Shivanand Pandit
On December 13, 2024, the Department of Financial Services under the Ministry of Finance released a draft bill for stakeholder consultation to address unregulated lending activities. Subsequently, on December 19, the Union government proposed new legislation targeting illegal lending practices, particularly by digital lending platforms. While the initiative to protect borrowers from exploitation is commendable, the proposed legislation raises concerns about its broad scope, potential impact on financial inclusion, and its limited emphasis on addressing systemic vulnerabilities.
This initiative comes against the backdrop of the rapid growth of digital lending platforms. According to the RBI’s Financial Stability Report (2023), a significant portion of complaints pertained to digital lenders, with borrowers frequently reporting exorbitant interest rates and unethical recovery practices. A recent report by the Ministry of Electronics and Information Technology revealed that over 1,000 unregulated lending apps are operating in the country, primarily targeting low-income groups with limited access to formal credit.
The proposed bill, titled the ‘Banning of Unregulated Lending Activities (BULA),’ aims to prohibit all individuals and entities not authorised by the RBI or other regulators from engaging in public lending activities, including digital lending. The BULA Bill was initiated in response to numerous reports of illegal and predatory digital lending practices in India. Authorities consistently cracked down on digital loan applications involved in unregulated lending, amid widespread complaints about their aggressive recovery methods and unethical practices. As a result, the RBI’s Working Group on Digital Lending, in its November 2021 report, recommended the introduction of specific legislation to curb unregulated lending activities.
In November 2024, the Enforcement Directorate (ED) detained two Chinese nationals for orchestrating a fraudulent online lending scheme that provided high-interest, short-term loans. To recover the loans, the operators employed harassment and blackmail, funnelling the proceeds abroad through cryptocurrency. Back in 2022, the ED raided the offices of Cashfree, Razorpay, and Paytm in connection with such apps. Due to suspected Chinese links, the government subsequently banned 94 loan-lending apps and 138 betting apps. Between September 2022 and August 2023, Google also removed around 2,200 of these apps from its Play Store.
What is in the Bill?
The Bill defines ‘public lending activity’ as the business of providing financing—whether through loans, advances, or other means—for purposes other than one’s own, at interest, in cash or in kind, excluding loans and advances made to relatives. It references 20 laws governing regulated lending activities outlined in the First Schedule of the Constitution. These include the RBI Act, the Banking Regulation Act, laws about the State Bank of India, Life Insurance Corporation, National Housing Bank, regional rural banks, multi-state cooperative societies, chit funds, and various State Money Lenders Acts, among others. The Bill empowers the Central Government, in consultation with regulators, to amend the First Schedule to exclude lending activities already governed by the listed regulations.
Violations of the proposed law would be treated as cognizable and non-bailable offences, punishable with fines and imprisonment. According to the Bill, any lender offering loans, whether digitally or otherwise, in contravention of this law, would face a minimum imprisonment of two years, extendable up to seven years, along with a fine ranging from ₹2 lakh to ₹1 crore. Additionally, lenders employing unlawful methods to harass borrowers or recover loans could face imprisonment ranging from three to ten years, along with monetary penalties.
The Bill stipulates that if the lender, borrower, or assets are located across multiple states or Union territories, or if the amount involved significantly impacts public interest, the investigation must be handed over to the CBI. Additionally, the government will appoint officers of secretary rank or higher as the “Competent Authority” responsible for enforcing the Act. This authority can provisionally attach an entity’s accounts if it suspects involvement in unregulated lending activities. The Competent Authority will have the powers of a civil court during investigations, including summoning individuals, examining them under oath, and compelling the production of records. The investigation proceedings will be treated as judicial proceedings under sections 227 (false evidence) and 265 (obstruction to apprehension) of the Bharatiya Nyaya Sanhita (BNS).
Furthermore, the government may designate an authority to develop, maintain, and operate an online database containing information on lenders. This platform would allow the public to search for details about lenders engaged in unregulated lending activities and report illegal lenders.
The Bill’s ambiguities pose challenges
Addressing exploitative lending practices is essential, but the draft’s broad approach risks undermining India’s informal credit networks, which are crucial for rural and underserved communities. The NABARD All-India Rural Financial Inclusion Survey (NAFIS) 2021-22 found that approximately 28.3% of rural households depend on informal credit systems. These systems are often built on trust and provide financial support where formal banking channels fall short. By criminalizing all unregulated lending, the government risks pushing these transactions underground, further alienating marginalized populations.
