Let’s say you are thinking of lending money to someone in India and charging them an interest rate, which may seem pretty fair to you and is kinda an old practice in the country, but you’ll be surprised to know that there are actual laws in place regarding this. Technically speaking, if you don’t have a proper license, you can’t just go ahead, lend money to someone, and charge them with higher interest rates. It doesn’t work like that.
What Does The Law Really Say About Money Lending in India?
If you don’t know yet, the thing that governs money lending in India is both the central and state laws. Like, the Reserve Bank of India (RBI) Act and the Banking Regulation Act are the ones that regulate the financial sector, and the regulations are framed in such a way that they would protect both borrowers and lenders. But keep in mind though, state-specific Moneylenders Acts would be applicable only in the case of individual or private lending to the people. Just so you know, they are specifically meant to protect individual clients from the exploitation of private lenders.
Let’s say though, in case you are lending money as a commercial business then you need to have a money lending license. Variations in the license requirements will take place depending on the state. For example, Karnataka is one of the states where private money lenders are required to obtain a license that has to be renewed every five years.
Is Lending with Interest Legal in India?
Absolutely, lending with interest is legal as long as it adheres to or is done as per the legal framework in the country, you know? Private lending especially in rural areas where people have limited access to formal banking is a normal and lawful phenomenon when done correctly. Private lenders must follow state laws, which means they should obtain licenses for this activity and ensure fair interest rates.
It is surely allowed to lend money privately, via P2P platforms such as Lendbox, or even just to friends and family. Still, it is critical to define clear terms and agreements.
What Are The Interest Rate Caps and Regulations?
You see, a lot of people are confused about how much they can charge in interest if they go down this path of lending money. But just so you know, the Reserve Bank of India and the state governments have set standards on the charges for loans. In Karnataka, for example, the private lenders are capped at 18% per year which roughly equals 1.5% per month. And sure, failure to adhere to this limit may attract legal action.
Even when both parties agree to a higher interest rate, the courts usually impose the cap set by the state in case there is some sort of dispute between both parties. This is designed to ensure that poor people who are the borrowing population are protected against exploitation by higher-than-normal interest rates. It is also to prevent any lender from the private sector who is not licensed or who has engaged in unethical behavior from charging more than what is actually legal in the country. So, that’s that!
