India central bank to curtail smartphone locking by digital lenders

The Indian central bank has presented revised proposals to restrict the locking of smartphones by digital lenders when borrowers fall into arrears.

The Reserve Bank issued revised draft directions on May 20. [1] The central provision is a requirement that lenders must not restrict or disable the functionalities of a mobile device of a borrower such as a mobile phone or tablet.

Mobile phones in India have become essential tools for communication, education, work, access to government services, banking, and healthcare, says K. L. Savitha, assistant professor of economics at the CHRIST university in Bangalore. “Blocking a borrower’s device as a debt recovery measure can excessively affect their daily life and livelihood.”

The proposals are “positive and necessary,” as they establish clearer boundaries for lenders and recovery agents, Savitha says. “Their effectiveness will depend on implementation, monitoring, and enforcement.” Many abusive practices, she says, occur because borrowers are unaware of their rights, or because violations go unreported. “The guidelines should be viewed as an important foundation rather than a complete solution.”

Indian smartphone penetration is estimated to be about half the population, or at least 650 million active users. The country’s MSME sector accounts for nearly 30% of GDP and employs 110 million people. The MSMEs have become increasingly dependent on digital tools including smartphones since COVID 19. Research has found that MSMEs using such tools were able to recover faster following the pandemic. [2]

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The improved performance available to MSMEs, however, has created new vulnerabilities, with lenders to MSMEs and individuals disabling phones as soon as repayments fall behind. The practice has even spawned services that will negotiate agreements with lenders and get phones unlocked – at a cost. [3]

The proposals have been watered down following feedback from the lending industry. Implementation has been pushed back to October 1, from the initially planned date of July 1.

An initial draft in February proposed a blanket ban on device disabling. There is now an exemption for devices which have been financed with loans.

The loan contract must expressly permit such an action. The lender will have to wait 60 days after the due repayment date and then give the borrower a further 21 days to repay. Once the 21 days is up, there must be further notice giving seven days for the arrears to be settled.

In any case, disabling essential features such as access to the Internet, incoming calls, emergency SOS features, and receipt of emergency government or public-safety notifications is not allowed. If the debt is paid after disablement, the bank has to restore functions within an hour or pay hourly compensation.

The industry is continuing to push back against the proposed restrictions. Vinod Kothari Consultants counts a wide range of Indian bank and non-bank lenders among its clients, and has worked on projects for the World Bank, the International Finance Corporation, and the Asian Development Bank.

The consultants argue that device financing loans are usually short-term in nature and that lenders should therefore not be forced to wait before being allowed to disable devices.

“In short-tenure device financing loans, recovery measures are most effective during the early stages of delinquency, when the borrower continues to actively rely on the device,” Vinod Kothari writes. [4]

There is clearly a risk that lenders will see the delay in implementation to October 1 as a window of opportunity to maximise the coercive use of device disablement. Disabling phones is a punitive step which will inevitably have dangerous and unpredictable consequences. Even with the proposed safeguards, the common use of multi-factor authentication to log in to accounts leaves borrowers at the risk of a vicious circle of not being able to settle a debt because a phone is disabled.

Savitha says that while lenders may have a legitimate interest in protecting assets financed through loans, any technological restrictions must be “narrowly defined, transparent, proportionate, and subject to informed consent. Ambiguity regarding which features can be disabled and under what circumstances could create opportunities for misuse.”

Restrictions, she says, should never undermine a person’s ability to access essential services, communications, or digital financial tools. “Regulators may need to provide further clarity and oversight.”

[1] Conduct of Regulated Entities in Recovery of Loans and Engagement of Recovery Agents. Press Releases - Reserve Bank of India

[2] Kunjan Pandey, Raju Patel, “Impact of Digital Transformation on MSMEs in Post-COVID India” The Academic 3 /12 December 2025. Direct Link: Microsoft Word - 41. Dr .Kunjan Pandey, Dr. Raju Patel (491-508)

[3] DMI Finance Loan Settlement | Samsung Finance+ & GPay Loans | AMA Legal Solutions

[4] Remote Device Locking: RBI proposes highly guarded path – Vinod Kothari Consultants