Part 06 — Collections & Recovery

Collections Compliance

Collections compliance is about who contacts the borrower, what they say, when they say it, what authority they carry, where money flows and how complaints are handled. In Indian SME lending, the sharpest regulatory risk is not only wrongful repossession; it is everyday conduct by telecallers, field agents, lending service providers (LSPs), direct selling agents (DSAs) and partner platforms acting as if collections is outside the lender’s control.

RBI Conduct Baseline

RBI’s clearest modern instruction is the circular Outsourcing of Financial Services - Responsibilities of regulated entities employing Recovery Agents, August 12, 2022. It applies to commercial banks, all-India financial institutions, NBFCs including HFCs, co-operative banks and ARCs, except microfinance loans covered by the separate microfinance directions. It says the ultimate responsibility for outsourced activities remains with the regulated entity.

The circular specifically requires REs and their agents not to use intimidation or harassment, verbal or physical; not to humiliate publicly or intrude on privacy of family, referees and friends; not to send inappropriate mobile/social-media messages; not to make threatening or anonymous calls; not to persistently call; not to call before 8:00 a.m. or after 7:00 p.m.; and not to make false or misleading representations.

These are not “soft” guidelines. RBI says violations will be viewed seriously. Its penalty orders have cited failures such as recovery-agent harassment, lack of Indian Institute of Banking and Finance (IIBF) recovery-agent training, missing police verification and failure to inform borrowers of recovery agency details before forwarding cases (RBI penalty order on RBL Bank, March 20, 2023).

Recovery Agent Controls

Banks’ long-standing recovery-agent instructions, consolidated in the Master Circular - Loans and Advances - Statutory and Other Restrictions, July 1, 2015, remain operationally useful. They require due diligence on agencies, antecedent verification of employees including police verification as a cautionary measure, borrower intimation of agency details when cases are forwarded, agent ID and authorisation letter, call recording precautions, website disclosure of agency details, grievance mechanism and care when complaints are pending or matters are sub judice.

NBFC directions impose similar conduct expectations. The NBFC Fair Practices Code provisions require NBFCs to ensure DSAs, DMAs and recovery agents are properly trained in care and sensitivity, calling hours, privacy and correct terms; maintain a Board-approved code of conduct; obtain undertakings; preserve confidentiality; and avoid intimidation or harassment (NBFC Directions, Fair Practices Code section).

Practical control set:

Control	Required evidence
Agency empanelment	KYC, background checks, agreement, code undertaking, audit rights.
Agent onboarding	ID, police verification status, IIBF/training record where applicable.
Borrower intimation	SMS/email/letter before agent contact, with agency and contact details.
Contact controls	Time-window lock, attempt caps, scripts, call recording.
Field visit controls	ID card, authorisation, visit disposition, no force/trespass.
Cash controls	Receipt, same-day posting/deposit, no agent fee deduction.
Complaint controls	Suppression/escalation workflow, root-cause review, agency penalties.

Digital Lending And LSP Collections

RBI’s Digital Lending Directions, May 8, 2025 define an LSP as an agent of the RE performing digital lending functions, including recovery. The RE must conduct enhanced due diligence on LSPs, review conduct periodically, guide LSPs acting as recovery agents, and remains fully responsible and liable for LSP acts and omissions.

Two digital-lending rules are especially important in collections:

When a recovery agent is assigned or changed after default, particulars of the authorised recovery agent must be communicated to the borrower by email/SMS before the agent contacts the borrower.
Servicing and repayment must flow directly into the RE’s bank account, with no third-party/LSP pass-through pool account. For delinquent loans, cash recovery through physical interface is permitted where necessary, but the full recovery must be reflected in the borrower’s account the same day and LSP fees must be paid by the RE, not deducted from recovery proceeds.

This kills a common bad practice in embedded lending: platform collects overdue from merchant settlement, deducts “collection fee”, then remits net amount later. Unless the arrangement is structured under permitted co-lending/escrow rules or direct RE account flow, it is unsafe.

