower sufficient time (at least 90 days) for loan repayment.
Finally, the RBI has also specified that on loan repayment, the bank must expeditiously reverse the restrictions on the device within one hour. The bank’s failure to do so will make it liable to pay compensation to the borrower. The RBI’s directions take a balanced approach by permitting banks to restrict device functionalities under specific circumstances, while also protecting the rights of borrowers and giving them sufficient time to repay the loan.
The RBI directions will come into effect from 1st October 2026.