Context: Recently, the government has proposed a new bill ‘BULA (Banning of Unregulated Lending Activities)’ which seeks to make unregulated lending a cognisable and non-bailable offense.
Relevance of the topic:
Prelims: Questions of various banking and finance regulation bodies.
Mains: Analytical question scope on need and impact of such law.
Major Highlights:
- The draft bill aims to address both traditional and digital lending.
- Definitions:
- The draft bill defines ‘unregulated lending activities’ as lending that is not covered by any laws governing regulated lending, whether conducted digitally or through other means.
- It defines ‘public lending activity’ as the business of financing by any person whether by way of making loans or advances or otherwise of any activity other than its own at an interest, in cash or kind, but does not include loans and advances given to relatives.
- Punishment: Violation of the law would be considered a cognisable and non-bailable offense.
- Lenders who offer unregulated loans will be punished with a minimum 2 years of jail term that can be extended to 7 years, along with a fine ranging from Rs 2 lakh to Rs 1 crore.
- Lenders who use unlawful methods to harass borrowers or recover loans will face imprisonment from 3 to 10 years and fines.
- The investigations would be transferred to the Central Bureau of Investigation (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.
Impacts of Unregulated Lending:
Unregulated lending is an umbrella term that includes the non-institutional financing i.e., loans from moneylenders, shroffs, unregistered fintech companies etc. It leads to:
- Parallel Economy: Unregulated lending paves a way for parallel economy or the shadow economy that is often used for money laundering.
- Undermines Monetary Policy efforts, as the unregulated lenders are beyond the purview of RBI. Example: If RBI increases Repo to control inflation, it will only reduce lending from regulated entities, while the unregulated entities will continue to lend leading to limited impact on inflation targeting.
- Exploitation of Borrowers: Unregulated loans leads to the exploitation due to the exaggerated interest rates resulting in suicides. Example: Chennai IT professional succumbed to harassment by loan application.
- Threatens National Security as the majority of the fraud digital lending applications were funded from China, posing threat to Indian economic security.
Regulating Mechanisms for Lending Activities:
- Regulating bodies
- Reserve Bank of India, 1934
- Security and Exchange Board of India oversees corporate lending activities.
- Regulating Acts
- RBI Act, 1934
- Banking Regulations Act, 1949
- State Moneylenders Act (specific to states)
Way Forward to control menace of Unregulated Lending:
- Create accessible complaint portals to report complaints about the fraud lenders and lending applications.
- Carpet ban on illegal lending applications. Example: Over 300 fraudulent loan Applications were banned in India under the IT Intermediary Guidelines and Digital Media Ethics Code, 2021.
- Promoting institutional lending by simplifying access to formal credit or incentivising people to choose Banking and NBFC institutions to get loans. Example: Easy loans via Small Finance banks.
Conclusion: Lending is a critical activity to sustain economic growth especially in nations like India where a major chunk of the economy is dominated by small businesses and MSMEs. Prompt regulation and intelligence about the lending market dynamics can resolve the issue of unregulated lending.