To Lend or Not to Lend? A Critical Review of the Banning of Unregulated Lending Activities Bill

Varsha S B*

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SECTION I: BULA – PURPOSE & STRUCTURE

On December 13, 2024, the Department of Financial Services, Ministry of Finance, Government of India (‘MoF’) released a draft bill titled ‘Banning of Unregulated Lending Activities Bill’ (‘BULA’). BULA was released further to the findings and recommendations of the Reserve Bank of India’s Working Group on Digital Lending including Lending Through Online Platforms and Mobile Apps (WGDL). In essence, the BULA aims to ban, (i) all ‘unregulated lending activities’, irrespective of whether they are undertaken digitally or not; and (ii) ancillary activities such as promotion, advertisement, or inducement to further such lending activities.  Section I of this article sets out the overall purpose, structure, and components of the BULA. Section II of this article critically analyses the BULA from the lens of constitutionality, legislative drafting style, and interpretation effects. Section III of this article outlines potential cross-statutory effects of the BULA viz. money-lending laws governing informal lending in India.

A Tale of Two Kinds of Lending

Interestingly, the BULA bifurcates lending activities into two categories - ‘regulated lending activities’[1] and ‘unregulated lending activities’[2]. ‘Regulated lending activities’ mean the lending activities covered under a number of banking sector laws such as the Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 (‘BR Act’), State Bank of India Act, 1955, and National Bank of Agriculture and Rural Development Act, 1981. However, such “regulated lending activities” themselves remain unlisted within the BULA. Per Clause 2(18) of the BULA, ‘Unregulated lending activities’ mean lending activities which are not covered under ‘Regulated lending activities’, carried on by any person whether through digital lending or otherwise and which are not regulated under any other law for the time being in force. Specifically, prohibitions on ‘unregulated lending activities’ are as follows[3]:

1. a categorical ban on ‘unregulated lending activities’ (including, digital lending);

2. prohibitions on lenders from directly or indirectly, promoting, operating, or issuing any advertisement in pursuance of an ‘unregulated lending activity’.

   
   

It may be noted that the ‘Appropriate Government’ is also empowered to ban certain activities (upon consultation with relevant regulators) by notifying them as “unregulated lending activities” under the BULA.[4] Given the fragmented and evolving nature of India’s banking sector, it may be practically unfeasible to exhaustively enumerate all kinds of permitted lending activities. However, for the sake of interpretational clarity, an exhaustive list of permitted lending activities should be provided in the Schedule to the BULA (‘Schedule’), to avoid cross-statute ambiguity among the Centre & States.

Ban on Unregulated Lending

Clause 3 of the BULA bans ‘unregulated lending activities’, and also prohibits lenders from directly or indirectly, promoting, operating, or issuing any advertisement in pursuance of an Unregulated Lending Activity. Additionally, Clause 4 also prohibits persons from knowingly making statements, promises, or forecasts which are false, deceptive, or materially conceal facts (intentionally or otherwise) which would induce other persons to transact with lenders involved in ‘unregulated lending activities’.

Consumer Welfare Database

Information asymmetry and gaps in lender verifiability are a key challenge to ensure secure lending, particularly for unbanked and under-banked demographic classes. Between 1 January 2020 and 28 February, 2021, a study by the Reserve Bank of India (RBI) identified 600 illegal lending apps in India. BBC reports indicate that scammers are both omnipresent and difficult to trace, given that they operate from all across India, in absence of a fixed location. Loan scammers such as these lurk in a digital abyss, where they can see outward towards unassuming consumers, but where the latter have no means to identify who they are dealing with. Statements from anonymous BBC interviews with loan scammers reveal the ease of duping unsuspecting victims.

“All I need is a laptop and a phone connection. One operator like me has more than 10 numbers to use for threatening the customer.”

