The central government has unveiled a draft bill aimed at tackling unregulated lending activities, with provisions that could impose penalties of up to Rs 50 crore and prison sentences of up to 10 years for violators. The proposed legislation, titled the Banning of Unregulated Lending Activities (BULA), seeks to regulate both digital and non-digital lending, specifically targeting unauthorised lenders outside the purview of the Reserve Bank of India (RBI) and other financial regulators. The bill will address the rising issue of fraudulent loan apps and illegal lending practices, particularly in the digital space, where many unlicensed platforms have proliferated.
The draft bill follows recommendations made by the RBI’s Working Group on Digital Lending in November 2021. It calls for the prohibition of individuals or entities not authorised by the RBI or other regulatory bodies from engaging in public lending. The new legislation sets stringent punishments, including imprisonment ranging from three to 10 years for lenders who engage in coercive collection practices. In addition, fines will range from Rs 2 lakh to Rs 1 crore for unauthorised lending, with repeat offenders facing even harsher penalties.
The draft bill further proposes the creation of a centralised database of authorised lenders, which will be publicly accessible. This measure aims to ensure transparency in the lending process and protect consumers from fraudulent practices. The bill also provides for the transfer of investigations to the Central Bureau of Investigation (CBI) in cases involving cross-state transactions or significant public interest.
Rising fraudulent activities
The government’s move comes amid growing concerns about fraudulent lending apps that use unethical tactics, including exorbitant interest rates, hidden fees, and coercive recovery methods. These practices have led to financial distress for many borrowers, some of whom have resorted to extreme measures. The RBI has already taken action by removing more than 2,200 fraudulent lending apps from Google’s Play Store between September 2022 and August 2023.
A significant challenge in the digital lending sector is the anonymity of lenders, which allows unregulated entities to pose as legitimate players. The proposed law aims to address this issue by creating a framework that ensures only authorised and regulated entities can offer loans. This move is seen as a step towards promoting ethical lending practices and protecting consumers from exploitation.
The draft bill has been released for public consultation, and stakeholders are invited to submit feedback by February 13, 2025. The government is expected to use the feedback to refine the bill before it is formally introduced in Parliament. If enacted, the BULA Act could reshape the lending landscape in India, enhancing consumer protection and ensuring greater transparency in the financial services sector.
