RBI’s Draft Second Amendment Directions, 2026 for Small Finance Banks: Recovery & Recovery Agent Conduct Framework

The Reserve Bank of India has proposed a fresh set of rules governing how Small Finance Banks handle loan recovery and interact with borrowers through recovery agents. These norms are contained in the Draft Reserve Bank of India (Small Finance Banks – Responsible Business Conduct) Second Amendment Directions, 2026, and are intended to substantially overhaul existing provisions on recovery-related conduct.

Issued under the powers conferred by Sections 21 and 35A of the Banking Regulation Act, 1949, these draft Directions aim to ensure fair, transparent, and legally compliant recovery practices by all Small Finance Banks (SFBs). Once notified, they will take effect from July 1, 2026, and will amend the Reserve Bank of India (Small Finance Banks – Responsible Business Conduct) Directions, 2025.

1.1 Statutory authority

The Reserve Bank has invoked its powers under:

  • Section 21 – relating to control over advances of banking companies; and
  • Section 35A – empowering RBI to issue Directions in public interest

to introduce these Second Amendment Directions, 2026 for SFBs.

1.2 Commencement

  1. The Directions are titled “Reserve Bank of India (Small Finance Banks – Responsible Business Conduct) Second Amendment Directions, 2026.”
  2. They will come into force on July 1, 2026.

1.3 Amendments to 2025 Directions

Under the Reserve Bank of India (Small Finance Banks – Responsible Business Conduct) Directions, 2025:

  • Paragraphs 408 to 416 and 442 to 454 in Chapter VIII on “Responsible Lending Conduct” are proposed to be deleted.
  • A new segment “L. Conduct of SFBs in Recovery of Loans and Engagement of Recovery Agents” is proposed to be inserted after paragraph 454, setting out a detailed and uniform framework on recovery conduct.

2. Mandatory Recovery Policy for SFBs

2.1 Policy requirement – Paragraph 454A

Every SFB must formulate and implement a comprehensive recovery policy dealing with:

  • Recovery of loan dues
  • Engagement of recovery agents for loan recovery
  • Procedure for taking possession of security

This policy must explicitly address, among other things:

  • Eligibility norms and due diligence criteria for empanelling recovery agents
  • Scope of activities to be handled by such agents
  • A formal Code of Conduct applicable to recovery agents and relevant employees
  • Standards and parameters for performance evaluation of recovery agents
  • Mechanisms for inspection / audit and internal controls
  • Processes to ensure adherence to statutory and regulatory requirements
  • Escalation matrix and penal consequences for non-compliant agents
  • Recovery procedures in the event of demise of the borrower(s) or guarantor(s)

Explanation: The term “Recovery Agents” refers to individuals and/or agencies appointed by an SFB to recover loan dues from its borrowers or guarantors, including representatives or employees of such agencies.

3. Engagement of Recovery Agents and SFB Employees

3.1 Due diligence obligations – Paragraph 454B

Before appointing any recovery agent, an SFB must establish and follow a robust due diligence process that is aligned with:

  • The Reserve Bank of India (Small Finance Banks – Managing Risks in Outsourcing) Directions, 2025, as amended from time to time.

Further, SFBs must ensure that:

  • Recovery agencies they appoint conduct background verification of their representatives / employees before assignment; and
  • Such verification is repeated at periodic intervals as pre-defined in the policy.

3.2 Training and certification – Paragraph 454C

SFBs can only engage those recovery agents who have:

  • Obtained a certificate from Indian Institute of Banking and Finance (IIBF) after completing the Debt Recovery Agents training programme, or
  • Completed an equivalent course offered by any institute that has a tie-up arrangement with IIBF.

3.3 Code of Conduct for recovery operations – Paragraph 454D

Each SFB must:

  • Frame a Code of Conduct for recovery agents and its own employees involved in loan recovery activities, based on the new Directions.
  • Obtain a prior written undertaking from every such employee or recovery agent confirming their agreement to comply with:
    • The Code of Conduct; and
    • All internal policies relating to loan recovery and taking possession of security.

4.