Who are Moneylenders?

Who are moneylenders?

Although the country is acquainted with a strong network of financial institutions, oftentimes, the recourse of such institutions is not accessible to the rural regions. In addition to this, because of the rigid KYC and collateral requirements, it becomes complicated for the small rural banks to provide loans to the small farmers. It is when a money lender comes into the picture. They are non-banking financial institutions that perform a gap-filling function by reaching out to the class of borrowers whose financial needs are not catered to by banks or other financial institutions. 

According to the definition, a money lender is referred to as an individual or group of individuals who use to lend small amounts of money at higher interest rates compared to financial institutions. The reason why money lenders charge a higher rate of interest than banks is that the lending risks are relatively higher. 

What is money lending?

When thing about what is money lending, let us inform you that it is the practice of lending small amounts of money for the short-term and that too at higher interest rates. The following mentioned are characteristics of the money lending loans:

• Money lending loans include small amounts of money compared to other loans.

• The duration for which a loan is granted is shorter.

• The interest charged is higher compared to other loans.

Money lending act: An overview

Now that money lenders act as a significant link between the formal lending sector and informal borrowing sector, the need for a strong framework regulating the working of money lenders was felt. As per Entry 30 of List II (State List) of the Seventh Schedule to the Indian Constitution, it is the state Legislature that is authorized to frame laws on the activities related to money lending. In addition to this, the state legislature enacted the Maharashtra Money-Lending (Regulation) Act, 2014 (money lending act) to regulate the activities and transactions related to money-lending in the state of Maharashtra. However, other states too are equipped with their respective money-lending acts and laws. 

When talking about the money lending act, it is the Consumer Credit Act 1995 that specifies the rules for money lending agreements. Also, moneylenders who are licensed by the central bank must follow the rules as specified in the Consumer Protection Code for Licensed Moneylenders.

Money lending Licenses

Central bank considers a range of factors before granting a money lending license to an individual or firm:

• Background and goodwill of money lender in the market.

• How much interest rate is proposed by the money lenders for providing money lending loans?

Applicability for registration and exemption

According to the Money Lending Act, money lenders are prohibited to carry out the business of money-lending except in the areas for which they are officially licensed. The term business of money-lending here can be defined as the business of providing loans in cash or kind and whether or not in connection with, or in addition to another business. 

The above-mentioned definition throws light on the following mentioned aspects:

• Money-lending transactions must be carried as a business by the money lenders.

• The money lenders don’t need to carry money-lending as a primary business.

• It is not essential for money lenders to advance loans in cash. 

Certain kinds of loans and lenders are excluded by the money-lending laws. The following mentioned are the transactions that do not constitute part of the money-lending business:

1. Secluded or isolated lending transactions: One-time money-lending transactions can’t be classified as the business of money-lending.

2. Inter-corporate deposits: The purpose of the company giving an Inter-Corporate Deposit (ICD) is not to indulge in the business of money-lending but the entity is looking forward to earning a surplus on the idle funds that are available with it.

3. Loans to group companies: The companies lending money to each other within the same group are not looking forward to earning interest but to facilitating the availability of funds to the group company so that it can carry its business. 

Money lending agreements

A money lending agreement is referred to as a credit agreement between the money lender and borrower. The moneylending agreement consists of one or more of the following:

• The name of both parties- money lender and borrower must be specified.

• The sum of the amount provided as a loan should be mentioned in the agreement.

• The date when the loan is granted and the period for which the loan is granted.

• The rate of interest charged on the total amount of the loan.

Conclusion

Moneylenders are those individuals who provide financial aid in terms of loans to small farmers and other groups whom it is difficult for financial institutions to reach. Money lending involves advancing small amounts of money at a higher rate of interest. Although money-lending loans are a riskier option, these are the last resort for those who aren’t able to get financing from financial institutions. It is recommended to go through the above-mentioned article to know more about money lender and money-lending loans.