The finance ministry said in a statement that the central bank has been asked to prepare a list of digital lending platforms that use unethical lending practices.
The finance minister expressed concern over increasing instances of illegal loan apps offering micro credit, especially to vulnerable and low-income group people at high interest rates.
The Reserve Bank of India tightened rules for digital lenders last month after complaints of unfair recovery practices began to mount.
India has the highest number of such apps in the world. Over half of the digital loan providers were operating illegally according to a panel set up by the Reserve Bank of India.
All possible action has been taken to prevent such platforms from operating. The finance ministry said that the ministry of corporate affairs would identify and deregister shell companies.
The country joined others in the region in trying to regulate the fast- booming sector, which has the potential to bridge the credit gap through its small-ticket and quick loans. Digital lending in India is expected to reach $350 billion in the next five years. There were calls for more regulation.
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