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Money lenders face cap on interest rates

A RBI committee has proposed setting a cap on interest rates that can be charged by private money lenders and has recommended regulation of the business through appropriate legislation, reports Gaurav Choudhury.

business Updated: Jul 25, 2007 02:42 IST
Gaurav Choudhury

A Reserve Bank of India (RBI) committee has proposed setting a cap on interest rates that can be charged by private money lenders and has recommended regulation of the business through appropriate legislation.

The recommendations came in the wake of a spate of suicides by farmers after they failed to meet huge debt burdens following failed harvests.

The technical group headed by economist SC Gupta has proposed a model law for regulating money lending and has proposed compulsory registration of money lenders by state governments.

The group also mooted the idea of establishing a link between formal and informal credit providers — a money lender who is an ‘accredited loan provider (ALP)’ may serve as an additional credit delivery channel for the formal sector with appropriate safeguards.

“Registration (of money lenders) should be made compulsory,” the panel said and suggested punitive measures for violators.
To encourage banks to take up the role of institutional creditors and for disbursal of loans through accredited loan providers as an additional business, the group recommended that such advances should be treated as priority sector lending.

The group has suggested that state governments place an annual report on the administration of the legislation before the state legislatures "in order to ensure that its enforcement and administration is properly monitored".

The maximum interest rate should be linked to the benchmark rate of commercial banks, the group suggested. “The state governments could link the rate to a benchmark with a maximum mark up to factor in other costs, ease of access, doorstep delivery and reasonable margin,” it said.

Typically, rural money lenders charge an interest rate of 36 per cent per annum, much higher than the benchmark prime lending rate of 11 per cent.

The rate could also be set on the basis of interest rates charged by micro-finance institutions in the area as well.
The panel recommended that Nyaya Panchayats should be adequately empowered to settle disputes over loans up to Rs 50,000 while Lok Adalats should adjudicate on matters involving credit exceeding Rs 50,000.

“Alternatively, state governments may think of setting up fast-track courts or designated courts to deal with disputes relating to money lenders and accredited loan providers,” it said.