On 13 December 2024, the Ministry of Finance, Government of India (MoF) released the draft Banning of Unregulated Lending Activities (BULA) Act[1] (hereafter “the draft BULA Act“) (Reserve Bank of India, 2024). This aligns with recommendations made in the Report of the Working Group on Digital Lending[2] (recommendation 3.4.2.5) (hereafter the “the WG Report”).
The draft BULA Act seeks to curb unregulated lending activities that exploit borrowers, establishing a regulatory framework that prohibits unauthorised lending while ensuring consumer protection.[3] It outlines penalties for non-compliance and designates a Competent Authority to oversee enforcement.
We welcome the draft BULA Act as a measure to curb unregulated lending and protect borrowers. Given Dvara Research’s commitment to strengthening meaningful financial inclusion and protection for low-income households and our in-depth explorations into the role of informal community lending in the lives of these households, we present two key observations on the draft BULA Act, focusing on its intent and the protections it offers to borrowers, from this angle.
1. Can we consider recalibrating exemptions in the First Schedule to ensure wider coverage of restrictions on unregulated lenders?
We highlight the following concerns with the current approach that the draft BULA Act is taking:
i) Companies Engaged in Lending Outside the RBI’s Purview
Non-Banking Financial Companies (NBFCs) are required to register with the RBI if their financial assets exceed 50% of total assets and their income from financial activities exceeds 50% of gross income.[4] Companies engaging in financial activities below these thresholds do not require an RBI license and remain outside its prudential regulations. If such companies lend to individuals for household or unincorporated business purposes, they would be permitted under the First Schedule of the draft BULA Act. We recommend that such companies engaged in retail lending not be automatically permitted under the Act.
ii) Exclusion of mediums that may facilitate unregulated digital lending
The draft BULA Act rightly bans inducements to lure borrowers into unregulated lending, but it does not fully address how digital platforms might unintentionally facilitate such activities. For example, app developers and web platforms that host financial products may lack the ability to verify whether a lender is regulated or not.
A possible solution could be to borrow the tiered approach used in the Intermediary Guidelines and Digital Media Ethics Code (2021)[5], which distinguishes between general social media intermediaries and significant social media intermediaries (SSMIs), holding the latter to stricter accountability standards. Similarly, larger financial platforms could be required to verify lenders’ licenses before listing them, while smaller players might have more relaxed responsibilities. This way, legitimate access to financial services is not blocked, but harmful inducement is still curbed.
2. Can we allow for bona fide lending practices like informal household lending and lending between friends (in addition to relatives) and afford appropriate protection to avoid unintentional ban on them?
In India, borrowing from friends and non-relatives is often as common or more common than borrowing from family. Such loans help cover medical emergencies, school fees, or even repayment of formal loans without the red tape of financial institutions. The Centre for Monitoring Indian Economy (CMIE-CPHS) survey found that in 2023, informal borrowing was reported by 42% of households in the lowest income quintile and even 25% of those in the highest quintile.[6]
The draft Act excludes loans to “relatives” from the prohibition but does not account for the broader social networks that enable informal lending. It also does not consider the fluid nature of lending—someone who lends today may need to borrow tomorrow. To prevent unnecessary criminalization, we suggest shifting the burden of proof to the lender. Instead of requiring upfront compliance, which can be easily manipulated on paper, authorities should assess whether a lender is running a business based on actual evidence.
3. Can we introduce greater clarity on interim protections for borrowers during investigations on the lender?
The draft BULA Act stipulates penalties for offences but lacks clarity on interim borrower protections when an alleged unregulated lender is under investigation. It remains unclear whether borrowers must continue repayments during this period.
A useful precedent exists in the Insolvency & Bankruptcy Code 2016, which introduces a ‘moratorium’ applicable to both corporate and individual debtors. Implementing a similar moratorium under the draft BULA Act would ensure uniformity in judicial processes and protect borrowers from enforcement actions while authorities determine the lender’s legal status.
This provision would ensure that lenders cannot demand repayments from the start of an investigation until authorities establish whether the lending activity falls within the purview of the Act. Such a measure would prevent undue financial pressure on borrowers and reinforce the Act’s goal of consumer protection.
Footnote:
[1] We accessed the draft from available at https://www.fidcindia.org.in/wp-content/uploads/2024/12/MOF-BULA-DRAFT-BILL-13-12-24.pdf
[2] Reserve Bank of India. (2022, August 10). Recommendations of the Working group on Digital Lending – Implementation. Retrieved from Reserve Bank of India: https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54187
[3] Preamble, The draft BULA Act
[4] The Reserve Bank of India defines a Non-Banking Financial Company (NBFC) as follows –
“A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).” Reserve Bank of India. (2017, January 01). All you wanted to know about NBFCs. Retrieved from Reserve Bank of India: https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=1167
[5] The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, available at https://prsindia.org/files/bills_acts/bills_parliament/2021/Intermediary_Guidelines_and_Digital_Media_Ethics_Code_Rules-2021.pdf
[6] Sharma, Misha & Harini, Shree. (2024, November). How have household balance sheets changed post the pandemic? A descriptive analysis of household portfolios using CMIE’s CPHS dataset. Retrieved from Dvara Research: https://dvararesearch.com/how-have-household-balance-sheets-changed-post-the-pandemic-adescriptive-analysis-of-household-portfolios-using-cmies-consumer-pyramid-household-survey-dataset/
