RBI’s 2026 Responsible Business Conduct Directions for Local Area Banks: Detailed Overview

The Reserve Bank of India has substantially widened the consumer-protection framework for Local Area Banks (LABs) through the Reserve Bank of India (Local Area Banks – Responsible Business Conduct) Second Amendment Directions, 2026. These Directions, issued under Section 35A of the Banking Regulation Act, 1949, will apply from January 1, 2027, and are integrated into the earlier Reserve Bank of India (Local Area Banks – Responsible Business Conduct) Directions, 2025.

The amended Directions lay down granular rules for how LABs may advertise, market, and sell both their own financial products and third-party offerings. They introduce precise definitions for compulsory bundling, dark patterns, mis-selling, and third-party product or service (TPPS), and impose strict obligations in relation to Direct Selling Agents (DSAs) and Direct Marketing Agents (DMAs). A clear emphasis is placed on explicit customer consent, transparent disclosure, and robust internal controls, supported by mechanisms to detect mis-selling and compensate customers where such misconduct is established.

1.1 Statutory authority

The Directions are issued by the Reserve Bank in exercise of powers under Section 35A of the Banking Regulation Act, 1949, on the ground that such measures are necessary and expedient in the public interest to regulate LABs’ conduct in relation to customers.

1.2 Commencement

  • The amended Directions are titled “Reserve Bank of India (Local Area Banks – Responsible Business Conduct) Second Amendment Directions, 2026”.
  • They take effect from January 1, 2027.
  • They amend and supplement the existing Reserve Bank of India (Local Area Banks – Responsible Business Conduct) Directions, 2025.

2. Key New Definitions Introduced

The 2026 amendment inserts several new definitions into paragraph 4 of the 2025 Directions, clarifying specific practices that LABs must regulate or avoid.

2.1 Compulsory bundling – 4(6A)

“Compulsory bundling” refers to a situation where an LAB makes access to one product or service conditional on the customer also availing another product or service (either its own or a third-party product) that the LAB is offering. In other words, the customer is not free to buy only the requested product without being compelled to take the bundled offering.

2.2 Dark pattern – 4(10.1A)

“Dark pattern” is defined as any deceptive interface or user-experience design which manipulates or tricks a user into actions they did not genuinely intend to perform, undermining autonomy or informed decision-making. Such conduct amounts to:

  • misleading advertisement, or
  • unfair trade practice, or
  • violation of consumer rights.

2.3 DSA / DMA and sub-agents – 4(10B) and 4(10C)

  • 4(10B): A Direct Selling Agent (DSA) / Direct Marketing Agent (DMA) is any entity or individual, other than an employee of the LAB, engaged by the LAB (irrespective of the contractual label such as Business Correspondent, Loan Service Provider, etc.) to sell, promote, or influence customers in relation to the LAB’s own or third-party products and services.
  • 4(10C): A DSA / DMA sub-agent is an individual appointed by a DSA / DMA who interacts directly with customers to carry out selling or marketing activities on behalf of an LAB.

Explanation: If the LAB directly outsources selling/marketing activities to an individual, the rules applicable to both DSA / DMA and DSA / DMA sub-agent will extend to that individual.

“Explicit consent” means a clear, specific and informed indication of a customer’s choice, recorded through a written/electronic statement or unmistakable affirmative action, which shows agreement to a clearly identified action or arrangement with the LAB.

2.5 Mis-selling – 4(20A)

“Mis-selling” is broadly defined to cover a range of misconduct, including:

  1. Sale of a product or service that is neither suitable nor appropriate for the customer’s profile at the time of sale, even if explicit consent was obtained.
  2. Sale based on incorrect, incomplete, or misleading information.
  3. Sale without explicit consent from the customer.
  4. Sale involving compulsory bundling of another product or service with the one requested.
  5. Any other conduct described as mis-selling by the relevant financial sector regulator.

2.6 Third-party Product or Service (TPPS) – 4(26A)

“Third-party Product or Service (TPPS)” refers to products or services provided by an external entity (TPPS Provider), which the LAB markets or distributes to its customers under an agency or referral arrangement.

3.