Despite the extensive network of financial institutions in the country, many rural areas still find themselves unable to access these services. Small rural banks often struggle to provide loans to small farmers due to stringent KYC (Know Your Customer) and collateral requirements. This is where moneylenders step in. Moneylenders are non-banking financial entities that fill the gap by offering loans to borrowers otherwise overlooked by traditional financial institutions. Also check Singapore money lender
A moneylender is typically an individual or a group who lends small amounts of money at interest rates higher than banks. These higher interest rates are charged because lending through moneylenders carries a greater risk.
What is Money Lending?
Money lending refers to the practice of providing small, short-term loans at higher interest rates. Some key characteristics of money lending loans include:
- The loan amounts are typically smaller than those of traditional loans.
- These loans have shorter durations.
- The interest rates are higher compared to conventional loans.
Money Lending Act: An Overview
Given the significant role moneylenders play in bridging the gap between formal and informal financial sectors, a regulatory framework is essential. According to Entry 30 of List II (State List) of the Seventh Schedule to the Indian Constitution, state legislatures are empowered to regulate money lending activities. For instance, Maharashtra has enacted the Maharashtra Money-Lending (Regulation) Act, 2014, to oversee money lending transactions. Similarly, other states have their respective money-lending regulations.
The Consumer Credit Act 1995 outlines the rules for money lending agreements, and licensed moneylenders must adhere to the guidelines specified in the Consumer Protection Code for Licensed Moneylenders.
Money Lending Licenses
Before granting a money lending license, central banks evaluate several factors:
- The moneylender’s reputation and goodwill in the market.
- The proposed interest rates on loans.
Applicability for Registration and Exemption
Under the Money Lending Act, moneylenders cannot operate their business unless they are licensed for the specific areas they serve. Money lending includes providing loans either in cash or in kind, whether as a primary business or in conjunction with another business.
Key aspects highlighted by the definition include:
- Money lending must be a regular business activity for the moneylender.
- Money lending doesn’t need to be the moneylender’s main business.
- Loans may be provided in forms other than cash.
Certain loans and lenders are exempt from money-lending laws, such as:
- Isolated lending transactions: One-time loans do not constitute a money-lending business.
- Inter-corporate deposits: These transactions are meant to earn surplus funds rather than engage in money-lending.
- Loans to group companies: Loans within a company group are meant to facilitate business operations rather than earn interest.
Money Lending Agreements
A money lending agreement is a credit agreement between a moneylender and a borrower, which typically includes:
- Names of both parties.
- The loan amount.
- The loan date and duration.
- The interest rate on the loan.
Conclusion
Moneylenders serve as vital financial support for small farmers and others who tend to be often neglected by traditional financial institutions.
