Introduction
India’s digital lending market has grown very fast in recent years. It has helped millions of people get loans, especially first-time borrowers and those who did not have access to banks. But this quick growth also created problems.Many unapproved or loosely regulated lending apps started working in the country. These apps often did not follow RBI rules or basic standards. They added hidden charges, gave loans at very high interest rates, and punished borrowers with harsh and embarrassing recovery methods.
The Reserve Bank of India noticed these problems many times. It warned the public about unfair collection practices, very high interest rates, and poor data security used by several digital lenders.In October 2024, the RBI took its strictest step. It ordered four NBFCs—Asirvad, Arohan, DMI Finance, and Navi Finserv—to stop giving new loans.
The RBI said these companies were charging extremely high prices and not following important rules. Reports showed that many borrowers were paying much more than the amount they originally borrowed because of hidden fees and extra charges.
This article explains the legal reasons, constitutional ideas, and the wider effects of the RBI’s action.
Background: Understanding ‘Usurious’ Lending
Usury means charging very high interest on loans. Indian law has restricted this for a long time. The Usurious Loans Act, 1918 allows courts to change or reopen loan terms when the interest is too high or the deal is unfair. Many states also have their own moneylending laws that stop lenders from charging extremely high rates. For example, Tamil Nadu has rules that limit “excessive” interest.
Today, financial markets do not usually have fixed limits on interest rates. But lenders must still follow fair practices. The RBI’s Fair Practices Code says that charging very high interest is unfair. The Consumer Protection Act, 2019 also gives consumer courts the power to reject loan terms that are unfair or too harsh.
Indian courts have often used principles of fairness to stop exploitative loan agreements. Over time, deregulation gave lenders more freedom to set prices. But it also created more chances for misuse. In the microfinance sector, some lenders avoided interest caps by adding many extra charges. Digital lending increased this problem even more. Many unregulated fintech apps worked with NBFCs and gave instant loans with hidden fees, service charges, and penalties. These extra costs made the total loan much more expensive than it appeared.
So, even though India does not have a clear legal definition of “usury,” courts and regulators can still act against unfair pricing. The RBI’s recent actions show that it believes some NBFCs crossed the line and charged borrowers unfairly.
The Recent RBI Action Against NBFCs
On 17 October 2024, the RBI used Section 45L of the RBI Act to give a strict order to four NBFCs, Asirvad, Arohan, DMI Finance, and Navi Finserv. The RBI told them to stop giving new loans from 21 October 2024. They were only allowed to collect money from old loans, not issue fresh credit.
The RBI gave several reasons for this action. It found that these companies were charging very high interest rates and spreads. These charges did not match RBI rules. They also broke rules under the Microfinance Master Directions (2022), Scale-Based Regulation (2023), and the Fair Practices Code. Many fees and penalties were not clearly explained to borrowers.
Borrowers often complained about very high interest, hidden charges, repeated penalties, and unfair foreclosure fees. Many people did not know the real cost of the loan. In many cases, the total cost was far higher than what most people would consider reasonable.
RBI inspections found even more serious problems. These companies did not properly check if borrowers could repay. They gave too many loans, kept unclear accounts that looked like loan evergreening, and did not follow rules for providing the Key Fact Statement.
In simple words, the RBI found very high pricing, poor transparency, and harsh recovery methods. These are common signs of unfair and exploitative lending.
Legal Basis of the Crackdown
The RBI’s action is fully supported by law. The RBI Act gives the central bank the power to control NBFCs so that customers stay safe and the financial system remains stable. Section 45L allows the RBI to give strict orders to any registered NBFC. The order issued in October 2024 is a legal step based on RBI inspections and clear rule violations.
Indian courts have also supported the RBI’s role in deciding interest rates and loan pricing. In 2024, the Supreme Court said that the consumer commission (NCDRC) cannot change credit card terms just because the interest rate is above 30%. The Court made it clear that only the RBI can take decisions about loan pricing.
The Digital Lending Guidelines (2022) and Digital Lending Directions (2025) also set important rules. They require lenders to be transparent, take proper consent for using customer data, follow fair recovery methods, and provide a clear Key Fact Statement. These rules protect the right to privacy and dignity, which comes under Article 21 of the Constitution.
