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RBI panel proposes model law for governing money lending

Reserve Bank had constituted a Technical Group to review legislations on money lending for (a) reviewing the efficacy of the existing legislative framework, which governs money lending, (b) reviewing the enforcement machinery in different states and (c) making recommendations to State Governments for improving the legal and enforcement framework in the interest of rural households.

The Technical Group, through an extensive consultative approach, has studied the practices of money lending activity prevailing in different parts of the country; ascertained some ground realities through surveys; explored the possibility of linkages of money lenders with formal financial institutions; and reviewed the international practices in regulating money lending activities.

The Technical Group has recommended a model law for the consideration and adoption by the State Governments that do not presently have a comprehensive legislation in place for governing money lending. The proposed model law reflects the significant elements of similar legislation, available internationally and domestically. The Technical Group has also recommended some modifications to the existing legislation to facilitate quick, informal and easy dispute resolution; and better enforcement.

The model legislation proposed by the Technical Group provides for the following:

i) a simple and hassle free procedure for compulsory registration and periodical renewal of their registration by money lenders;

ii) a simplified dispute resolution mechanism to ensure better enforcement;

iii) adoption of the rule of Damdupat restricting the maximum amount of interest chargeable by the money lender; and

iv) periodical fixing of the maximum rate of interest in line with market rates.

The Group has also explored establishment of a link between the formal and informal credit providers, whereby a money lender who is an ‘Accredited Loan Provider’ may serve as an additional credit delivery channel for the formal sector, provided there are safeguard measures. RBI has invited feedback on the Report recommendations, before formally approving it.

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