The Hindu : Business : Model law to regulate money lending

Online edition of India's National Newspaper
Wednesday, Jul 25, 2007
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Model law to regulate money lending

Special Correspondent

Panel for periodical fixing of maximum interest rate

MUMBAI: The Reserve Bank of India panel on Tuesday recommended a model law for consideration and adoption by State governments that do not at present have a comprehensive legislation in place for governing money lending.

“Considering the significance of moneylenders, especially in the rural credit delivery system, there is a need for a suitable and effective legislation in the interest of the borrower. While having enabling provisions in the legislation so that there are incentives for registration and mainstreaming the activity of money lending, there is a need for disincentives to those that escape the law in the form of more stringent action against unregistered lenders,” the RBI panel observed.

Further the Technical Group set by the central bank has also recommended some modifications to the existing legislation to facilitate quick, informal and easy dispute resolution and better enforcement. The model legislation provides: a simple and hassle free procedure for compulsory registration and periodical renewal of their registration by money lenders; a simplified dispute resolution mechanism to ensure better enforcement; adoption of the rule of Damdupat, restricting the maximum amount of interest chargeable by the money lender; and periodical fixing of the maximum rate of interest in line with market rates.

“Renewal of registration may be at less frequent intervals say once in three years,” the panel noted. Further, for the purpose of bringing in more transparency, the register of moneylenders is recommended to be put in the public domain.

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