In short, the RBI’s action is built on a strong legal base. It is supported by NBFC regulations, consumer protection laws, digital lending rules, and constitutional principles.
Impact on NBFCs and Digital Lenders
The RBI’s order created an immediate jolt for the NBFCs involved. These companies earned most of their revenue by offering fast, hassle-free loans, and once the RBI put a stop to this, their core operations practically froze. This led to a drop in cash inflows and also shook investor confidence to some extent. Following this action, other NBFCs are now preparing for tighter scrutiny, especially around how they set interest rates and manage their risks. The RBI has also begun reviewing the lending rates of NBFCs and may eventually bring in a unified framework similar to the one used for banks.
Fintech apps that rely on NBFC partnerships have also felt the impact. This includes platforms operating under the First-Loss Default Guarantee (FLDG) model. The Buy-Now-Pay-Later (BNPL) segment—which was already under fire for non-transparent pricing—may also face stricter oversight going forward.
Still, the move has its positives. The RBI’s action pushes lenders to be more upfront about the fees and charges they apply. Borrowers will now receive clearer Key Fact Statements that lay out the real cost of a loan in simple language, helping them understand what they’re signing up for and avoid hidden surprises. Banks, which already have stronger compliance systems, may gain an edge as a result. At the same time, NBFCs will have to strengthen their internal processes and ensure complete compliance with regulations.
Constitutional & Policy Perspectives
The RBI’s action supports the basic values of our Constitution—justice, equality, and dignity. Predatory lending hurts poor people the most. It also affects women and other marginalised groups more harshly. Many studies show that low financial knowledge, especially among women, makes them easy targets for unfair lenders.
Some recovery methods used by these lenders are abusive. They check a borrower’s phone contacts or shame them in public. These acts directly violate Article 21, which protects a person’s privacy and dignity. The RBI now stresses fair recovery and proper consent. This matches the spirit of the Constitution.
Article 19(1)(g) gives people the right to do business. But the law also allows limits when they protect the public. Here, many borrowers suffered serious harm and the lending system faced risks. So the RBI’s steps are reasonable and follow the purpose of the law.
Judicial Precedents Relevant to Usurious Lending
The Supreme Court’s 2024 decision makes it clear that the RBI has the highest power to control interest rates. Courts have also said many times that lenders must act fairly and honestly. If a loan term is extremely unfair, consumer courts can cancel it.
The Puttaswamy case is the main source of the right to privacy in India. It also gives a strong base for data protection in digital lending.
Other cases on delegated laws, such as State of Punjab v. Devans Modern, say that regulators must work within the limits set by law. The RBI has followed these limits in this situation.
Challenges & Criticisms
Some people criticise the RBI’s move because it does not give a fixed number for what counts as “excessive” interest. They say this confusion may stop lenders from giving loans to high-risk borrowers.
Some NBFCs also claim that the RBI acted too suddenly and is now controlling their work too closely.On the other hand, consumer groups say the RBI should have taken action much earlier.
This debate shows a bigger issue. We must stop lenders from exploiting people, but we must also make sure that people who need loans can still get them.
Way Forward
To solve these problems, we need clear rules and stronger protection for consumers.The RBI can bring in transparent pricing rules. It can also make lenders clearly show the Annual Percentage Rate (APR) and strictly follow data protection laws.
All lenders should use standard Key Fact Statements. Fees should have a fixed limit. Recovery methods should always follow ethical rules.India can also learn from international practices and think about creating one common Consumer Credit Code.
Different regulators must work together. This is important to stop illegal digital lending and protect borrowers.
Conclusion
The RBI’s action against unfair and very high-interest lending by NBFCs is supported by law and by constitutional values. By focusing on fairness, openness, and consumer safety, the RBI is protecting the ideas of justice and dignity written in the Preamble.There is still debate about how far regulators should go. But the RBI’s move is reasonable because many borrowers faced serious harm.
The RBI is also lifting the bans slowly as companies fix their mistakes. This shows a balance between strict action and flexibility.India’s digital lending market can grow a lot. But its success depends on honest behaviour and clear pricing. With simple rules and aware consumers, India can create a lending system that supports the constitutional ideals of equality and justice.
Author and Co-Author
Ankit Kumar&Bijendra Shandilya
4th Year, 5-Year B.B.A. LL.B. Programme
Indian Institute of Management, Rohtak
