UNDERSTANDING THE REGULATORY LANDSCAPE
The Reserve Bank of India (RBI) plays a pivotal role in overseeing monetary policy and banking operations across the nation, including the realm of money lending activities. It conducts comprehensive reviews and evaluations of the existing legislative framework governing money lending, scrutinizing the effectiveness of laws pertaining to moneylenders.
According to Entry 30 of List II (i.e. State List) of the Seventh Schedule to the Constitution of India, the State Legislature has exclusive power to make laws on activities relating to money-lending. Many states have enacted robust laws to oversee and regulate money lending enterprises, complementing the RBI's regulatory efforts. These state regulations typically encompass licensing procedures, interest rate ceilings, borrower safeguards, and enforcement mechanisms, ensuring comprehensive governance of money lending activities within their respective jurisdictions.
The RBI collaborates closely with state governments and works towards enhancing enforcement mechanisms and providing recommendations to them to bolster the legal framework.
Under the ambit of the Banking Regulation Act of 1949, the RBI exercises regulatory authority over banks. It establishes guidelines for personal loans, encompassing criteria such as minimum credit scores and eligibility requirements. Additionally, it imposes stringent regulations on non-banking financial companies (NBFCs) to promote responsible lending practices.
OVERVIEW OF STATE LEGISLATION
The various Moneylenders Acts define moneylenders and set rules for their business practices. The goal is to ensure fair practices, protect borrowers, and maintain stability in the financial system.
The following States have enacted laws relating to money lending and money-lenders:
- Karnataka – Karnataka Money Lenders Act, 1961
- Kerala – Kerala Money Lenders Act, 1958
- Uttar Pradesh – Uttar Pradesh Regulation of Money Lending Act, 1976
- Tamil Nadu – Tamil Nadu Money Lenders Act, 1957
- Maharashtra and Gujarat – Bombay Money Lenders Act, 1946
- Punjab, Delhi and Haryana – The Punjab Registration of Money-Lenders Act, 1938
- West Bengal – Bengal Money-Lenders Act, 1940
- Orissa – Orissa Money Lenders Act, 1939
- Bihar – Bihar Money Lenders Act, 1974
- Rajasthan – Rajasthan Money Lenders Act, 1963
- Madhya Pradesh and Chattisgarh – Madhya Pradesh Money Lenders Act, 1934
- Andhra Pradesh – Andhra Pradesh (Andhra Region Scheduled Areas) Money Lenders Regulation, 1960
- Telangana - Telangana Money Lenders Act, 1349F
STATE LEGISLATION: KEY FEATURES
Although the various States have enacted their own legislations for regulating money-lenders, some common traits can be found in them. The main features include:
- Registration / licensing: Legislations of all States regulating money-lenders have the requirement of registration/license for money-lenders carrying on the business of money lending [Section 4, Rules 2 and 8]
- Interest rates: The legislations of most States fix the maximum rates of interest that can be charged or empower respective State Governments to do so. [Section 6(v)]
- Petitions by unlicensed money-lenders: The benefit provided to registered and licensed money-lenders is that they can seek legal redress (money suit or application for execution of a decree) for the recovery of their loans. Unlicensed money-lenders’ petitions are barred.
ROLE OF MONEY-LENDERS IN FINANCIAL INCLUSIVITY / ACCESSIBILITY
Moneylenders are persons (or association of persons) who lend money, usually at high rates of interest, to individuals or businesses who cannot access formal sources of credit. Moneylenders operate in both rural and urban areas, and cater to the needs of small borrowers who may not have collateral, credit history, or steady income.
Moneylenders play a role in the financial scenario of the country by filling the gap between the demand and supply of credit, especially for the poor and marginalized sections of society. They provide quick and flexible loans, without much paperwork or documentation, and often have a personal relationship with the borrowers. Moneylenders also act as intermediaries between the formal and informal sectors, by borrowing from banks and lending to their clients.
To regulate the transactions of money-lending in the State of Punjab, the state legislature has enacted Punjab Registration of Moneylenders' Act, 1938. This legislation is also applicable in the Delhi and Haryana, as the Government of NCT of Delhi adopted the Punjab legislation, and the Government of Haryana adopted the Punjab Legislation vide Haryana Adaptation of Laws Order, 1968. This article deals with registration under the Punjab Registration of Moneylenders' Act, 1938 specifically.
