RBI Fair Practices Code: The Rules That Bar Lenders From Harassment and Force Written Loan Terms on Borrowers

When a loan account is tagged a non-performing asset and the first recovery call comes through, most borrowers assume the lender holds every card. It does not. The Reserve Bank of India's Master Circular on Fair Practices Code, numbered RBI/2015-16/16 and dated 1 July 2015, binds every non-banking financial company (NBFC), residuary non-banking company and NBFC-microfinance institution to a written code of conduct that governs how a loan is marketed, priced, serviced and recovered (rbi.org.in).

The Code does two things borrowers rarely think to exercise. It forces the lender to hand over a copy of the loan agreement, with a copy of every enclosure, at the point of sanction or disbursement; and it prohibits recovery by "undue harassment", spelling that out as "persistently bothering the borrowers at odd hours" and "use of muscle power for recovery of loans" -- phrases lifted verbatim from RBI/2015-16/16 of 1 July 2015. Two Supreme Court judgements, reported at (2007) 2 SCC 711 and (2012) 1 SCC 1, have converted that single sentence into enforceable civil liability against lenders.

This playbook sets out where the Fair Practices Code sits in the statute book, the exact procedure a lender must follow before and during recovery, the defences a borrower can raise, and the tribunal and High Court position as it stands in 2026. Every number and citation below is drawn from the primary source named alongside it.

The Statutory Position

The Fair Practices Code is not a standalone Act. It is a direction issued by the Reserve Bank under its supervisory powers over NBFCs, chiefly Section 45JA (power to determine policy and give directions) and Section 45L (power to call for information and give directions to financial institutions) of the Reserve Bank of India Act, 1934 (indiacode.nic.in). Because it flows from these sections, a breach of the Code is a breach of a binding RBI direction, not merely a lapse of etiquette, and it exposes the NBFC to regulatory action in addition to any civil claim by the borrower.

RBI/2015-16/16, dated 1 July 2015, applies to all NBFCs, RNBCs and NBFC-MFIs. Its core obligations fall into four buckets, each of which a borrower can hold the lender to.

For secured loans, the Fair Practices Code operates alongside, not instead of, the enforcement machinery of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 -- the SARFAESI Act, Act 54 of 2002 -- and the recovery route through a Debts Recovery Tribunal under the Recovery of Debts and Bankruptcy Act, 1993. A lender may hold collateral and may enforce it, but the manner of enforcement remains governed by the Code and by the two Supreme Court rulings discussed below. In other words, the RBI Act, 1934 sets the conduct floor; SARFAESI, 2002 and the RDDB Act, 1993 provide the enforcement ceiling.

Procedure Step by Step

Where the loan is secured and the account has been classified as a non-performing asset, the lender cannot simply appear at the door. It must move through a fixed statutory sequence. The timeline below is drawn from Section 13 of the SARFAESI Act, 2002.

1. Classification and demand notice. Once the account is an NPA, the secured creditor issues a demand notice under Section 13(2) of the SARFAESI Act, 2002 giving the borrower 60 days to discharge the full liability. The notice must set out the amount claimed and the secured asset intended to be enforced.
2. Borrower's representation. Within that 60-day window the borrower may submit a representation or objection under Section 13(3A). This right was inserted by the 2004 amendment to the Act.
3. Creditor's reasoned reply. The secured creditor must consider the representation and, if it does not accept it, communicate the reasons for non-acceptance to the borrower within 15 days under Section 13(3A).
4. Enforcement measures. Only on the borrower's failure to pay within 60 days may the creditor proceed under Section 13(4) to take possession (symbolic or physical), sell, lease or assign the secured asset, or appoint a manager -- without the intervention of a court.
5. Recovery conduct throughout. At every step the Fair Practices Code applies. Communications must remain in the borrower's language, and possession must be taken without muscle power. The 2008 recovery-agents circular, RBI/2007-2008/296 (DBOD.No.Leg.BC.75/09.07.005/2007-08) dated 24 April 2008, additionally requires banks to control agents' conduct, including their hours of calling and respect for customer privacy (rbi.org.in).

If a borrower wants to model the effect of clearing the arrears or foreclosing early, the foreclosure calculator and the home loan EMI calculator show how a lump-sum payment resets the outstanding principal before the 60-day clock expires.

Borrower Defences Available

A borrower is not confined to paying up or losing the asset. Several defences flow directly from the Fair Practices Code and from Section 17 of the SARFAESI Act, 2002.

Non-supply of the loan agreement. Because RBI/2015-16/16 of 1 July 2015 requires a copy of the loan agreement and every enclosure at sanction, a lender that cannot produce evidence of that delivery is in breach of a binding RBI direction. That breach is a live ground in any complaint to the Grievance Redressal Officer and in proceedings before a Debts Recovery Tribunal.

Communication in a language the borrower does not understand. The Code requires all communications to be in the vernacular or a language the borrower understands. A Section 13(2) demand notice served only in English on a borrower who transacted in a regional language can be challenged as non-compliant with RBI/2015-16/16 of 1 July 2015.

Harassment and use of muscle power. The prohibition on "persistently bothering the borrowers at odd hours" and "use of muscle power" in RBI/2015-16/16 is enforceable. Forcible seizure of a hypothecated vehicle by recovery musclemen is not just a Code breach; on the authority of (2012) 1 SCC 1 it can sound in damages.

