The Government of India, Ministry of Finance, vide their Letter No: F.No.7/93/2024-BOA-I dated 13.12.2024 under the subject: Stakeholder Consultation on Draft Bill to Curb Unregulated Lending Activities â reg., has asked states, ministries, RBI, SEBI, NABARD, IBA, fintech associations, MFIN, Sa-Dhan, and FIDC to give their comments and suggestions before 13.02.2025. No discussion has appeared in the media except for an article by Sweta Roy in Financial Times on 5th Feb 2025.
The Banning Unregulated Lending Activities Bill (BULA) would punish unregulated lenders with up to 10 years in prison and fines of up to Rs. 2 lakhs.
The effect of the bill can be gauged from the comments of a few players and experts.
The CEO of Sa-Dhan, a so-called self-regulatory organization for Microfinance Institutions (MFIs), says, âThe people who depend on unregulated activities need to look for funding support from regulated MFIs.â
Former Deputy Governor of RBI, R. Gandhi, has said, âThe new rules target credit as a business offered by trusts, societies, and non-profits such as microfinance firms.â
âLending businesses by individual pawnbrokers and moneylenders will not be the target of the ban, provided they are registered under respective state laws,â he added.
Dr. Jean Dreze, a development economist who has co-authored books with Dr. Amartya Sen, such as An Uncertain Glory: India and Its Contradictions and Public Action and Governance, has said, âItâs another step towards centralized control and surveillance under the Modi government. Money lending is on the state list under the Constitution. Lending is an ordinary day-to-day activity; it cannot and should not be restricted to regulated entities, within limits at least.â
In my opinion, the aim of the bill is not to regulate the fraudsters who are using digital lending to loot people but to convert informal lending institutions like Self Help Groups (SHGs), SHG federations, trusts, and savings and credit institutions into NBFC-MFIs or ban them. This will destroy the efforts of the National Bank for Agriculture and Rural Development (NABARD), which started SHGs in 1992 and has created a movement. India has more than 12 million SHGs covering more than 14.2 crore families. They are not registered MFIs. What will happen to them? There are more than 48 lakh women in Kudumbashree in Kerala, organized into 3,20,000 neighbourhood groups. Should they become MFIs? Many SHG federations have been functioning successfully for a long time but are registered as societies. What will happen to them? To register as a Non-Banking Financial Company-MFI, you require a capital of Rs. 5 crores, which will be raised to Rs. 7 crores after 1st April 2025. It will not be possible for these non-profit organizations to become NBFC-MFIs.
In addition to this, the following problems will arise:
Impact on Small Loans
Today, the banking sector, especially public banks, is unable to fulfill its task due to a shortage of staff. In the last 10 years, the staff strength has come down to 7,40,000 from 8,60,000, though the business has more than doubled, as per RBI data. Thus, informal lending continues. Forty percent of MSMEs access credit from informal agencies, as per reports.
The number of branches of public sector banks needs to double, and staff strength should also double. Priority sector lending needs to be redefined to support small credit and direct finance, with strict monitoring of lending by SBLC, DCC, etc.
Access to Credit
According to an LSE article and a World Bank report, less than 10% of Indians have access to formal credit. This bill will affect the 90% of people who are dependent on informal credit.
What is needed is an increase in cooperatives, cooperative banks, regional rural banks, and federations of SHGs. Additionally, the expansion of PSBs should be encouraged. Nidhis should be allowed to give loans to joint liability groups, self-help groups, and farmer producer organizations. MSME branches of PSBs should be opened across the country. The Postal Bank of India should be made a universal bank, and all post offices should become its branches.
Alternative:
Instead of banning informal lending, it should be regulated. A microfinance bill, which has been kept in cold storage, needs to be brought forward with the removal of objectionable clauses. Womenâs organizations have already submitted an alternate bill, which should be debated and finalized. All states should be asked to conduct public discussions.
Thomas Franco is the former General Secretary of the All India Bank Officersâ Confederation and a Steering Committee Member at the Global Labour University.
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