Who Collects In Co-Lending

Co-lending is not “originator owns collections and partner bank stays invisible”. RBI’s Co-Lending Arrangements Directions, August 6, 2025 require the agreement between REs to specify segregation of responsibilities, time-frame for exchanging critical information, customer interface, customer protection and grievance redressal. The loan agreement must disclose roles, including the single point of interface with the customer, and any change in customer interface requires prior borrower intimation.

Operationally:

Model	Who contacts borrower	Compliance requirement
Bank-NBFC co-lending, NBFC as interface	NBFC or its approved agent	Bank still needs audit/data visibility and borrower-level status sharing.
Digital co-lending via platform	Interface RE/LSP as disclosed	Digital Lending Directions plus co-lending escrow and role disclosure.
Partner RE takes over after termination	New interface RE/agent	Prior borrower intimation and business continuity plan.

The 2025 co-lending directions also require borrower-level asset classification sharing near real time and latest by end of next working day if either RE classifies its CLA exposure as SMA/NPA. Collections status, PTP and legal action therefore have to be shared, not hidden in one partner’s CRM.

Embedded And Anchor-Led Lending

Embedded SME loans often involve anchors: payment aggregators, e-commerce marketplaces, distributor apps, GST/accounting SaaS providers, supply-chain platforms or merchant-acquiring partners. The anchor may have commercial leverage over the borrower through settlements, order flow or dashboard access. That leverage is useful but risky.

Acceptable activities:

Anchor activity	Conditions
Reminder in merchant dashboard	Script approved by RE, no misleading threat.
Settlement sweep/escrow	Must match legal mandate and RBI fund-flow rules.
Data sharing for delinquency	Consent and RE-LSP agreement controls.
Field follow-up by anchor staff	Treat as recovery agent/LSP activity, with training and conduct rules.
Blocking services	Only if contractually lawful and not a disguised coercive recovery practice.

The RE should not allow an anchor to shame a seller in a marketplace group, block unrelated business services without contractual basis, contact employees/family unnecessarily or threaten police action for a civil default. If the anchor is an LSP, the RE is responsible for its conduct.

Scripts, Notices And Evidence

Every serious collections operation should maintain approved scripts. A compliant script states lender name, caller identity, overdue amount, due date, payment mode, grievance channel and consequences accurately. It should not say “police case will be filed today” for a normal civil default, “your shop will be sealed tomorrow” without legal basis, or “we will inform all your customers”.

Legal notices should be route-specific. SARFAESI notices, NI Act section 138 demand notices, loan recall notices and arbitration invocation notices have different statutory consequences. Mislabelled notices create defence points for borrowers and compliance findings for lenders. See legal toolkit for timelines.

Evidence to preserve:

Evidence	Why it matters
Call recordings and disposition	Conduct defence, PTP proof, complaint resolution.
SMS/email logs	Borrower intimation and payment reminders.
Field visit geo/time logs	Agent conduct and asset trace.
Receipts and payment posting	Cash-control proof.
Complaint records	RBI Ombudsman/internal audit trail.
Agency allocation history	Shows who was authorised when.

Complaints And Ombudsman Risk

Collections complaints should pause escalation where the complaint concerns the recovery process, unless the lender has documented reasons that the complaint is frivolous or unrelated and policy permits continuation. Banks’ recovery-agent guidance specifically cautions against forwarding cases to agencies while borrower grievances are pending, except where frivolous/vexatious complaints are evidenced (RBI Master Circular, July 1, 2015).

Digital lending complaints have a 30-day escalation path: if a complaint against the RE or LSP is rejected, partly rejected, unsatisfactory, or unanswered within 30 days, the borrower can approach RBI’s Complaint Management System under the Reserve Bank - Integrated Ombudsman Scheme; the Digital Lending Directions require this information to be conveyed to the borrower (RBI Digital Lending Directions, para 11).

Compliance quality is visible in small details: no personal phones, no WhatsApp abuse, no off-ledger cash, no undisclosed agency, no fake legal threats, no calling outside permitted hours. A collections system should enforce these controls because after a bad recovery incident, “agent acted independently” is not a defence RBI accepts.