PUNJAB MONEY LENDING LEGISLATION: AN INSIGHT
Section 2(8) defines a “loan” as an advance of money or goods with interest, including transactions recognized as loans by the court. There are several exclusions to the definition of a loan, and Section 2(8) specifies situations where the term “loan” does not apply.[(i) An in-kind advance by a landlord to a tenant for husbandry purposes, as long as the return's market value doesn't exceed the advance's market value, (ii) deposits in banks, companies, or co-operative societies as security by employees, (iii) loans or deposits with registered societies or associations, (iv) loans involving Central / State / local government / entities, (v) loans from audited entities (banks, co-operative societies, companies), (vi) loans between traders in the regular course of business, (vii) advances based on negotiable instruments, excluding promissory notes.]
Section 2(9) defines "money-lender" broadly to cover individuals or firms engaged in the “business of advancing loans”. However, certain exclusions are provided to avoid applying the term in specific situations, such as when dealing with the estate of a deceased money-lender or when a money-lender makes a bona fide assignment of a single loan to a particular individual.
Section 2(9) implies that only the individuals or firms engaged in money lending transactions which constitute a business for the lender (may or may not be the primary business) can be said to be in the “business of money lending” or advancing loans, and only these money lenders are regulated by this Act, subject to two exceptions (stated above).
EXEMPTIONS AND APPLICABILITY: WHO NEEDS A MONEY LENDING LICENSE?
Section 2(8)(v) implies that audited financial entities like NBFCs, banks, insurance companies, co-operatives, etc. that are regulated under other legislations are not governed by the Punjab Registration of Moneylenders' Act and do not require a money lending license. The Act is thus applicable to Companies. However, loans given by Companies are thus exempted from the application of the Act.
Financial entities that are regulated by other central legislation, like NBFCs, banks, insurance companies do not fall under the ambit of State legislations, and will not require a money lending license. Only non-regulated entities (individuals / firms) undertaking business of money-lending require this license.
It was held by the Supreme Court in Nedumpilli Finance Co. Ltd. v. State of Kerala, that any State enactment regulating the business of money lending and intended to afford protection to borrowers, may fall under Entry 30 (money lending and moneylenders; relief of agricultural indebtedness) of List II (State List). But at the same time any parliamentary enactment dealing with incorporation, regulation and winding up of trading corporations [banking, insurance, and financial corporations (except cooperative societies)], would fall under Entry 43 of List I (Union List).
REGISTRATION AND LICENSING REQUIREMENTS
Under Section 4 of the Act and Rule 2 of The Punjab Registration of Money Lenders Rules, 1939, every money-lender is required to register himself as such at the Office of the Collector of the applicant’s District of residence, or where he has his principal place of business in the State. Such application must be made in Form A and with fees as prescribed in Rule 3. On successful registration, the Collector issues a certificate to the money-lender in the format as prescribed in Form B, as per Rule 7.
After registration and issuance of certificate by the Collector, the money-lender must apply to the Collector for a license. (Rule 8)
Section 5 mandates every money-lender to apply to the Collector for a license. License is issued by Collector in Form D after payment of prescribed fee (Rule 13). If a licensed money-lender applies for renewal before their license expires, their existing license will continue until a decision is made on the renewal application.
LICENSE RENEWAL AND CANCELLATION
Application for renewal of license is made in Form C as per Rules 2, 9 and 10, to the Collector of the applicant’s District of residence (or principal place of business), along with prescribed fee and affidavit stating whether any court has made any order regarding the money-lender’s illegal acts / omissions since making of the last application, and must be made at least one month before the current license expires. If they fail to do so and have valid reasons for the delay, the Collector may allow it, but a penalty must be paid for the extension. [Rule 14]
The maximum period for which license may be issued / renewed is three years at a time, with pre-payment of prescribed fee.
Section 6 provides that the Collector may cancel a money-lender’s license if following conditions are met: (1) has contravened certain provisions of related Acts in multiple court cases, (2) has had suits dismissed under specific sections of related Acts, (3) has been found guilty of committing forgery, cheating, dishonestly / fraudulently altering loan documents, charging higher interest rates than allowed by law. The Collector cannot cancel a license until the period for appeal, revision, or review has expired, or until it is finally decided.
License cannot be cancelled without serving notice to the money-lender, which must be in format as prescribed in Form E [Section 7 and Rule 17]. The money-lender must surrender his license as soon as the Collector makes an order cancelling it, and such order must be published in the State Government Gazette. [Rules 18 and 19]
CONSEQUENCES OF NON-REGISTRATION
Section 3 ensures that only registered and licensed money lenders can legally pursue loan recovery through court proceedings, or they must provide proof of pending registration and licensing.
However, regarding the question of whether non-registration or unlicensed conduct of business attracts a penalty, no offense is defined in the Act, and therefore there is no penalty.
