Can banks lock your phone for unpaid loans?

Banks can disable a gadget or electronic device only if it's specified in the loan agreement.

These days, some people who take mobile phones on loan are heard complaining that the lending bank has locked their mobile. Can banks really do this? Yes, banks can do this but only under strict regulations and in a phased manner. RBI has formally allowed banks lending for the purchase of smartphones, tablets, or laptops to restrict certain features of the device in case of default, using technology. However, this can only be done if the loan was specifically given for purchasing that device.

In fact, the Reserve Bank of India (RBI) has issued a comprehensive new framework regarding the recovery of outstanding loans for commercial banks. Under this, significant changes have been made to the rules related to the behaviour of banks and the external recovery agents appointed by them. The new framework will be implemented from 1 January 2027. Along with this, RBI has also introduced India's first detailed regulatory framework regarding restrictions on devices like mobile phones purchased on bank loans through technology.

This step has been taken following complaints about harassment by recovery agents, aggressive recovery methods, and digital lenders remotely disabling smartphones purchased on loans. By bringing a comprehensive set of rules instead of separate instructions, RBI aims to balance the banks' rights to recover loans and the borrowers' rights to dignity, privacy, and fair treatment.

Banks can only disable a customer's gadget or electronic device if it is mentioned in the loan agreement. The bank must clearly state in the loan agreement that restrictions can be imposed on the device in case of default.

Additionally, the recovery process and the stage at which restrictions can be imposed must also be clarified. If payment is not made despite notice to the borrower, no restrictions can be imposed on the device until the account is overdue for 30 days. Even after this, restrictions must be implemented gradually.

According to RBI,

the full restrictions agreed upon in the loan agreement can only be imposed if the loan remains unpaid for 60 days. Outgoing calls cannot be blocked before the completion of 60 days. RBI has also made some important safety provisions in this regard. Banks cannot disable incoming calls, SMS services, or emergency SOS features. Restrictions should not affect activities necessary for the borrower's work or employment. The borrower should have the facility to see at any time which restrictions are applied to their device. After paying the outstanding amount, the bank must restore the full functionality of the device within one hour. If there is a delay in normalizing the device due to the bank, compensation of ₹250 per hour will be given to the borrower. However, the maximum limit of compensation will be equal to the loan amount.

Strict security provisions have also been made regarding privacy in the new directives. According to RBI, banks and third-party technology providers cannot access the private data present on the borrower's device. This includes personal information such as contacts, photos, messages, call logs, and location history.

India's retail loan market has grown rapidly over the past decade. Digital loans, unsecured personal loans, Buy Now Pay Later (BNPL), and financing of electronic goods including smartphones have played a significant role in this expansion. Along with this, complaints regarding loan recovery methods have also increased. Borrowers have complained about repeated phone calls, threats, visiting homes at inappropriate times, public shaming on social media, and harassment of family members or employers. Meanwhile, some lenders providing loans for smartphones have started using technology to remotely disable certain features of the device if instalments are not paid.

According to the new RBI rules, banks will have to record phone calls related to loan recovery and keep these recordings safe for at least six months. The borrower must also be informed that the conversation is being recorded. Additionally, the structure of targets and incentives set for recovery agents should not encourage them to adopt aggressive methods. Every bank must establish a separate grievance redressal mechanism for complaints related to loan recovery. The contact information of the grievance redressal officer must be provided in loan documents and all recovery-related messages. This means that not only the outsourced recovery agency but also the bank will be accountable for violations of the rules.

This policy must also outline the process for dealing with borrowers facing genuine financial distress. A record of discussions with such borrowers must be kept before proceeding with recovery actions. Additionally, the policy must include what the recovery process will be in the event of the borrower's death. Compensation provisions must also be made for recovery actions taken in violation of RBI rules. Banks must strengthen the monitoring of outsourced recovery agencies. This includes periodic audits, performance reviews, and proper checks before including any agency in the list.

The biggest change in the new rules is the emphasis on dignified loan recovery.

Recovery agents can only contact the borrower between 8 AM and 7 PM unless the borrower specifies another time for contact. Recovery agents must identify themselves. They must have an identity card and an authorization letter from the bank. They must also have a copy of the notice issued by the bank. Discussions related to the loan can only be held with the borrower or guarantor. Banks cannot allow recovery agents to discuss outstanding loans with neighbours, colleagues, or any other unrelated person.

RBI has also listed activities that will be considered unacceptable. These include using abusive language, making anonymous or threatening calls, sending repeated messages, harassing relatives, intimidating, publicly humiliating, and posting the borrower's information or recordings on social media. Recovery agents are also advised to avoid visiting the borrower's home during sensitive situations such as a family death, medical emergency, wedding ceremony, or similar circumstances. RBI has made banks directly responsible for the behaviour of outsourced recovery agents. Banks must conduct background verification of any recovery agent before appointment and continue to check periodically thereafter.