A game-changer in the making? That's what it seems from a glance at the way the government cracked down on illegal digital moneylenders last week with a draft bill to ban unregulated lending.
The government tabled the draft Banning of Unregulated Lending Activities (BULA) Bill in Parliament on December 19 to rein in spurious moneylenders flooding both the internet as well as the marketplace. The Bill seeks to ban such unauthorised people and practices and make some of the offenses cognisable and non-bailable.
The legislation has its roots linked to the recommendation of a working group set up by the Reserve Bank of India more than two decades back. The panel had in November 2001 submitted a report suggesting measures to curb unregulated lending activities and protect consumers. Such entities, if found guilty, should be liable to punishment of 2-7 years of imprisonment, and up to Rs 1 crore fine, it had recommended.
The Draft Bill at a Glance
One, the Bill forbids any statement, promise or forecast that is false, deceptive or misleading to induce another person from seeking loan from unregulated lenders.
Two, it proposes to create a competent authority or officers appointed for the purpose of this Act, who shall have the same powers as a civil court to conduct investigation or inquiry, and issue summons during the investigation, as well as impound records. Where required, the state police shall have the powers to enter, search and seize without warrant, or seek an order to freeze property, account, or securities.
Three, it proposes an online database on lenders operating in India and the common public shall be able to search for entities undertaking regulated lending activities and report on illegal or cloned lenders.
Four, this competent authority will be sharing all information with the Central Bureau of Investigation or the police, the proposal said. The Bill also proposes to set up designated courts which shall be presided by a district and sessions judge.
Why is It Significant?
Unregulated lenders have been mushrooming over the last few years, especially in the southern and eastern parts of the country. These new-age loan sharks typically chase gullible customers at the bottom of the economic pyramid for easy loans and then engage in harassment when it comes to recovery.
Money lending is a lucrative business. The lending space is crowded by RBI-regulated banks and NBFCs, cooperative banks, microfinance companies, and credit societies. Then comes the illegal moneylenders who are thriving on the demand-supply gap caused by factors such as need for strict documentation, time for processing of loans, tight credentials laid out by legitimate lenders, and various caps set for applying for loans.
In this age of technology, the illegal moneylenders have emerged as the faceless rioters, ransacking the industry and pushing desperate borrowers to the edge. They are everywhere around you, but you often don’t know the people operating from behind. The key attraction that lures gullible borrowers to these apps is little or no documentation for the loan process.
Most borrowers, who fall prey to such lenders, are usually people with irregular income and low credit ratings. The credit barrier at bigger lenders is higher and the processing time is longer. For poor-quality borrowers, therefore, the easy-to-go loan apps are the most logical option.
Little does the borrower realise that they are walking into death traps from where there is no return.
Even as the government and the Reserve Bank of India has been cracking down on illegal digital lending apps over the last couple of years, the number of complaints against such apps have more than doubled to 1,062 in FY23. Soumitra Majumdar, partner at JSA Advocates & Solicitors, said the mushrooming of unregulated lending platforms have the potential for putting Indian households at a massive systemic risk. “This legislation is extremely timely – with the intent to put in place mechanisms of ethical and regulated lending, backed by proper credit appraisals,” he said.
In this context, the proposed law will hopefully help curb such illegal lending activities. It is a decisive step in the right direction by all means.
Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
