Loan recovery rules: RBI’s new debt recovery norms push for empathy and efficiency - expert explains how it is working

India’s debt recovery ecosystem is at a turning point, where compliance, technology, and empathy must now work hand in hand. According to Mayank Khera, Co-founder and COO of Credgenics, the future of recovery lies in transparent, data-driven, and humane practices that protect borrower dignity while ensuring financial discipline.

The Reserve Bank of India (RBI) has laid down strict guidelines to ensure that loan recovery practices by banks and financial institutions remain fair, ethical, and non-coercive. Under the Fair Practices Code, lenders are accountable for the conduct of their recovery agents, who must operate within clear boundaries. Agents can contact borrowers only between 8 a.m. and 7 p.m., must carry proper identification and authorization, and are prohibited from using intimidation, abusive language, or public shaming. They cannot visit a borrower’s home or workplace without prior consent. Importantly, lenders bear full responsibility for any misconduct by their agents. Borrowers must receive written notice of default before recovery begins, and no case can be referred to an agent if a complaint is pending. Finance Minister Nirmala Sitharaman recently reinforced these principles, urging NBFCs to follow empathetic, respectful, and RBI-compliant recovery practices, especially in cases involving small loan amounts.

Khera said that every lending institution should have a board-approved debt recovery policy that acts as both a “compliance compass and a relationship framework.” Such a policy, he explained, must align with the Reserve Bank of India’s debt collection guidelines and the FACE 2025 Code, emphasizing fair, time-bound, and transparent conduct.

He noted that the policy should strictly restrict contact to permitted hours, ensure privacy safeguards, and provide plain-language disclosures on dues and borrower rights. “Governance must be unmistakable,” Khera said, adding that banks must designate nodal officers, enforce oversight at the board level, and hold outsourced recovery partners to the same ethical standards as internal teams.

According to Khera, the objective of RBI’s new collection standards is to prevent harassment and unethical recovery practices while upholding borrowers’ dignity. “The RBI recognises that protecting borrower rights and ensuring accountability can coexist,” he said. He advised lenders to treat their recovery frameworks as living documents—reviewing them annually or whenever regulations change—to stay agile in the evolving digital recovery ecosystem.

Digital and physical recovery

Khera said the debt recovery landscape in India is rapidly moving toward a hybrid model that is “digital-first but human-assisted.” However, integrating both channels brings challenges such as data fragmentation, AI transparency, and maintaining a consistent tone across human and automated interactions.

He recommended unified governance and shared dashboards to track communication across channels, supported by real-time oversight of third-party agents. “The human-in-the-loop principle is crucial,” Khera said. “It ensures technology aids recovery, not replaces empathy.”

Ethical recovery

Khera underscored that ethics and empathy must define the future of collections, leaving “zero scope for aggression or intimidation.” He called for mandatory induction and biannual training for all recovery teams—covering soft skills, data protection, and handling distressed borrowers.

Monitoring mechanisms like call audits, mystery borrower programs, and behavioral supervision should be standard practice, Khera said. Institutions must also impose penalties for violations, including blacklisting agencies and disclosing terminated agents publicly. He added that modern recovery platforms now come equipped with built-in compliance controls that detect and flag misconduct.

Balancing tech and other aspects

With the rise of automation in financial services, Khera warned that lenders must not overlook borrower privacy. “Institutions must establish clear safeguards for AI use, including explicit borrower consent for data-driven interactions,” he said. Automation, he added, should handle routine reminders and payments, while sensitive engagements must always have human oversight.

“The goal is to strike a consent-first equilibrium where technology amplifies efficiency without diluting trust,” Khera said.

Future of debt recovery

Looking ahead, Khera believes technology and regulation are together reshaping debt recovery into a fairer and faster process. Artificial intelligence and predictive analytics, he noted, now help lenders detect early signs of stress and engage borrowers before default.

He pointed to the RBI’s growing focus on online dispute resolution (ODR) as a signal of what’s next. “The future of debt recovery in India will be digital, data-driven, and humane,” Khera said. “ODR will make resolution faster, fairer, and less confrontational.”

He added that reforms like the proposed Arbitration and Conciliation Bill 2024 and RBI’s digital dispute settlement guidelines will enable “faster, simpler, and transparent” solutions.

“As technology and ethics converge,” Khera concluded, “India’s debt recovery is evolving from coercion to conversation — rebuilding trust while maintaining financial integrity.”