Draft Bill moots unregulated lending ban, up to 10-year imprisonment

The Centre, in collaboration with states, has proposed to classify unregulated lending as a cognizable and non-bailable offence, with penalties including imprisonment of up to 10 years. The finance ministry has invited feedback by February 13 from stakeholders on the draft Bill, titled BULA (Banning of Unregulated Lending Activities), which aims to address both traditional and digital lending.

“Unregulated lending activities are defined as those not governed by any legal framework, carried out by individuals or entities not authorised by the Reserve Bank of India (RBI), or other regulatory bodies,” stated the draft Bill.

“Essentially, the Bill prohibits any form of public lending by individuals or organisations that are neither registered under any law, nor authorised by the RBI or other regulators,” according to the draft Bill.

The Bill stipulates that lenders who engage in illegal lending practices, whether digital or otherwise, will face imprisonment for terms ranging from 2 to 7 years, along with fines between Rs 2 lakh and Rs 1 crore. Lenders who use unlawful methods to harass borrowers or recover loans could face imprisonment of 3 to 10 years and hefty fines.

The draft Bill also calls for the Central Bureau of Investigation (CBI) to handle probes in cases where the lender, borrower, or property are spread over multiple states or Union Territories (UTs), or if the value of the transaction is large enough to significantly impact public interest.

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.

The origin of the BULA Bill can be traced to the RBI’s Working Group on Digital Lending, which, in its November 2021 report, recommended the creation of a law to curb unregulated lending.

“Considering that the financial services space (particularly with digital lending) has evolved as a dynamic sector in many ways, the regulators have been constantly striving to regulate it responsibly. Primarily, it has been regulated entities (REs) engaged in unfair practices and lending by unregulated entities. Two years ago, the RBI notified the Digital Lending Guidelines to curb unfair practices by REs; the proposed legislation intends to regulate the latter,” said Mayank Arora, director-regulatory, Nangia Andersen India.

One of the main issues in the digital lending domain is that the consumers are not aware of the real lenders as there is no physical interaction in the lending transaction, Arora said. “Unregulated entities used this to camouflage as authorised lenders, affecting the entire ecosystem. With the proposed central repository of all the regulated lenders, BULA Bill intends to establish a foundation for ethical lending,” Arora added.