Government Proposes New Law To Ban Unregulated Lending Activities

The Department of Financial Services has proposed a bill that aims to restrict persons or entities, not having the Reserve Bank of India's authorisation or are not registered under any other law, from undertaking public lending business activity.

The government has asked for comments and suggestions on the Banning of Unregulated Lending Activities Bill by Feb. 13, 2025. This draft law has come as the RBI had set up a working group on digital lending, which suggested a set of measures in its report in November 2021, including a law to ban unregulated lending.

While unregulated digital lending activities will also be banned, any funding or advertising related to such operations are also not permitted.

The proposal also includes setting up of an authority, which will look at creating a comprehensive database of legitimate lenders, as it will ensure better tracking of lending operations and protect borrowers from exploitation by illegal or cloned lenders.

"This legislation is extremely timely, with the intent to put in place mechanisms of ethical and regulated lending, backed by proper credit appraisals," Soumitra Majumdar, partner at JSA Advocates and Solicitors, said. "The draft bill appears a bit prescriptive in defining regulated lending activities."

Violations under the proposed law will be cognisable and non-bailable, with penalties and prison terms. The bill also proposes a list of offences and punishments, such as any lender who lends money, whether digitally or otherwise, shall be punishable with an imprisonment of not less than two years. However, the punishment may be extended to five years along with a fine of not less than Rs 2 lakh and may be extended to Rs 1 crore.

For repeated offenders, punishment would be imprisonment of not less than five years, which can be extended to 10 years, along with a fine of not less than Rs 2 lakh, which can be extended to Rs 5 crore.

The bill constitutes 20 legislations that govern regulated lending activities under the First Schedule of the Constitution, including the RBI Act, Banking Regulation Act, SBI, LIC, NHB, RRB, Multi-State Cooperative Societies, Chit Funds, and the State Money Lenders Act, among others.

The government's proposed bill is expected to further bring in transparency and regulation in the sector at a time when demand and access to credit has risen substantially.

"Regulators have raised several alarms on the burgeoning household debt levels. Further, these lending platforms are not most transparent in levying financing charges," Majumdar said.

Adopting a principle-based approach may bode well for the Indian fintech sector, whose innovation momentum should not be stifled, she added.