Unregulated lending: Govt proposes bill to oversee unregulated loan apps, Rs 1 cr penalty, 10-yr jail suggested

Unregulated Lending Activities: The Central government has put forth a new proposal for a law that aims to prohibit unregulated lending and impose a penalty of Rs 1 crore on violators, as well as a 10-year imprisonment. This initiative comes in response to the crackdown on various digital loan apps engaged in unregulated lending practices in the past two years, and the numerous complaints about their unethical lending and aggressive recovery methods. 

The finance ministry has released a draft bill titled the Banning of Unregulated Lending Activities (Draft) Bill for public feedback, with comments being accepted until February 2025.

A proposed legislation, known as Banning of Unregulated Lending Activities (BULA), aims to prohibit unauthorized individuals and entities from participating in public lending without approval from the RBI or other regulatory agencies. The draft bill stated, “An Act to provide for a comprehensive mechanism to ban the unregulated lending activities other than lending to relatives and to protect the interest of borrowers.”

According to the bill, public lending activity refers to the financing business conducted by individuals, including making loans or advances to non-relatives at interest rates, whether in cash or kind. Loans given to relatives are excluded from this definition.  

Key details

> An expansion of the definition of "unregulated lending activities" to encompass loans provided beyond the purview of current regulations, such as those facilitated by digital lending platforms.
> Potential repercussions of imprisonment for up to seven years and fines ranging from Rs 2 lakh to Rs 1 crore for unauthorized lending practices.
> Stringent penalties, including imprisonment spanning from three to 10 years and increased fines, for lenders engaging in coercive methods of debt collection.
> The referral of investigations involving multiple states or Union Territories, or significant monetary impact on public welfare, to the Central Bureau of Investigation (CBI).

Fraudulent lending apps

In recent years, there has been a rising concern over the proliferation of fraudulent loan applications. Multiple reports have connected these platforms to aggressive debt collection practices, high-interest rates, and undisclosed charges, causing significant distress and, in some tragic cases, even leading to suicides.

From September 2022 to August 2023, Google took down more than 2,200 of these apps from its Play Store. Prior to this, the government had issued guidelines urging online platforms and social media companies to refrain from advertising such financial services.

RBI's role

The RBI's Working Group on Digital Lending initially proposed these actions in its November 2021 report, including the implementation of regulations to outlaw unregulated lending practices.

"The RBI proposes to create a public repository of DLAs deployed by its regulated entities. The regulated entities will report and update information about their DLAs in this repository. This measure will help the consumers to identify the unauthorised lending apps," said the then RBI governor Shaktikanta Das.

RBI's Proposed Digital Lending Apps Repository: In a bid to assist consumers in distinguishing authorized digital lending apps (DLAs) from unauthorized ones, the RBI has suggested the creation of a public repository for DLAs utilized by regulated entities.

Crackdown on Unauthorised Apps: From 2021 to 2023, Google took action against numerous unauthorized loan apps on its Play Store as per government mandates.

According to a statement made by the government in the Rajya Sabha earlier this year, the Ministry of Electronics and Information Technology reported that Google reviewed approximately 3,500-4,000 loan apps during the period from April 2021 to July 2022. During this time, more than 2,500 loan apps were either suspended or removed from the Play Store. Similarly, from September 2022 to August 2023, over 2,200 loan apps were removed from the Play Store.