Defects in the Section 13(2) notice. A demand notice that misstates the amount, omits the secured asset, or is issued before the account is validly classified as an NPA is open to challenge under Section 17 of the SARFAESI Act, 2002. The appeal to the DRT must be filed within 45 days of the measure under Section 13(4); a pre-deposit is not mandatory at this first stage, though the tribunal may direct one.

The escalation ladder. RBI/2015-16/16 requires every NBFC to display the name and contact details of a Grievance Redressal Officer, and to resolve complaints within one month; if it does not, the borrower may escalate to the Officer-in-Charge of the concerned Regional Office of the RBI. Beyond that, the Reserve Bank - Integrated Ombudsman Scheme, 2021, in force from 12 November 2021, lets a borrower complain to the RBI Ombudsman once a grievance is unresolved for 30 days (rbi.org.in).

A borrower weighing whether to litigate or settle should first price the outstanding accurately; the EMI-to-interest-rate calculator helps reconstruct the effective rate actually being charged, which is often the pressure point in a one-time settlement negotiation. Where the dispute is over a temporary inability to pay rather than the debt itself, the moratorium concept and a restructuring request may be the cheaper route than a full DRT appeal.

Recent Tribunal/HC Position

The judicial spine of borrower protection against coercive recovery rests on two Supreme Court decisions, and they remain good law in 2026.

In Manager, ICICI Bank Ltd. v. Prakash Kaur, reported at (2007) 2 SCC 711, the Supreme Court "unequivocally deprecated the practice of employing recovery agents or musclemen" and held that using enforcers or "goondas" to recover loans is an improper and disapproved method of debt collection (indiankanoon.org). The ruling has since been cited across the National Consumer Disputes Redressal Commission and several High Courts as authority against intimidation during recovery.

That principle was sharpened four years later in Citicorp Maruti Finance Ltd. v. S. Vijayalaxmi, (2012) 1 SCC 1, decided on 14 November 2011, where the Supreme Court condemned the use of musclemen by a finance company to repossess a vehicle and confirmed that a financier cannot take back a hypothecated asset by force even where the borrower is in default (indiankanoon.org, doc 956414). The decision is routinely relied upon to award damages where possession is taken through coercion rather than through the SARFAESI, 2002 route or an order of the court.

The practical consequence for 2026 is a two-track exposure for any lender that oversteps. On one track, a coercive recovery breaches RBI/2015-16/16 of 1 July 2015 and invites regulatory action from the Reserve Bank. On the other, following (2007) 2 SCC 711 and (2012) 1 SCC 1, it exposes the lender to a civil claim in damages regardless of whether the underlying loan default is admitted. Borrowers should preserve call logs, recordings and dates, because the two judgements turn documented harassment into a recognised cause of action rather than a mere complaint.

FAQ

Does the Fair Practices Code apply to banks or only to NBFCs?

RBI/2015-16/16, dated 1 July 2015, is addressed to NBFCs, RNBCs and NBFC-MFIs (rbi.org.in). Banks are governed by a parallel Fair Practices Code framework issued by the Reserve Bank under the Banking Regulation Act, 1949, but the substance -- a written agreement, transparent pricing and a bar on coercive recovery -- is the same, and the Supreme Court rulings at (2007) 2 SCC 711 and (2012) 1 SCC 1 bind both.

Can a lender repossess my vehicle without a court order if I default?

A secured creditor may enforce security without the intervention of a court under Section 13(4) of the SARFAESI Act, 2002, but only after the 60-day notice under Section 13(2) and only without force. On the authority of (2012) 1 SCC 1, repossession through musclemen is unlawful even where the borrower has defaulted.

How long do I have to challenge a recovery notice?

Where a measure has been taken under Section 13(4) of the SARFAESI Act, 2002, the borrower may appeal to the Debts Recovery Tribunal under Section 17 within 45 days. A further appeal to the Debts Recovery Appellate Tribunal under Section 18 must be filed within 30 days, and that stage requires a pre-deposit of 50% of the debt due, which the tribunal may reduce to not less than 25% for reasons recorded in writing.

What can I do if a recovery agent calls me at odd hours?

RBI/2015-16/16 of 1 July 2015 prohibits "persistently bothering the borrowers at odd hours". Record the dates and times, raise a written complaint with the Grievance Redressal Officer named by the NBFC, and if it is not resolved within one month, escalate to the concerned Regional Office of the RBI or to the RBI Ombudsman under the Reserve Bank - Integrated Ombudsman Scheme, 2021.

Is the lender obliged to give me a copy of my loan agreement?

Yes. Under RBI/2015-16/16, dated 1 July 2015, an NBFC must furnish a copy of the loan agreement "as understood by the borrower" together with a copy of every enclosure at sanction or disbursement. A lender that cannot show it did so is in breach of a binding RBI direction.

Does filing a DRT appeal require me to deposit money first?

At the first stage, an appeal to the Debts Recovery Tribunal under Section 17 of the SARFAESI Act, 2002 carries no mandatory pre-deposit, though the tribunal may direct one. The 50% pre-deposit (reducible to 25%) applies only at the second stage, before the Debts Recovery Appellate Tribunal under Section 18.

Can harassment during recovery be a ground for damages, not just a complaint?

Yes. Following (2007) 2 SCC 711 and (2012) 1 SCC 1, coercive recovery through musclemen is a recognised civil wrong. A borrower who documents the harassment can pursue damages in addition to filing a regulatory complaint under RBI/2015-16/16 of 1 July 2015.