Every money lender is required to hold a licence. This article examines the process of obtaining a money lender licence.
Money Lender License
People who are in dire need of money but do not have a bank account, those who have a poor credit history, and those who are unable to borrow money from friends or family turn to money lenders for credit facilities. Money lenders primarily serve a segment of borrowers that other financial institutions, including banks, cannot reach, they fill a previously unregulated niche in the market. Even though the country has a robust network of financial institutions, access to these institutions is usually inaccessible to those living in rural areas. Moreover, because banks have strict criteria for KYC and collateral, it is challenging for them to offer loans to small farmers.
According to Entry 30 of List II (i.e., the State List) of the Seventh Schedule to the Indian Constitution, the State Legislature has the exclusive authority to establish legislation governing money-lending businesses.
For example, the Maharashtra Money-Lending (Regulation) Act, 2014 (‘Money Lending Act’) was adopted by the state legislature to govern money-lending transactions in the state of Maharastra. Other states, as well, have their own money-lending regulations. Similarly, the Tamil Nadu Government oversees the money lending process in accordance with the Money Lenders Act of 1957.
|Financial entities like banks, insurance companies, non-banking financial companies (or “NBFCs”), and others have been exempt from obtaining money-lending licences as these are regulated by other laws.|
Scope and Need for a Money Lender License
In order to prevent unregulated indigenous lenders from charging borrowers high-interest rates, money-lending legislation was developed by various state legislatures. These regulations normally demand that money lenders obtain licences, have a cap on the amount of interest they may charge, and generally stipulate that a court of law will not hear a case brought on by an unlicensed money lender.
Conditions for Obtaining a Money Lending Licence
According to the Money Lending Act operational in Maharastra, no money lender may conduct money-lending activity except in the region for which he has been given a licence. The word used here is ‘money-lending business.’ Money-lending here refers to the providing of loans in cash or kind, whether in combination with or in addition to any other business.
Who is Eligible for a Money Lender License?
When determining whether an applicant is eligible for a money lender license the following aspects are taken into consideration
- Whether they are capable of managing a firm that lends money.
- Whether the applicant’s location is suitable for operating their firm.
- Whether granting the licence would be contrary to general welfare
These aspects are taken into consideration when a licence is issued, renewed, or endorsed.
What are the Documents Required to Obtain a Money Lender License?
The following documents are required to obtain a money lender license –
- Application form ( Form A)
- Passport size photograph
- (3) specimen signatures mentioning the money lenders name as well as his nominee
Validity of Money Lender Licence
The Revenue Department typically issues a money lender licence three to four months after the application is submitted. The application is valid for a year after it has been submitted. However,
How to Obtain a Money Lender License: Step by Step Guide
To obtain a money lending licence, the following steps must be followed.
Step 1: The applicant must head to the appropriate Tahasildar office o
Step 2: Following this, the applicant must obtain the application form from the Tahasildar, for which the applicant must pay a fee of ₹100.
Step 3: The applicant must then fill out the application form with the necessary information.
Step 4: Once duly filled the form must be submitted to the Tahasildar’s office.
Penalty for Not Obtaining a Money Lender License
According to Section 39 of Maharastra’s Money Lending Act, anybody who undertakes money-lending activity without a valid licence risks a punishment of –
Imprisonment for a term that may be up to 5 years, or a fine of up to ₹ 50,000, or both.
In our opinion, given the seriousness of the penalties for lending money without a legitimate licence, it is critical for lenders to determine if they are in the money-lending industry and whether they have a proper licence to do so.
Obtaining a valid licence under the Money Lending Act allows money lenders to operate legally and have legal remedies against defaulters, nevertheless one of the primary reasons for non-registration is the interest rate ceiling. Moreover, many lenders are not even aware that such a licence is required.
Though acquiring a money lender licence appears to be a hassle, it is always a good idea to do so, especially if you are lending substantial sums of money. Furthermore, given the high likelihood of default in the money lending industry, it is preferable to obtain a licence, since only registered money lenders may bring such matters to a court of law.