At the outset, Clause 8 of the BULA provides an elegant fix to the problem. It empowers the Central Government to designate an ‘Authority’, to create, maintain and operate an online database. The database will allow borrowers to verify lender information, and will also facilitate reporting of illegal or cloned lenders. Additionally, the BULA mandates that all lenders intimate this designated authority of its business activities, upon and after the commencement of the BULA.[5] Notably, information in respect of offences under the BULA, received by the ‘competent authority’[6] from police officials (i.e., the key authority under the BULA) must be shared with the CBI and/or State Police officials – and with the designated authority for the database.[7] Arguably, the provision therefore works as a bridge for the information deficits for intentional borrowers viz. traceable lenders – and not entirely to address the menace of digital scams which operate in more clandestine and underreported ways. Further, this bridge may also work as a feedback loop to reinforce the lack of statutory recognition for certain lenders due to ambiguities in legislative drafting. Sections II & III below provide a detailed analysis and issues a call to action for greater interpretational clarity.

Enforcement & Penalties

The BULA effectively punishes 5 (five) kinds of offences.

Offence	Punishment
Unregulated lending activity (Clause 3 Offence)	Imprisonment for a term of 2  – 7 years along with fine ranging from INR 2 lakhs – INR 1 crore
Unregulated lending activity & unlawful loan recovery (Clause 3+ Offence)	Imprisonment for a term extending to 3 – 10 years along with fine ranging from INR 5 lakhs –  2x loan amount
Wrongful inducement in relation to unregulated lending activity (Clause 4 Offence)	Imprisonment for a term of 1 – 5  years along with fine extending to INR 10 lakhs
Offences by lenders other than individuals (Clause 14 Offence)	Lender & every person in charge of and responsible to the lender for the conduct of business (at the time of commission of the offence) to be  deemed guilty and be liable to be proceeded against and punished accordingly
Repeat commission of Clause 3 Offence, Clause 3+ Offence, Clause 4 Offence and Clause 14 Offence  (Repeat Offences)	Imprisonment for a term of 5 – 10 years along with fine ranging from INR 10 lakhs –  INR 50 crores
Failure by lenders to give intimation / information in relation to business activity / unregulated lending activity (Clause 9 Offence)	Punishment with fine extending to INR 5 lakhs

Further, irrespective of anything contained in the Bharatiya Nyaya Sanhita, 2023 (erstwhile Indian Penal Code, 1860) all offences punishable under the BULA, except for Clause 9 Offences, are cognizable and non-bailable.[8] 

SECTION II: CRITICAL ANALYSIS OF THE BULA – A NOTE ON CONSTITUTIONALITY, LEGISLATIVE DRAFTING & STATUTORY INTERPRETATION EFFECTS

The BULA raises concerns on constitutional guarantees on the right to carry on businesses, simplicity of legislative language and the interpretation of prohibitory provisions.

Constitutionally, Article 19(1)(g) guarantees all citizens with the right to practise any profession, or to carry on any occupation, trade, or business; subject to reasonable restrictions as may be imposed by the State through law. As noted above, the (proposed) law (here, BULA) restricting the exercise of such rights, does not contextualise the subject of statutory restriction, i.e., ‘lending activities’. However, given that the BR Act is one of the key statutes covering ‘regulated lending activities’, and also defines ‘banking companies’ as “companies transacting in the business of banking in India”[9] — one may argue that such lending activities fall within the ambit of ‘business’. It may be noted that the Supreme Court of India (‘SC’)  in Akshay N. Patel v. Reserve Bank of India & Another,[10] has held that rights available under Article 19(1)(g) do not extend to corporations (being non-citizens). However, there has been a marked increase in individual, representative petitions being filed by shareholders and the like, to allege infringement of rights guaranteed by Article 19(1)(g). This judicial trend is especially relevant for regulated entities, such as banks and financial institutions to have recourse against potentially arbitrary, restrictive laws affecting the gamut of banking business operations.

Even if constitutional challenges, possibly even under Article 14 are thwarted by courts on grounds of ‘reasonable classification’, certain observations must be made here on the drafting style of the BULA. As noted above, the BULA contains legislative prohibitions on certain kinds of lending. Further, it defines ‘unregulated lending activities’ in a negative sense - to the extent that they are not covered by ‘Regulated lending activities’, which are further governed by the laws listed in the Schedule. For those who will ultimately read and be subject to the BULA, it is essential to note that the universe of permitted and prohibited lending activities remains unclear, from a bare reading of its current form.

