The Banning of Unregulated Lending Activities Bill, 2024

Introduction

India’s growing economy has fueled rising consumer needs and aspirations, leading to a significant increase in consumer spending over the years. Influenced by western practices, many consumers now prefer spending on credit rather than debit payments, driving the demand for loans and credit facilities. However, accessing credit from banks remains a challenge for many due to strict regulatory norms and complex documentation.

The rise of digital lending platforms has revolutionized the Indian credit system, making it easier for borrowers to access credit through apps and online platforms. However, this growth has been plagued by the rise of illicit lending applications, offering short-term instant loans that often trap unaware consumers in unregulated lending activities[i].

The use of such applications became especially prominent in India during the pandemic and has persisted since. These applications lend money at exorbitant rates of interest, charge high processing fees and use predatory recovery practices by engaging representatives who typically within 15 days of approval of such loan, abuse, threaten and blackmail the borrowers by accessing their contacts and pictures. In some cases, the recovery process begins as early as 5 (five) to 6 (six) days after the loan disbursal and in some cases, even before the borrower actually received the loan.[ii]

To curb these activities, several measures have been implemented, including the release of a list of approved digital lending applications by the Government of India. The list was further shared to Google Play Store and Apple Store to ensure that only the apps featuring on the list are hosted on their app stores. Google had also removed nearly 4,700 (four thousand seven hundred) illegal loan apps in the span of 2 (two) years ending August 2023[iii].

In this context, the Reserve Bank of India (“RBI”) constituted a Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps on January 13, 2021 (“Working Group”) to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory mechanism can be adopted. In its report dated November 18, 2021, the Working Group recommended the introduction of a legislation analogous to the Central law of “Banning of Unregulated Deposit Scheme Act, 2019” styled as “Banning of Unregulated Lending Activities Act” which would ban all entities not regulated and authorized by RBI or by any other law/statutory for undertaking public lending business.

Following the recommendation, the Department of Financial Services, Ministry of Finance has released the Draft Banning of Unregulated Lending Activities Bill (“Draft Bill”) and has sought stakeholder comments on it by February 13, 2025. The key provisions of the Draft Bill include:

Prohibited Activities

1. Unregulated Lending: The Draft Bill proposes to ban all unregulated lending activities (other than lending to relatives), including digital lending and any activity which directly, or indirectly promotes, operates or issues any advertisement regarding such unregulated lending. It defines ‘unregulated lending activities’ as lending activities that are not regulated under the laws listed in First Schedule of the Draft Bill, which include the Reserve Bank of India, 1934, Banking Regulation Act, 1949, state Money Lenders Acts, Companies Act, 2013, Limited Liability Partnership Act, 2008, National Housing Bank Act, 1987, etc.
2. Certain Activities to be Unregulated Lending Activities: The Draft Bill empowers the appropriate Government which may be the State Government in relation to a specific State, or Government of the respective Union Territory in relation to Delhi and Puducherry, or the Central Government in relation to the Union Territory without legislature (“Appropriate Government”), in consultation with the concerned regulators, to classify certain activities as unregulated lending activities for their respective States or Union Territories.
3. Wrongful Inducement: The Draft Bill proposes to prohibit any person from making any statement, promise or forecast either digitally or otherwise, knowing that it is false, deceptive or misleading, to induce another person to apply or take unregulated loans.
4. Unlawful Recovery– The Draft Bill proposes to prohibit the acts of using unlawful means to harass and recover unregulated loans. Although ‘unlawful means’ has not been explicitly defined, guidance can be drawn from RBI guidelines and notifications which categorize actions such as intimidation, verbal or physical harassment, public humiliation, intrusion into the privacy of debtors’ family members, and friends, anonymous or threatening calls, false and misleading representations, persistent harassment at odd hours, and the use of muscle power as unlawful means for loan recovery.[iv]

The Draft Bill proposes to form a central online database consisting details of all the regulated lenders operating in India. This database would be accessible by the public and will also facilitate the reporting of unregulated lenders. Every lender that continues its business after the enforcement of the Draft Bill would be required to intimate the authority operating the central database within the time limit as may be prescribed.

Enforcement

1. Competent Authority and Its Powers: The Draft Bill delegates the Appropriate Government to appoint competent authority to enforce the provisions of the Draft Bill. The Draft Bill bestows the competent authority with the following powers:
   1. Power to Attach: If the authority believes that any lender is undertaking unregulated lending activity, it has the power to provisionally attach the accounts held by the lender and money or other property acquired by the lender or by any other person on behalf of the lender. However, this power seems very wide and arbitrary and should be subject to judicial oversight to ensure the due process of law is followed.
   2. Investigation and Inquiry: The competent authority has the same powers vested in a civil court under the Code of Civil Procedure, 1908 while conducting any investigation or inquiry in relation to the violations under the Draft Bill.
   3. Directing to Furnish Information: The competent authority has the power to direct any lender to furnish information and details of the unregulated loans given by him and to impound or retain any records produced before it.
2. Investigation of Offences: Every offence under the Draft Bill except for failure to intimate the authority for continuing the business of lending after the enforcement of the Draft Bill and furnish documents to the competent authority, is cognizable and non-bailable. On recording of any complaint regarding commission of offence under the Draft Bill, the state police is required to inform the same to the competent authority. If the competent authority has a reason to believe that the borrower, lender or properties are located in more than one State or Union Territory in India or outside India or the total value of the amount involved is of such magnitude which may significantly affect the public interest, it shall refer such case to the Central Bureau of Investigation (“CBI”). This provision appears to be a well-considered measure to address inter-state crimes under the Draft Bill or cases which may significantly affect the public interest, however, the Draft Bill does not define the value threshold for referring cases to the CBI, which could lead to arbitrary decision-making.Further, the Draft Bill empowers police officers, not below the rank of officer-in-charge, with the permission of Superintendent of Police and written record of search purpose, to authorize its subordinates to enter, search and seize records or property linked to unregulated lending within their territorial jurisdiction.
3. Designated Courts: The Appropriate Government with the concurrence of the Chief Justice of the respective State’s High Court will constitute one or more designated courts which will have exclusive jurisdiction over matters pertaining to the Draft Bill. Such courts shall be presided over by a Judge not below the rank of District and Sessions Judge or Additional District and Sessions Judge.

