Despite multiple regulations around private money lending in India, unlicensed vendors are many and their arbitrary operations go unchecked, experts tell Metrolife.
Recently, Bengaluru police sent a notice to a trio of private money lenders who was charging exorbitant interest from borrowers and shaming them in public for not repaying the loan.
A top police official says the trio, comprising a man and his two sons, had given loans at 10% interest per month. Experts say this is quite high. The Karnataka Prohibition of Charging Exorbitant Interest Act 2004 caps the interest rate to 18% per year. This comes down to 1.5% interest per month.
“We have cracked five such cases since last year,” says the police official.
Rules at a glance
According to chartered accountant Sathish K V, a private money lender is required to obtain a licence from the government against a fee of Rs 5,000 and renew it every five years.
People should ask such micro financiers to furnish their licence to determine if they are legally compliant, advises investment banker and financial consultant Ashok Rangappa. “If they register, they will be taxable,” he explains why some vendors dodge the licensing process.
Advocate J Manjunatha Reddy says illegal lenders and those who flout the rules can face a jail term of three years and a fine of up to Rs 30,000. Borrowers can complain to the RBI or approach the court.
Rangappa says while 18% is the highest permissible interest rate set by the RBI, private lenders can levy more if borrowers agree. “But in case of a dispute in the court, the borrower will be liable to pay back interest up to 18% only,” he explains. There is no ceiling on the amount of money one can loan.
Systemic problem
Sathish says unregulated private lenders are thriving because the procedures to get bank loans are time-consuming and difficult to meet by informal traders. This is problematic because some lenders use goons and coercion to get their money back, forcing borrowers to take more money from others.
Rangappa explains the systemic issue: “For bank loans, your salary should be more than Rs 20,000, you should have filed income tax for two years, etc. This leaves out auto drivers, cab drivers, poultry sellers and a huge section of people making Rs 10,000-15,000 a month. This forces people to turn to private lenders to get loans faster. Some even accept 10% weekly interest.”
Industry insiders feel banks must relax the lending norms. “Big-ticket loans for up to Rs 2 crore are given at 10-15% annual interest with a window of 5 years to repay. But approximately 21-36% interest is levied on small-ticket loans of Rs 25,000-Rs 2 lakh with a 3-year window to repay. People earning Rs 15,000-Rs 30,000 per month go for such small loans. You see the disadvantage?” asks Rangappa.
However, in his practice, Manjunatha has seen private lenders struggle to get their money back from defaulters.
Private lending needs to be monitored closely, suggest experts.