The Reserve Bank of India (RBI) has drawn a clear line on how banks and other regulated lenders can use technology to recover overdue loans.

Under the final loan recovery directions issued on August 6, lenders will not be allowed to remotely lock or disable a phone, tablet or laptop if the loan was not taken to finance that particular device. The new framework will come into force on January 1, 2027.

Even when a device was financed by the lender, restrictions will have to follow strict conditions and cannot be imposed immediately after an EMI is missed.

When Can a Lender Restrict Your Device?

The RBI allows remote device restrictions only when the loan was specifically used to purchase the device in question.

The loan agreement must clearly state that such technology may be used and explain how restrictions could be imposed. Borrowers must also receive advance information about the possible restrictions.

Importantly, lenders cannot use a normal personal loan as a reason to remotely disable a borrower’s existing smartphone or computer.

No Device Restrictions During the First 30 Days

The RBI has introduced a phased system for device restrictions.

A lender cannot restrict any function of a financed device until the associated loan has remained overdue for at least 30 days, provided the borrower has also received the required notices.

After 30 days, lenders may begin restricting non-essential functions in stages.

The full range of restrictions permitted under the loan agreement can only be applied once the loan becomes 60 days past due. Outgoing calls also cannot be restricted before this 60-day point.

This means a lender cannot completely disable a financed phone immediately after a borrower misses an EMI.

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Calls, SMS and Emergency Services Must Continue

The new RBI framework protects several essential functions regardless of the level of restriction imposed.

Lenders cannot block:

• Incoming calls
• SMS messages
• Emergency SOS functions
• Functions required for work or employment

Borrowers must also be able to see the status of restrictions placed on their device.

Banks and their technology providers will need appropriate certification for the restriction mechanism from the device manufacturer or operating-system platform wherever such certification is available.

Lenders Cannot Access Personal Data

The RBI has also placed restrictions on how lenders can use information stored on a device.

Recovery technology cannot be used to access or exploit personal information such as:

• Contacts
• Messages
• Call logs
• Photographs
• Location history

The restrictions are intended to facilitate recovery of legitimate dues without giving lenders unrestricted access to a borrower’s private data.

Device Must Be Restored Within One Hour

Once the borrower pays the outstanding dues, the lender must restore all restricted functions within one hour.

The same one-hour requirement applies where restrictions were imposed wrongly or restoration is delayed for reasons attributable to the lender.

In such cases, the borrower can receive compensation of ₹250 for every hour of delay, subject to a maximum amount equal to the loan originally disbursed.

Once the loan has been completely repaid, the lender must also give up access to the device-restriction technology. If borrowers need to remove associated software themselves, the lender must provide instructions.

Borrowers will continue to have the right to make partial or full prepayments at any stage.

RBI Tightens Rules for Recovery Agents

The new framework also introduces stricter rules for calls and visits by recovery agents.

Banks and recovery agents can ordinarily contact or visit borrowers or guarantors only between 8 AM and 7 PM. Communication outside this period is allowed only when the borrower or guarantor has specifically requested or authorised it.

Borrowers can also request that calls or visits be avoided at particular times, and such requests should ordinarily be respected.

Before the first physical recovery visit, lenders must provide at least one day’s notice and inform the borrower about the recovery agency involved.

Recovery agents must carry proper identification and authorisation documents.

Recovery Calls Must Be Recorded

Lenders will also have to maintain stronger records of recovery activity.

Recovery-related calls must be logged and recorded, with records generally preserved for six months. Borrowers must be informed that their conversation is being recorded.

The RBI has prohibited recovery agents from using:

• Threatening or abusive language
• Excessive or repeated calls
• Public humiliation
• False claims about debts or consequences of non-payment
• Social media posts exposing borrowers’ personal information

The rules are designed to prevent aggressive recovery practices while allowing regulated lenders to pursue legitimate unpaid dues.

Which Lenders Will Have to Follow the Rules?

The final directions apply across a broad range of regulated financial institutions, including commercial banks, small finance banks, regional rural and co-operative banks, NBFCs, housing finance companies and other RBI-regulated entities.

The new framework follows feedback received by the central bank on its revised draft issued in May.

Bottom Line

A bank cannot simply lock your personal phone because you defaulted on a normal loan.

From January 1, 2027, remote restrictions will be permitted only in specific circumstances where the lender financed the device itself and the loan agreement provides for such action. Even then, restrictions must be phased, essential services must remain available, personal data must be protected and the device must be restored promptly after payment.

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The post Can a Bank Lock Your Phone After Loan Default? RBI Sets Strict Rules first appeared on Rightsofemployees.com.

According to Bhasha news, banks and non-banking financial companies have been imposing penal charges on default in loan payments as a means of increasing revenue.

Banks will be able to impose only ‘reasonable’ default charges

According to the news, concerned about this trend of penalty charges, RBI had amended the norms on August 18 last year, under which banks or NBFCs will be able to levy only ‘reasonable’ default charges. Banks, NBFCs and other RBI regulated entities were given an extension of three months till April to implement these revised norms. In a set of frequently asked questions (FAQs), the RBI said that in case of existing loans also, these instructions will be applicable from April 1, 2024.

Penal fee has to be reasonable

The Reserve Bank of India has also said that the change in the new penalty fee system will be ensured on the renewal date coming by June. Regarding the August 2023 guidelines also being applicable in case of default in loan repayment, RBI has said that such default is a violation of important terms and conditions of the repayment agreement, hence penal charges can be imposed. But this penal charge can be imposed only on the defaulted amount and will have to be reasonable.

No good for those who deliberately default

IBA and NESL are working on such a system with the help of which loan defaulters can be declared defaulters in a fast track manner. The Bank will provide additional information to the Information Utility Services regarding loan accounts which have been identified as fraud. According to NESL data, default is highest in loans ranging from Rs 10 to Rs 100 crore in the country.

The post Bank loan default: New rules related to penalty on bank loan default will be applicable from April 1 first appeared on Rightsofemployees.com.