finance

Regulating Digital Lending: Key Insights on the BULA Draft Bill

Introduction

The Ministry of Finance, via its Department of Financial Services, has introduced a draft bill titled “Banning of Unregulated Lending Activities (BULA)” to tackle unregulated lending practices and safeguard consumer interests. This move is in response to the recommendations made by the Reserve Bank of India’s (RBI) Working Group on Digital Lending, which suggested a legislative framework for regulating unauthorized lending activities.

Overview of the Draft Bill

Objectives

The BULA bill aims to prevent individuals and entities from engaging in public lending without the necessary authorization or registration under relevant laws.

Key Provisions

  • Definitions: The draft bill outlines essential terms such as “digital lending” and “unregulated lending activities.”
  • Regulatory Measures: Provisions for appointing competent authorities and establishing designated courts for enforcement are included.
  • Stakeholder Engagement: The government has invited feedback from various stakeholders including state governments, financial regulators, and industry associations, due by February 13, 2025.

Detailed Discussion on the Draft Provisions

Chapter I: Preliminary

  1. Short Title and Commencement

    • Title: This Act may be cited as the Banning of Unregulated Lending Activities Act, 20–.
    • It extends comprehensively throughout India and shall commence on a date specified by the Central Government.

  2. Definitions key to the Act include:

    • Client: Any individual engaged in a transaction with a reporting entity.
    • Digital Lending: Lending conducted remotely through digital technologies.
    • Unregulated Lending Activities: Lending activities not covered under regulated activities, as specified in the First Schedule.

Chapter II: Banning of Unregulated Lending Activities

  • Prohibition of Unregulated Lending: Effective from the Act’s commencement, all unregulated lending activities will be banned.
  • Wrongful Inducement: Individuals must not deceive others regarding unregulated lending to encourage loan applications.

Chapter III: Authorities

  • Competent Authority: Appointed by the Government to oversee compliance; authorized to attach accounts of lenders suspected of violations.
  • Designated Courts: Established with concurrence from the Chief Justice of the relevant High Court to exclusively handle cases arising under this Act.

Chapter IV: Information on Lenders

  • Central Database: A comprehensive online database for lenders will be maintained by a designated authority.
  • Reporting Requirements: Lenders will be required to notify the authority regarding their business activities.

Chapter V: Offences and Penalties

  • Contraventions of Section 3: Entities engaging in unregulated lending may face imprisonment of 2 to 7 years and fines between ₹2 lakh and ₹1 crore.
  • Repeat Offenders: Those previously convicted could face 5 to 10 years of imprisonment and fines up to ₹50 crore.

Chapter VI: Investigation and Enforcement

  • All offences under this Act are deemed cognizable and non-bailable.
  • Police officers may conduct searches without warrants under certain conditions.

Chapter VII: Miscellaneous Provisions

  • Regular Indexing of Rules: The Central Government retains the authority to formulate rules for implementing the provisions of this Act.
  • Good Faith Actions: Protection is extended to actions taken in good faith by government officers under this Act.

Conclusion

The BULA draft bill represents a significant step toward regulating lending practices in India, with the intent to protect consumers from unregulated lending activities. Stakeholders are urged to actively participate in the consultation process by submitting their feedback by February 13, 2025. The enforcement of this legislation could play a crucial role in formalizing the lending landscape in India, ensuring accountability and transparency in financial transactions.