Banning of Unregulated Lending Activities Bill: Implications for Businesses and Individual Lenders
To curb unregulated lending activities & to protect the interest of borrowers, RBI has constituted a Working group of Digital Lending (WGDL). Pursuant to its report, the Government has recently unveiled a draft bill titled as “Banning of Unregulated Lending Activities Bill”. Though the proposed law is still in the consultation phase, it has sparked significant interest and debate within the business community & financial sector. There are critical questions regarding its scope, impact, and applicability. Here is a short overview & attempt to address the concerns and queries of stakeholders.
What the Law is all about?
The draft bill seeks to regulate all persons/ entities involved in the business of lending, including banks, non-banking financial companies (NBFCs), Credit Co-operative societies, digital lending platforms, and even individuals engaged in systematic lending activities.
The law places restrictions on any false, deceptive or misleading advertisement /statement by the lender and its agents. The Government has been empowered to classify certain activities which are not permissible & can be considered as Unregulated under the new law. Information & database of all the lenders would be maintained under the new law and the same would be accessible to the public at large. After the law is enacted, no person shall be allowed to carry out any unregulated lending activities. The proposed law provides for transfer of investigations to CBI if the lender, borrower, or properties are located across multiple states or Union territories or if the total amount involved is large enough to significantly impact public interest.
Who Will Be Affected by the New Law?
Though the committee by RBI was constituted for Digital Lending, its scope is extended to other lending as well. It also bans the advertisement or marketing of any unregulated lending activities. The primary objective is to bring transparency and accountability to lending practices, ensuring fair treatment for borrowers while curbing predatory practices.
1. Institutional Lenders: Banks and NBFCs already operate under stringent regulatory frameworks established by RBI. The new law may introduce additional compliance requirements, particularly focusing on loan disbursal, interest rates, and recovery mechanisms.
2. Digital Lending Platforms: With the rise of fintech, digital lending has grown exponentially. These platforms often operate outside traditional regulatory frameworks, raising concerns about borrower protection. The draft bill seeks to address this gap by enforcing standard operating procedures and mandatory disclosures.
3. Individual Lenders: One of the most debated aspects of the proposed law is its applicability to individuals lending their personal funds for profit. The draft indicates that systematic lending activities—characterized by recurring loans, structured agreements, and interest income—will fall under the purview of the law. However, isolated instances of lending among family or friends may remain exempt.
Impact on Normal Business Operations:
The introduction of this law is likely to have a mixed impact on the lending ecosystem. For legitimate and compliant lenders, it may enhance trust and operational efficiency. However, for those operating in unregulated or gray areas, the changes could necessitate significant adjustments. Here’s how the proposed law might affect normal business operations:
1. Enhanced Compliance: Businesses involved in lending will need to align their operations with the new regulations, including maintaining detailed records of transactions, adopting transparent lending practices, and adhering to probable interest rate caps. This could increase administrative overheads but also foster greater borrower confidence.
2. Borrower Impact: The law is primarily aimed to protect the interest of the borrowers by bringing greater clarity and protection. Probable standardized agreements and disclosure norms may be proposed to ensure that borrowers fully understand the terms of their loans, reducing the risk of exploitation.
Addressing Specific Concerns:
One recurring question among the business community is whether individuals lending their own or family funds for interest income will be subjected to the same regulations as institutional lenders. On the basis of present draft law, the following views can be formed:.
1. Systematic Lending: If an individual lends funds in a structured manner—such as issuing multiple loans, advertising lending services, or earning regular interest income, this activity may be classified as a business. Such individuals would likely need to register as lenders and comply with the new law.
2. Casual Lending: On the other hand, personal loans extended on an ad hoc basis, especially among acquaintances, are unlikely to fall within the ambit of the law. The distinction hinges on whether the lending constitutes a regular business activity.
Real Life Transactions vis a vis Proposed Law:
While the objective of proposed central legislation is laudable, the implementation of new law could face several challenges. The distinction between systematic and casual lending needs clearer articulation to avoid unintended consequences for individuals and small businesses. In my view, the impact of the new proposed law on some of the practical day to day finance activities would be as under:
1. Frequent borrowing and lending from and to multiple parties by any person may be regarded as unregulated lending activities. It appears that even persons making frequent and regular lending of their own fund through a hundi broker may be regarded as unregulated lending activities as it is not pursuant to under the regulated acts as mentioned in the schedule to proposed law.
2. Just one or two activities of lending or non-frequent lending for earning interest would not be reckoned as unregulated lending activities & may be outside the ambit of the proposed law.
3. The person engaged in the vehicle financing business, regular real estate funding, bill discounting business, chit fund business, Mortgage business, etc would be within the ambit of the new law.
4. Loans and advances given to the relatives will not be barred by the new law. The definition of “Relatives” is to be taken as per the Companies Act – 2013.
Conclusion
Several countries across the globe have implemented laws to regulate lending practices and protect borrowers from exploitative terms. The proposed law in India to regulate lending is a significant step toward creating a fair and transparent financial ecosystem. While it promises to curb malpractices and enhance borrower protection, its success will depend on how effectively it balances regulation with ease of doing business.
One may note that there are various other laws like state Lenders Act, Co-op societies Act, Companies Act, Banking Act, etc which equally regulate lending. New proposed law would be a master legislation to ensure the compliance with those laws as far as unregulated lending activities is concerned. Needless to say, the new proposed law has strong & vast power of search & seizure, inspection, imposing monetary penalty, prosecution, etc to ensure the compliance.
Given that the draft bill is open for public consultation, stakeholders have a valuable opportunity to provide feedback.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & responses to queries are available at www.theTAXtalk.com].
