RBI to issue guidelines on loan recovery, proposes stricter norms to curb mis-selling

• RBI to release draft guidelines on loan recovery, mis-selling of financial products
• New norms aim to curb coercive recovery and promote ethical, transparent lending
• Compliance obligations for lenders expected to increase under proposed RBI rules

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The Reserve Bank of India (RBI) plans to issue draft guidelines related to consumer protection, on how regulated entities recover loans, and mis-selling financial services and products.

The RBI governor, Sanjay Malhotra, announced the move after the Monetary Policy Committee decision to keep the repo rate unchanged at 5.25 percent today (February 6).

According to the RBI note, “Currently, different sets of instructions apply to different categories of Regulated Entities (REs) with respect to the engagement of recovery agents and conduct related aspects of loan recovery. It has now been decided to review and harmonise all the extant conduct-related instructions on engagement of recovery agents and other aspects related to recovery of loans. ”

Analysts say that once the compliance guidelines are issued, it is likely to increase obligations for lenders.

“It is likely to shape future enforcement and borrower litigation by setting defined benchmarks against coercive recovery and unfair sales practices. While compliance obligations for lenders may increase, the measures are expected to strengthen governance and promote a more transparent and sustainable retail lending environment,” said Grahita Agarwal, Senior Associate, B. Shanker Advocates LLP.

RBI to propose stricter norms to curb mis-Selling

The RBI says that mis-selling financial products and services by any RE has significant consequences for both customers and the RE. There is a felt need to ensure that third-party products and services that are being sold at the bank counters are suitable for customer needs and are commensurate with the risk appetite of individual clients.

“It has therefore been decided to issue comprehensive instructions to REs on advertising,  marketing and sales of financial products and services. The draft instructions in this regard shall be issued shortly for public consultation,” the RBI stated.

Analysts maintain that mandating transparent disclosures, strict conduct norms for recovery agents, and liability caps for fraud, the regulator is directly addressing practices that have long undermined consumer trust.

“Importantly, this comes at a time of rapid digital lending expansion, where oversight has lagged innovation. The measures do not restrict credit; they raise compliance standards. Overall, it signals RBI’s clear intent to promote ethical lending, curb coercive recovery, and build a more resilient, consumer-centric credit ecosystem,” said Alay Razvi, Managing Partner, Accord Juris.