The Department of Financial Services on Thursday introduced the draft Banning of Unregulated Lending Activities (BULA) Bill. This legislation aims to outlaw unregulated lending, protect borrowers from financial exploitation, and set stringent rules for the burgeoning digital lending sector.
The government defines the unregulated lending activities that cover lending practices, including digital lending, that are not governed by existing financial regulations or laws.
The Bill defines several key terms to establish its scope. “Public lending activity” refers to organised financing operations conducted for profit, excluding loans to family members. It underscores the necessity for lending to remain a regulated business. “Unregulated lending activities” encompass practices, particularly digital ones, that operate outside existing financial laws.
The comments and suggestions to the same have been invited until February 13th, 2025.
Banning Unregulated Lending Activities
The Bill explicitly bans all unregulated lending activities from the day the legislation is enacted. It prohibits the promotion, operation, or advertising of such schemes and penalizes misleading statements or deceptive practices designed to lure borrowers into engaging with unregulated lenders.
A government-appointed Competent Authority will oversee compliance, with powers to attach accounts and properties linked to violators, conduct inspections, and compel the production of critical documents. Designated Courts will expedite the adjudication of offences.
The proposed Bill seeks to address critical challenges in the financial services space, which has evolved dynamically in recent years, particularly with the rise of digital lending platforms.
Mayank Arora, Director – Regulatory at Nangia Andersen India, said, “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. Unregulated entities used this to camouflage as authorised lenders, affecting the entire ecosystem. BULA, with the proposed central repository of all the regulated lenders, intends to establish a foundation for ethical lending.”
Central Database
BULA Bill shall be creating a centralized online database, which aims to provide a comprehensive registry of regulated lenders in India. This initiative allows the public to report illegal or cloned lenders, while also facilitating seamless data sharing between regulatory bodies and law enforcement to prevent violations. Regulated lenders must report their operations to the designated authority, ensuring transparency and accountability.
Penalties and Enforcement
There are severe penalties to deter unregulated lending. Violators could face jail terms ranging from two to ten years, with monetary penalties ranging from Rs 2 lakh to Rs 50 crore. Non-individual entities such as companies and firms will be held accountable, including their directors, managers, or other responsible personnel.
Soumitra Majumdar, Partner at JSA Advocates & Solicitors, added, “The mushrooming of lending platforms which offer quick, unsecured loans mostly for frivolous consumptions, without adequate credit check, has the potential for putting Indian households at a massive systemic risk. Regulators have raised several alarms on the burgeoning household debt levels. Further, these lending platforms are not most transparent in levying financing charges. Thus this legislation is extremely timely – with the intent to put in place mechanisms of ethical and regulated lending, backed by proper credit appraisals.”