It is a fundamental principle of legislative drafting[11] that legislative provisions that create prohibitions must: (i) state the precise terms and limits of the prohibition in general language, and (ii) prescribe the exact classes of persons who are subject to the prohibition and the legal context in which, and the circumstances when, the prohibition applies. In other words, the BULA  must reflect the circumstances, i.e., specific prohibited or permitted lending activities. An absence of such reference may allow a deduction that the said lending activity under consideration is permitted by law.

Therefore, legal commands that make engaging in a certain activity illegal must be clear and accessible in their expression. Without such clarity under the BULA, a host of interpretational issues may arise, and particularly, take the shape of judicial challenges by lenders under perceived fire. For the sake of illustration, let us consider Lender A, who engages in Lending Activity X after the commencement of the BULA. Further, let us consider that basis statutory intimations by Lender A to the designated authority, and further calls for information on suspicion of ‘unregulated lending activities’ under Clause 9, there is a finding of a Clause 3 Offence, on grounds that the said activity is not covered under laws listed in the Schedule. Given that the BULA is the charging legislation, the accused Lender A may argue that the BULA itself does not categorically prohibit Lending Activity X.

Recent bills formulated by Indian legislators have relied extensively on the ‘Simple, Accessible, Rational & Actionable’ (‘SARAL’) principles to ensure elegant legislative language. One of the key tenets of SARAL drafting is ensuring ‘actionability of a law’. Actionability requires the drafter to, as far as possible, narrow down the information in the legislation regarding the relevant parties, the types of possible actions/prohibitions, and the effects of not following the structure established in the legislation.

Flowing from the above argument on legislative drafting, is a potential interpretational concern. It is a widely known legal maxim that, “everything which is not forbidden is allowed”. Indian courts have previously examined what makes an act lawful or legal - and in the converse, what is unlawful or illegal. In Shashimani Mishra & Another v. State of Madhya Pradesh & Another[12] the Madhya Pradesh High Court, has previously held as follows:

“Where the law permits a certain act, there is no doubt that doing of that act would be legal. Similarly, where the law prohibits a particular act, the doing of that act would be illegal. However, where the law does not explicitly permit an act and neither prohibit it, or in other words, where the law of the land is completely silent about the legality or illegality of the act, would the doing of that act be unlawful, only because it is at conflict with the contemporary mores of the society and an overwhelmingly preponderant public perception of what is right? The liberty of an individual to act in any manner where such act is not prohibited under the law, is unfettered and unquestionable.”

It can be argued therefore, that the subject matter of a prohibitory provision in law must be a clearly identifiable ‘act’. A prohibition cannot be couched in obscure, or all-encompassing terms. Despite well-settled legal principles and recent changes in legislative drafting practices, Indian financial sector regulators often take an inverted policy approach. Compliance officers in the financial sector lean towards the school of thought that advises not doing a certain thing unless specifically permitted – even if the same is not prohibited in law. The BULA, while not silent on the prohibition, is an avoidable deviation from legal principles, reaffirmed by precedent, that have guided the structuring of prohibitory provisions under statutes.

From a sectoral perspective, prohibitory provisions within existing Indian banking statutes themselves align with the prevailing approach. As an example, the provisions of the BR Act place clear prohibitions on identifiable acts, the contours and context of which are expressly mentioned within such provisions. Illustratively, Section 8 of the BR Act prohibits all banking companies, irrespective of permitted activities under Section 6 or the terms of contract, from engaging in ‘trading’. The universe of ‘trading’ is clearly stated to mean “...directly or indirectly dealing in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business relating to administration of estates as executor, trustee, or otherwise.” As a regulated banking company governed by the BR Act, what I cannot do is clear to me. Contrasted with the prohibitions under the BULA, answers to the question of ‘what’ is prohibited remain to be provided under the bill itself.

