Draft Bill Issued on Banning of Unregulated Lending Activities

On 13th December, the Department of Financial Services under the Ministry of Finance released a draft bill to curb unregulated lending activities for stakeholder consultation.

The proposed bill titled ‘Banning of Unregulated Lending Activities (BULA) envisions to ban all persons/entities who are not authorized by RBI/other regulators from undertaking public business lending activity, including digital lending.

The BULA Bill got its start after multiple reports of illegal and predatory digital lending operations in India. There was a consistent crackdown on digital loan applications that engaged in unregulated lending operations, as well as the many complaints regarding their aggressive recovery tactics and unethical lending practices. Consequently, the RBI’s Working Group on Digital Lending suggested in its November 2021 report that a categorical law is needed to stop unregulated lending.

Last month, two Chinese people were detained by the Enforcement Directorate (ED) for running a fraudulent online lending operation in which they dispensed high-interest, short-term loans. After harassing and blackmailing the borrowers to collect the loans, the lenders used cryptocurrency to send the money overseas.

In 2022, the ED raided Cashfree, RazorPay, and Paytm’s offices in relation to these apps. Due to suspected Chinese connections, the government also prohibited 94 loan-lending applications and 138 betting apps. Google removed about 2,200 of these apps from its Play Store between September 2022 and August 2023.

According to the bill, public lending activity refers to the financing business conducted by individuals, including making loans or advances to non-relatives at interest rates, whether in cash or kind. Loans given to relatives are excluded from this definition. 

The draft law references 20 existing pieces of legislation under the First Schedule of the Constitution, which govern regulated lending activities. These include the RBI Act, Banking Regulation Act, and the State Money Lenders Act.

The Bill also grants the Centre the authority to amend the First Schedule in consultation with regulators to exclude any lending activities already covered under the listed regulations.

Additionally, it suggested that “any lender who offers loans, whether digitally or otherwise, in violation of this law shall be punished with a fine ranging from Rs 2 lakh to Rs 1 crore and imprisonment for a minimum of two years, which may extend up to seven years.”

Lenders that harass borrowers or collect debts through illegal means risk penalties and imprisonment for three to ten years.

According to the Bill, if the lender, borrower, or properties are spread across several states or Union territories, or if the total amount involved is substantial enough to have a substantial impact on the public interest, the investigation should be turned over to the CBI.

Further, the government will appoint officers of the rank of secretary or above as the “Competent Authority” entrusted with enforcing the Act. If the said authority believes that an entity may be engaged in unregulated lending, then it has the power to provisionally attach the entity’s accounts. The authority would also have the same powers as a civil court while conducting an investigation, allowing it to summon and examine individuals under oath and compel the production of records. The proceedings of the authority’s investigation will have the same status as judicial proceedings under sections 227 (pertaining to false evidence) and 265 (obstruction to apprehension) of the Bharatiya Nyaya Sanhita (BNS).

The government may also designate an authority to create, maintain, and operate an online database for information on lenders with a facility for the public to search for information about lenders undertaking unregulated lending activities and also facilitate reporting of illegal lenders.

Stakeholders have until February 13, 2025, to provide feedback.