New law to curb unregulated and fraudulent private money lending practices
A draft of the ‘Banning of Unregulated Lending Activities’ (BULA) bill was released inviting comments/recommendations from various stakeholders.
Bill based on recommendations of a Working Group on Digital Lending constituted by RBI in 2021.
Purpose is to ban all unregulated public lending activity i.e. lending not authorized by RBI / other regulators. Regulated lending activities are defined as lending under an Act listed in the First Schedule of the proposed Bill. Apart from various banking Acts, the list includes the Companies Act, 2013 and the Limited Liability Act, 2008.
Public lending activity is defined as a business of financing by any person whether by way of making a loan or advance at an interest, in cash or kind.
Applicable for all persons (Individual, HUF, Company, Trust, Partnership, LLP, AOP, Co-op Society, AJP)
Lending to relatives is excluded from the scope of the bill. Relatives to have the same meaning as defined in the Companies Act (Spouse, Father, Mother, Brother, Sister, Son, Daughter, Son’s wife, Daughter’s husband).
Proposal to create an online database of all authorized lenders in India with a facility for the public to search for information on lenders. Any person who carries on lending business on or after this Act commences, shall be required to intimate the authority designated for maintaining the online database.
Proposed punishment for unregulated money lending – imprisonment for 2 to 7 years and fine from 2 lakhs to 1 crore rupees. Where a person making unregulated lending uses unlawful means to harass and recover loans, the imprisonment, maximum imprisonment may extend to 10 years and fine to twice the amount of loans. Offense shall be cognizable and non-bailable.
It will be interesting to evaluate the impact of the proposed bill on unsecured loans often taken by SMEs from the ‘market’. Currently, various states have the State Money Lenders Act which requires non-corporate money lenders to register under the Act and to renew the registration periodically. However, its compliance is rarely enforced. The proposed bill could significantly reduce the malpractices in private lending activities.