A closer look reveals that the statutory tendency to provide for specific prohibitory provisions holds true for certain other banking sector laws as well, which also have a general prohibitory character. The Banning of Unregulated Deposit Schemes Act, 2019 (‘BUDS Act’), was introduced given that central legislations such as the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and the Chit Funds Act, 1982, as other State Government legislations had been unable to effectively address the issue of unregulated and illicit deposit schemes. Section 3(b) of the BUDS Act follows a similar approach to trading prohibitions under the BR Act, and provides that “no deposit taker shall, directly or indirectly, promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an ‘Unregulated Deposit Scheme’”.

As specific prohibitory statutes, the BUDS Act and BULA have similar objectives even though the intended legislative subject matter may differ. However, one may observe deviations in the structuring of both prohibitory texts.

Statutory Element	BUDS Act	BULA
Preamble	An Act to provide for a comprehensive mechanism to ban the unregulated deposit schemes, other than deposits taken in the ordinary course of business, and to protect the interest of depositors and for matters connected therewith or incidental thereto.	An Act to provide for a comprehensive mechanism to ban the unregulated lending activities other than lending to relative(s) and to protect the interest of borrowers and for matters connected therewith or incidental thereto.
Scope of prohibited activity	Section 2(17). Unregulated Deposit Scheme: means a scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme, as specified under column (3) of the First Schedule.	Clause 2(18). Unregulated Lending Activity: means lending activities which are not covered under Regulated Lending Activities as defined...[13] carried by any person whether through digital lending or otherwise which are not regulated under any other law for the time being in force.
Prohibitory provision	Section 3. Banning of Unregulated Deposit Schemes. – On and from the date of commencement of this Act,— (a)   the Unregulated Deposit Schemes shall be banned; and (b)  no deposit taker shall, directly or indirectly, promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.	Clause 3. Banning of Unregulated Lending Activities. – On and from the date of the commencement of the Act, (a)   the Unregulated lending activities (including digital lending) shall be banned; and (b)  no lender shall, directly or indirectly, promote, operate, issue any advertisements in pursuance of an unregulated lending activity.
Schedule structure	Lists out specific ‘regulated deposit schemes’ under various laws, along with the regulator for such ‘regulated deposit scheme’ under such law.	Lists out only the laws regulating or exempting from regulation, the ‘regulated lending activities’.

It can be argued from the above that not only does the BULA turn away from judicial precedent, but also from drafting practices reflected within comparable Indian banking laws. In fact, the Standing Committee on Finance (2018-2019) constituted under the Sixteenth Lok Sabha, and chaired by Dr. M. Veerappa Moily (‘SCF’) noted that the definition of an ‘unregulated deposit scheme’ was left for residual interpretation under the Unregulated Deposit Schemes Bill, 2018. Specifically, the SCF noted that this could allow open ended, subjective – and possibly incorrect decisions by authorities while adjudicating offences related to such deposits, and recommended that the term be more coherently defined and indicatively listed in a schedule to the Bill.[14] Seemingly, this recommendation was not adopted under the BUDS Act.

SECTION III: CROSS-STATUTE EFFECTS – OTHER IMPLICATIONS OF THE BULA FOR THE INFORMAL LENDING SECTOR IN INDIA

The BULA may also significantly impact informal lending, particularly in rural areas with lower penetration of formal lending channels. Informal lending is undertaken by persons such as money lenders, relatives, and also amongst business networks. ‘Money-lending’ is the only clearly legislated informal channel, and is a specific mandate for the state legislature.[15] In contrast, ‘regulation of banking corporations’ and ‘banking’ fall within the remit of the Union legislature.[16] There are a number of state-level money lending statutes, such as the Maharashtra Money-Lending (Regulation) Act, 2014, the Karnataka Money-Lenders Act, 1961, and the Tamil Nadu Money-Lenders Act, 1957. Similar to the BULA, the intent of state-level money lending statutes while centered on effective regulation of money-lending transactions – is oriented towards consumer protection.

