Examining the Draft Bill on Unregulated Lending Activities in India

Introduction

On December 13, 2024, the Ministry of Finance introduced the Banning of Unregulated Lending Activities (Draft) Bill (“Bill“). This Bill was based on a report submitted by the Reserve Bank of India’s (“RBI“) working group on digital lending. The Bill envisages the banning of all lending entities that are: (a) not authorized by the RBI or other regulators; and (b) not registered under any other law to undertake a public lending business activity. This article analyses certain key provisions of the Bill and examines the potential implications of the Bill on the lending industry in India.

Prohibited Activities  

The Bill seeks to prohibit ‘unregulated lending activities’, which means lending activities that are not regulated under the existing laws governing lending in India i.e., the Reserve Bank of India Act, 1934, the State Bank of India Act, 1955, the State Money Lenders Act, etc. Any advertisements in relation to such unregulated lending activities have been prohibited under the Bill. Additionally, the Bill bans the making of any deceptive or false claims to persuade individuals to apply for such unregulated loans.
Transparency

The Bill has proposed the creation of a publicly accessible online database, containing information about all regulated lenders operating in India. Such a database will allow individuals to verify legitimate lenders and will facilitate the reporting of illegal lenders or prohibited lending activities. Moreover, all lenders that continue their business after the enforcement of the Bill are required to report to a designated authority about their operations in the manner and timeframe that will be notified.

Enforcement

The Bill provides for the appointment of a competent authority, allowing such authority to enforce the provisions of the Bill, including conducting investigations. The Bill bestows such competent authority with the same powers as a civil court under the Civil Procedure Code, 1908, for discovery, receiving evidence on affidavits, and examining witnesses. All proceedings of such competent authority will be treated as judicial proceedings under the Bharatiya Nyaya Sanhita, 2023.

The competent authority shall, in case of suspected unregulated lending activity, have the authority to demand statements, information, or records from any lender regarding the loans they have issued.
The Bill provides that high-impact offences that involve multiple states, union territories or countries, or significant offences involving a high financial magnitude that is against public interest, will be referred to the Central Bureau of Investigation (“CBI“). The Bill also mandates the establishment of special ‘designated courts’ to handle such cases exclusively under its purview.

The Bill grants the police significant powers for search, seizure and arrests in relation to offences under the Bill. The police may conduct searches, seize assets, and make arrests with the written authorisation of a Superintendent of Police or a higher-ranking officer. However, in case of emergencies, where the prior authorisation may compromise evidence, the police are permitted to act without a warrant, subject to certain conditions.

Penalties for Violation

Offences under the Bill will attract strict penalties. Engaging in unregulated lending activities will be punishable with imprisonment of 2 (two) to 7 (seven) years and with fines between Rs. 2,00,000/- (Rupees two lakh) and Rs. 1,00,00,000/- (Rupees one crore), while lending with coercive recovery practices increases imprisonment to 3 (three) to 10 (ten) years and fines of Rs. 5,00,000/- (Rupees five lakh) to twice the loan amount. False claims to induce borrowing shall result in 1 (one) to 5 (five) years of imprisonment and fines up to Rs. 10,00,000/- (Rupees ten lakh). Repeat offenders will face 5 (five) to 10 (ten) years of imprisonment and fines between 10,00,000/- (Rupees ten lakh) and Rs. 50,00,00,000/- (Rupees fifty crore). All offences, except failure to file the requisite information with the competent authority, are cognizable and non-bailable.

Conclusion

The Bill provides for strong borrower protections and regulatory mechanisms to address the risks of rapidly growing unregulated digital lending. However, its enforcement powers, such as searches without a warrant, seizures, and arrests, risk misuse if not regulated judiciously, Similarly, freezing accounts and assets without adequate evidence could harm legitimate businesses. Additionally, the Bill may unintentionally disrupt informal lending relied upon by small borrowers in rural areas, potentially driving such activities further underground and complicating oversight.

In order for the Bill to achieve its objectives, without causing unintended consequences, the Bill must strike a delicate balance between strict enforcement and safeguarding access to legitimate credit, particularly for vulnerable populations.