Soon, unregulated loan apps may be banned with Rs 1 cr penalty, 10-yr jail

The central government has introduced a draft bill, proposing stringent measures to combat unregulated lending. The new legislation could see violators facing up to 10 years in prison alongside hefty fines.  

 

The Reserve Bank of India’s (RBI) Working Group on Digital Lending first recommended such measures in its November 2021 report. Among its suggestions was the introduction of laws to prohibit unregulated lending activities.  

 

Provisions of the proposed law  

 

The draft bill, titled the Banning of Unregulated Lending Activities (BULA), seeks to ban individuals and entities not authorised by the RBI or other regulatory bodies from engaging in public lending.  

 

 

Key provisions include:  

— A definition of “unregulated lending activities” to cover loans offered outside the scope of existing regulations, including digital lending platforms.  

— Punishments of up to seven years’ imprisonment and fines ranging from Rs 2 lakh to Rs 1 crore for unauthorised lending.  

— Harsh penalties, including three to 10 years’ imprisonment and higher fines, for lenders who use coercive collection practices.  

— Transfer of investigations to the Central Bureau of Investigation (CBI) for cases involving multiple states or Union Territories or significant amounts affecting public interest.  

 

The draft bill states, “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.”  

 

Fraudulent lending practices  

 

Fraudulent loan apps have become a growing concern in recent years. Reports have linked some platforms to coercive recovery tactics, exorbitant interest rates, and hidden fees, leading to distress and, in extreme cases, suicides.  

 

Between September 2022 and August 2023, Google removed over 2,200 such apps from its Play Store. Previously, the government had instructed online platforms and social media companies to avoid hosting ads for these services.  

 

“Unregulated loans are often marketed through flashy advertisements on public platforms, targeting financially vulnerable groups,” said Aurelia Menezes, Partner at King Stubb & Kasiva.  

 

Menezes emphasised the importance of public awareness and proposed measures for implementation:  

— A publicly accessible centralised database of authorised lenders.  

— Secure systems to prevent tampering with lender records.  

— A dedicated portal for reporting fraudulent lending activities.  

— Financial literacy campaigns, especially in rural and low-income areas.  

 

Legal experts have expressed optimism about the proposed bill’s potential to curb exploitative lending practices.  

 

“By targeting unregulated lenders, the act will help eliminate debt traps and promote transparency. Such measures could prevent credit bubbles and defaults that might destabilise the economy,” said Piyush Agrawal, Partner at AQUILAW.  

 

Stakeholders are invited to provide feedback on the draft by February 13, 2025.