In this regard, the BULA recognises money-lending as a ‘regulated lending activity’ through a sweeping mention of ‘State-money Lenders Acts’ under the Schedule. However, not all state legislatures have enacted laws governing money-lending. As a corollary, the question that arises is whether the BULA, through the structure of the Schedule, illegalises otherwise ‘non-prohibited’ money lending activities in such states lacking state-level money lending legislation. Theoretically, one may argue that this is not the intent as such a reading would lead to an absurd conclusion - without a reasonable classification (from an Article 14 lens). Law-makers, of course, would not validate money lending in one state and invalidate it in another simply on grounds of ‘no-law’ (a situation which has arisen due to possible political/administrative prerogatives). In practice, however, this kind of legislative structuring can lead to problematic results.

An interesting paradox arises due to the above. Clause 2(1)(iv) of the BULA deems the relevant ‘State Government’ as the ‘Appropriate Government’ in matters relating to states. This would, therefore, include matters relating to money-lending and money-lenders under Schedule VII of the Constitution of India. Further, Clause 5 of the BULA empowers the Appropriate Government, in consultation with the concerned Regulator(s), to notify activities to be banned under the BULA by classifying it as an ‘unregulated lending activity’. Therefore, state governments are empowered to curb the menace of unregulated lending through an act of ‘invalidation’– but are not permitted to bridge the gap for unlegislated but otherwise existent ‘money lending’ – through validating acts. Due to this, the legislative stance on money-lending in certain states otherwise permitted in principle (as it is not expressly prohibited/regulated in a corresponding state law) may be prone to ambiguity till such time the BULA either issues a clarification on this grey area, or grants state governments with appropriate ‘validating powers’ akin to those available to them under Clause 5.

In conclusion, much of the public debate on the BULA remains to be seen. However, the above issues necessitate a re-thinking of the draft law, on the lines of core constitutional values, statutory clarity, and gaps in the implementation of legislative mandates.

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*Varsha is an India qualified lawyer, and Senior Resident Fellow at the Vidhi Centre For Legal Policy (Corporate Law & Financial Regulation), New Delhi. The views expressed in this article are solely hers and not those of her employer

[1] Clause 2(14) and 2(185) of the Banning of Unregulated Lending Activities Bill, 202x.

[2] Clause 2(18) of the Banning of Unregulated Lending Activities Bill, 202x.

[3] Clause 3 of the Banning of Unregulated Lending Activities Bill, 202x.

[4] Clause 5 of the Banning of Unregulated Lending Activities Bill, 202x.

[5] Clause 9(1), Banning of Unregulated Lending Activities Bill 202x.

[6] Clause 6(1), Banning of Unregulated Lending Activities Bill, 202x.

[7] Clause 10(1), Banning of Unregulated Lending Activities Bill, 202x.

[8] Clause 17, Banning of Unregulated Lending Activities Bill, 202x.

[9] Section 5(c), Banking Regulation Act, 1949. In ICICI Bank Limited v. APS Star Industries Limited (2010) 10 SCC 1, the SC held that the scope of “banking business” is wide and is not limited to the core banking functions of accepting deposits and lending. As a corollary, the BULA may open up to potential constitutional challenges by persons exercising the rights under Article 19(1)(g) in ancillary banking operations.

[10] (2022) 3 SCC 694.

[11] 4-6, B.R. Atre, Legislative Drafting (Principles and Techniques), Universal Law Publishing, LexisNexis, 5th edn. (2017).

[12] ILR 2019 MP 1397.

[13] Clause 2(14) of the BULA defines ‘Regulated lending activities’ to mean the lending activities specified under laws listed in the First Schedule. However, the BUDS Act specifically lists regulated (i.e., permitted) deposit schemes under the schedule.

[14] Part II, Paragraph 3, Standing Committee on Finance (2018-2019).

[15] Entry 30, List II (State List), Schedule VII, Constitution of India, 1950.

[16] Entry 43 and 45, List I (Union List), Schedule VII, Constitution of India, 1950.