On December 13, the Department of Financial Services, under the Ministry of Finance, unveiled the ‘Banning of Unregulated Lending Activities (BULA)’ draft bill to address the growing concerns around unauthorized lending practices. Open for stakeholder consultation, the bill prohibits individuals or entities not registered with the Reserve Bank of India (RBI) or other relevant regulators from engaging in public business lending, including digital platforms.
Need for the BULA Bill
The proposed legislation seeks to prohibit lending activities not regulated under existing laws, whether conducted through digital platforms or other means. It aims to restrict lending by individuals or entities not authorized by the Reserve Bank of India (RBI) or other regulatory bodies, or those not registered under any law.
This recommendation came in light of several enforcement actions, such as the detention of two Chinese nationals last month by the Enforcement Directorate (ED) for operating fraudulent lending schemes. These schemes involved short-term, high-interest loans, with proceeds funneled overseas via cryptocurrency.
Additionally, enforcement agencies have taken significant action against entities linked to these operations. In 2022, the ED raided offices of Cashfree, RazorPay, and Paytm, while the government banned 94 loan apps and 138 betting platforms with suspected foreign ties. Over 2,200 such apps were removed from Google Play between September 2022 and August 2023
Key Provisions of BULA
1. Definition of Unregulated Lending: The bill defines unregulated lending as lending activities conducted outside the purview of regulatory frameworks established by laws such as the RBI Act and other legislations. Entities not authorised by the Reserve Bank of India (RBI) or other regulators, or those not registered under any law, are prohibited from engaging in lending.
2. Penalties for Violations:
-Lending in violation of the proposed law may result in imprisonment ranging from two to seven years and fines between Rs. 2 lakh and Rs. 1 crore.
-Harassment or use of unlawful methods for loan recovery can attract imprisonment of three to 10 years and additional fines.
3. Jurisdiction of CBI: Cases involving cross-border or multi-state transactions, or those significantly affecting public interest, will be investigated by the Central Bureau of Investigation (CBI).
4. Regulation of Lending Activities: The draft law lists 20 existing legislations governing regulated lending under the First Schedule of the Constitution. These include the RBI Act, Banking Regulation Act, State Money Lenders Act, Chit Funds Act, and others. The bill empowers the Central Government to amend the First Schedule, in consultation with regulators, to exclude specific regulated activities from its ambit.
Legislative Framework
The draft law refers to 20 existing legislations governing regulated lending, such as the RBI Act, Banking Regulation Act, and Chit Funds Act, listed under the First Schedule of the Constitution. It also empowers the Centre, in consultation with regulators, to amend the schedule to exclude certain regulated activities from the bill’s scope.
Addressing Fraudulent Lending Practices
The rise in unethical lending practices has become a significant concern, marked by exorbitant interest rates and aggressive recovery tactics that have caused widespread distress. In response, the government has taken action by eliminating more than 2,200 questionable loan applications from the Google Play Store between September 2022 and August 2023.
Proposed Measures for Reform
Legal professionals have recommended several steps to improve the lending ecosystem. Key suggestions include creating a publicly accessible database of approved lenders, implementing robust systems to prevent manipulation of records, setting up a dedicated portal for reporting fraudulent activities, and initiating financial literacy programs to educate borrowers.
Feedback on the proposed legislation is open until February 13, 2025. Experts remain optimistic that the new law will help curb predatory lending practices and foster greater transparency in the sector.
Frequently Asked Questions (FAQs)
1. What is the BULA Bill?
Ans. The Borrower and Usury Lending Act (BULA) Bill is a proposed legislation aimed at regulating lending practices, preventing exploitative interest rates, and ensuring transparency in financial transactions involving borrowers.
2. What issues does the BULA Bill address?
Ans. The Bill seeks to combat unethical lending practices, including:
-Predatory interest rates
-Aggressive recovery methods
-Fraudulent digital lending apps
-Lack of transparency in loan agreements
3. How will the BULA Bill protect borrowers?
Ans. It proposes measures such as:
-Regulating digital lending platforms
-Establishing a public database of licensed lenders
-Mandating clear disclosure of loan terms and interest rates
-Introducing penalties for non-compliance
4. Who will oversee the implementation of this Bill?
Ans. A designated regulatory authority, likely under the Ministry of Finance or Reserve Bank of India, will monitor compliance and address grievances.
5. What are the proposed penalties for violations?
Ans. Severe financial penalties and possible license revocation for entities found engaging in unethical practices, alongside provisions for criminal action in extreme cases.
6. How can stakeholders participate in the drafting process?
Ans. The government has invited public feedback on the draft Bill until February 13, 2025. Stakeholders can submit their suggestions via the designated online portal or other official channels.
7. What are the key suggestions from legal experts?
Ans. -Creating a centralized, publicly accessible database of authorized lenders
-Developing secure systems to prevent tampering of borrower records
-Launching a reporting portal for fraudulent activities
-Promoting financial literacy to empower borrowers
8. When is the BULA Bill expected to become law?
Ans. The timeline for enactment will depend on the feedback received, amendments made, and approval by the Parliament. It is expected to move forward in 2025.
