Money lenders cannot claim interest on security deposit: SC

The Supreme Court on Thursday ruled that money lenders and pawn brokers would not be entitled to any interest on security deposit made by them for carrying out their business.

"The profession of money lending, may be a trade, but onerous restrictions may be placed on such trade which is definitely usurious," a bench of Justices Madan B Lokur and Deepak said.

These onerous restrictions would be reasonable keeping in view the nature of the trade. The legislature in its wisdom can decide whether it should make it more difficult for people to engage in the business of money lending and pawn broking, the court said.

The top court held as "constitutional, valid and legal" the 1998 amendments to the Karnataka Money Lenders Act, 1961 and the Karnataka Pawn Brokers Act, 1961, providing that the security deposit furnished by the money lenders and pawn brokers shall not carry interest.

The bench said the businesses of money lending and pawn broking are usurious businesses and the government may rightly restrict or even  discourage people from entering into such businesses.

The court, however, said Section 7-A and 7-B of the ML Act and 4-A and 4-B of the PB Act are valid from the date of their enactment. "The provisions making these amendments retrospective from 1985 are illegal and invalid," it said.

Not arbitrary

On an appeal filed by Karnataka government represented by Additional Advocate General Devdatta Kamat, the court said the provisions prohibiting payment of interest on the amount of security deposits cannot be said to be arbitrary or violative of Article 14 (equality) of the Constitution.

"A money lender or a pawn broker applies for licence to do this business knowing fully well that the security that he shall deposit shall not earn any interest. He with open eyes accepts the condition which is part of the Acts. Nobody forces a person to engage in the trade of money lending or pawn broking," the bench said.

With regard to applicability of amendments retrospectively, the court said legislature cannot, by way of introducing an amendment, overturn a judicial pronouncement (previous one on validity of the law) and declare it to be wrong or a nullity.