Furthermore, the stringent penalties could discourage legitimate fintech startups that have played a vital role in bridging the credit gap. India’s digital lending market, valued at $75 billion in 2020, is projected to reach $350 billion by 2025, according to a report by Bain & Company and Omidyar Network India. These platforms have provided loans to millions of small businesses and individuals excluded from traditional banking. Overregulation could hinder this growth, potentially restricting access to credit for those who need it most.
The effectiveness of this legislation depends on its enforceability, which faces significant challenges. Digital lending platforms often operate anonymously, making it difficult to track and prosecute offenders. A 2023 report by the Indian Computer Emergency Response Team (CERT-In) highlighted a sharp rise in cybercrime complaints, with financial fraud being a major concern. It highlights the difficulties of effectively policing the rapidly expanding online ecosystem. Without substantial investment in cyber surveillance and inter-agency coordination, the law risks becoming another poorly enforced statute.
Additionally, the legislation fails to address the systemic issues driving borrowers to predatory lenders. Financial exclusion remains a significant barrier. Despite initiatives like the Pradhan Mantri Jan Dhan Yojana, access to formal credit remains limited. The World Bank’s Global Findex Report (2021) found that only 8% of Indian adults accessed formal borrowing, compared to a global average of 17%. Low financial literacy exacerbates the problem. A 2023 survey by the National Centre for Financial Education revealed that only 27% of Indian adults possess basic financial literacy. Without a sufficient understanding of loan terms or alternative credit options, vulnerable individuals continue to fall victim to exploitative practices.
International examples highlight the importance of balancing regulation with innovation and consumer protection. Singapore’s Moneylenders Act enforces licensing, interest rate caps, and mandatory borrower disclosures to create a fair lending environment. Similarly, the UK’s Financial Conduct Authority imposes affordability checks and limits on total interest costs to prevent borrower exploitation. These frameworks are supported by strong financial literacy campaigns and consumer protection mechanisms. In contrast, India’s draft law focuses heavily on punitive measures without sufficient safeguards to protect borrowers or promote ethical lending practices. While it aims to hold lenders accountable, it fails to adequately address systemic and consumer-level issues driving exploitative practices.
A Pathway to Inclusive Transformation
To effectively achieve its objectives while minimizing unintended harm, the law must adopt a more nuanced and balanced approach. Policymakers should acknowledge and formalize community-based credit systems, ensuring they coexist with formal financial structures, while implementing stringent penalties against predatory lending practices. Fair-term informal lenders should not be conflated with exploitative operators; rather, they should be recognized for their role in providing accessible credit to communities in need.
Furthermore, there should be a nationwide initiative focused on financial literacy, with an emphasis on digital literacy. These programs should aim to raise awareness about borrowers’ rights and responsibilities, enabling individuals to make informed decisions regarding loans and credit. Local governments and non-governmental organizations (NGOs) play a vital role in delivering these educational efforts at the grassroots level, ensuring inclusivity and accessibility.
In addition, the investment in advanced AI-based monitoring systems is crucial to track illegal lending activities and bolster cyber-policing capabilities. These systems will assist in identifying rogue lending apps and platforms that operate outside legal boundaries, enabling swift action to shut them down.
To foster a healthy fintech ecosystem, the law should introduce regulatory sandboxes where fintech start-ups can innovate and test lending models under strict supervision. These sandboxes will allow for the development of innovative financial products while ensuring that consumer protection remains a top priority. Additionally, clear disclosures of loan terms, including repayment obligations and interest rates, must be mandated in local languages to ensure borrowers fully comprehend the terms of their loans. This approach promotes transparency and accountability, safeguarding the interests of borrowers and encouraging responsible lending practices.
While addressing illegal lending is an important step, the draft law, in its current form, lacks nuance. Criminalizing informal lending without providing viable alternatives, risks exacerbating financial exclusion. Borrowers require more than punitive measures—they need access to affordable credit, transparent terms, and education to make informed financial choices. A legislative framework that promotes inclusion, safeguards innovation and tackles underlying issues is not just beneficial, but imperative. India’s vision of economic equity and financial empowerment hinges on its development.
The writer is a tax specialist, financial adviser, author, guest faculty and public speaker based in Goa. He can be reached at [email protected] or 9822983420