Offences and Penalties

The Draft Bill proposes to impose the following penalties for various offences in relation to unregulated lending activities:

1. Lenders engaging in the practice of unregulated lending activities will be punishable with imprisonment for a term of 2 (two) to 7 (seven) years along with fines between INR 2,00,000 (Indian Rupees Two Lakhs) to INR 1,00,00,000 (Indian Rupees One Crore).
2. Lenders using unlawful loan recovery practices will be punishable with imprisonment for a term of 3 (three) to 10 (ten) years along with fines of at least INR 5,00,000 (Indian Rupees Five Lakhs) to twice the amount of loan.
3. Any person wrongfully inducing someone to take unregulated loans will be punishable with imprisonment for a term of 1(one) to 5 (five) years along with fines up to INR 10,00,000 (Indian Rupees Ten Lakhs).
4. Repeat offenders will be punishable with imprisonment for a term of 5 (five) to 10 (ten) years along with fines of at least INR 10,00,000 (Indian Rupees Ten Lakhs) to INR 50,00,00,000 (Indian Rupees Fifty Crore).

Although the Draft Bill prescribes hefty penalties, it fails to establish a mechanism through which the victims can be compensated for their losses and mental or physical torture.

Other Key Considerations

1. The intent behind recommending the Draft Bill was to curb “unregulated public lending activities.” Although the Draft Bill defines “public lending activities” as the business of financing by any person whether by way of loans or advances at interest, in cash or kind, the term is not used in the definition of “unregulated lending activity.” This omission leads to a different interpretation of the provision.For example, if Mr. A lends INR 1,00,000 (Indian Rupees One Lakh) to his friend Mr. B without interest during an emergency, would be hit by the Draft Bill. However, if the definition of “public lending activities” had been used in defining “unregulated lending activity,” this scenario would be excluded because the loan lacks interest and the lender is not in the business of providing loans for profit. The intent was likely to curb unregulated profit-driven lending businesses rather than such informal loans. To get the interpretation in line with the spirit of the report of the Working Group and the Draft Bill, the definition of “unregulated lending activity” should be revised to include the term “unregulated public lending activity.” Clarification is required in this regard to avoid unintended disputes and inconvenience to the public.
2. The Working Group recommended establishment of a nodal agency named Digital India Trust Agency (“DIGITA”) to ensure that only authorized and trusted digital lending applications are used by consumers. This agency would discharge the function of verifying the digital lending applications before such applications can be publicly distributed through app stores or through any other digital means. Only DIGITA ‘verified’ applications will be considered as authorised applications. Eligible applications not carrying the ‘verified’ signature of DIGITA would be considered as unauthorised for the purpose of law enforcement. Further, DIGITA shall be entrusted with the duty to maintain a public register of ‘verified’ applications. This could have given effect to in the Draft Bill.
3. Further, the Draft Bill does not address how such loans given in the past will be dealt with.

Conclusion

The introduction of the Draft Bill is a significant step towards protecting borrowers and making the lending space more transparent. However, the Indian economy still heavily relies on informal lending systems, such as traditional moneylenders, pawn brokers, or loans from friends. This is particularly true for rural populations, who are often excluded from the formal credit framework. Despite its shortcomings, these informal systems fill a critical gap by providing quick and easy loans.. A complete ban on such informal lending systems without providing adequate alternatives could negatively impact these excluded populations and the overall economy.

To address this, it would be prudent for the Government to incorporate provisions and facilities that mitigate these issues to the greatest extent possible before enforcing such a ban. One of the provisions can be providing entities with a transition period to register themselves under the applicable law.

Further, the Draft Bill could benefit from including provisions that allow the competent authority to take appropriate steps to promote awareness of the risks associated with unregulated lending activities. Such measures could encourage and educate individuals to seek loans only from regulated entities.

While  the Draft Bill is undoubtedly a positive step, achieving its objectives without adversely affecting excluded populations will require a balanced approach. This balance must safeguard borrowers’ interests not just in theory but also in practice, ensuring they have access to affordable and convenient credit options as the informal lending system is gradually phased out.

Authors: Aishwarya H, Rohit Dhingra

We thank our intern Vishnudath for the assistance provided.

Publication Date: 3^rd March 2025

---

[i]https://www.aljazeera.com/economy/2023/12/25/the-dark-world-of-illegal-loan-apps-in-india

[ii]https://www.aljazeera.com/economy/2023/12/25/the-dark-world-of-illegal-loan-apps-in-india

[iii]https://www.livemint.com/money/google-removed-over-4-700-illegal-loans-apps-from-playstore-how-to-protect-yourself-from-fake-apps-11707561782224.html

[iv]Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks dated November 3, 2006 https://rbi.org.in/scripts/NotificationUser.aspx?Id=3148&Mode=0 ;Guidelines on Fair Practices Code for Lenders dated May 5, 2003  https://rbi.org.in/scripts/NotificationUser.aspx?Id=1172&Mode=0; Recovery Agents engaged by Banks notification dated April 24,2008 https://www.rbi.org.in/commonman/English/Scripts/Notification.aspx?Id=347