MEANING

By definition, a moneylender is an individual or group that lends small amounts of money but at higher interest rates than banks or other financial institutions. The reason for these higher rates is the increased risk involved in lending to people who may not have strong financial histories or collateral. For many borrowers, these higher rates are the cost of access to funds they otherwise couldn’t get. To know more about money lender in Singapore

WHAT IS MONEY LENDING?

Money lending is the practice of lending small amounts for short periods, usually with higher-than-normal interest rates. Loans from moneylenders often have these features:

  • Smaller loan amounts: Moneylenders typically lend small sums, unlike large bank loans.
  • Short loan terms: The loans are for shorter periods.
  • Higher interest rates: Moneylenders charge more interest to cover the increased risk they take on.

THE MONEY LENDING ACT

Since moneylenders operate between formal financial institutions and informal lending, there is a need for laws to regulate their work. Under India’s Constitution, states are responsible for making laws related to money lending. For instance, Maharashtra passed the Maharashtra Money-Lending (Regulation) Act, 2014, which governs money lending in the state. Other states have their own laws and regulations for money lending.

Another important regulation is the Consumer Credit Act, of 1995, which sets rules for moneylending agreements. Licensed moneylenders are required to follow these rules as outlined in the Consumer Protection Code.

MONEY LENDING LICENSES

To become a licensed moneylender, an individual or firm must apply for a license through the central bank, which considers several factors, including:

  1. The reputation and background of the lender.
  2. The proposed interest rates for loans.

RULES FOR REGISTRATION AND EXEMPTIONS

According to the Money Lending Act, moneylenders cannot operate in areas where they aren’t licensed. For moneylenders, “money lending” means providing loans in cash or kind, either as their main business or alongside another business.

However, some types of transactions are exempt from being classified as moneylending, such as:

  • Isolated loans: One-time loans that are not part of an ongoing lending business.
  • Inter-corporate deposits: These are loans between companies within the same group, aimed at managing surplus funds rather than functioning as a business.
  • Group company loans: When companies lend money within the same group, it is not considered moneylending since the intent is to support business operations, not earn interest.

MONEY LENDING AGREEMENTS

A money lending agreement is a contract between a lender and a borrower. It generally includes:

  1. The names of the lender and borrower.
  2. The loan amount.
  3. The date and duration of the loan.
  4. The interest rate charged on the loan.

CONCLUSION

Moneylenders serve a vital role by offering loans to small farmers and others who can’t get financial support from banks or other institutions. Money lending involves providing small loans at higher interest rates, which helps fill a financial gap in rural areas. This overview highlights the importance of understanding money lending laws and practices for those seeking or offering loans outside traditional banking systems.