State moneylending laws don’t apply to NBFCs, holds SC

Timothy Lopes, Manager | tim@vinodkothari.com

In a landmark judgment dated 10^th May, 2022, the Supreme Court in Nedumpilli Finance Company Limited vs State of Kerala & ors[1] held that the money lending laws will not apply in the case of NBFCs regulated by RBI. This ends an age-old quarrel between the States and NBFCs.

Facts of the case in brief

After the growth of NBFCs in the state of Kerala picked up, the Government of Kerala started insisting upon NBFCs to take a license under the money lending law prevailing in Kerala, failing which penal consequences would ensue. Therefore, NBFCs filed a batch of writ petitions against the state of Kerala.

Further, the Gujarat High Court took the stance that the money lending laws would not apply to NBFCs. However, the State of Gujarat filed appeals against this.

Background

The general intent of money lending laws was to afford protection to borrowers against usurious loans by money lenders.

Once the concept of NBFCs sprouted, however, the applicability of such money lending laws on NBFCs was challenged since the laws did not specifically exclude NBFCs. This posed an unnecessary burden on NBFCs since the relevant state would require them to obtain a license under the laws and impose restrictions on the interest rate charged by such NBFCs.

The Gujarat High Court in Radhey Estate Developers vs Mehta Integrated Finance Co Ltd[2] (dated April 2011) ruled that the Bombay Money Lenders Act, which applied to Gujarat as well, would not apply to NBFCs. However, the ruling was limited to Gujarat only[3].

This article is meant to highlight the key principles laid down by the Supreme Court while deciding the aforementioned case.

Highlights of the Supreme Court ruling

In the Gujarat High Court case supra, a legal dictum called “occupied field” was used, implying that where a field of regulation was already occupied by a regulator, another legislation cannot make an ingress into the same[4].

However, the Hon’ble Supreme Court ruled that Chapter III-B of the RBI Act, 1934[5] dealing with ‘Provisions relating to non-banking institutions receiving deposits and financial institutions’ is a “complete code” in itself and that this code “would cast a shadow on the applicability (even assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by RBI.”

Duplicate regulation on NBFCs

Money lending laws are a piece of state legislation existing well before the concept of Non-Banking Financial Companies (NBFCs) was familiar in India. Some of the money lending laws were enacted in the pre-independence era as well.

Public lending in India is controlled by RBI through regulation over banks and NBFCs. The idea of NBFCs obtaining a license under the money lending laws of the State, while being regulated by RBI in the first place seems superfluous.

Although it may be argued that the money lending laws intend to impose curbs on exorbitant interest charged by lenders and protecting the interest of the borrower, RBI already has extant instructions for fair practices by NBFCs and also states that “though interest rates are not regulated by the Bank, rates of interest beyond a certain level may be seen to be excessive and can neither be sustainable nor be conforming to normal financial practice”[6]. Furthermore, RBI has already mandated NBFCs to adopt an interest rate model to be approved by the Board of such NBFCs.

The ‘Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps’[7] also noted the money lending laws while making the following suggestion –

“Regulatory bodies for other authorized lenders such as credit societies, registered money lenders, non-banking non-finance companies (NBNCs), etc. may consider stipulating appropriate guidelines consistent/ proportionate with that of RBI, to prevent/ minimize environment of regulatory arbitrage in the businesses of digital lending.”

Keeping in view the above, it is clear that RBI already has in place regulations for NBFCs that protect the interest of the borrower. The Hon’ble Court also ruled that “the   single   aspect   of taking care of the interest of the borrowers which is sought to be   achieved   by   the   State   enactments   gets   subsumed   in   the provisions of Chapter III­B.”

Conclusion

The ruling of the Hon’ble Supreme Court finally settles the debate on the applicability of money lending laws on NBFCs. The ruling comes as a relief to several regulated NBFCs as the question of applicability is now resolved. It is clear that these money lending laws would not apply on NBFCs as chapter III-B of the RBI Act, 1934 is a complete code for regulation of NBFCs. The principles of law laid down in this ruling would apply equally to other state enactments also.

Read our other articles on the topic –

1. Inapplicability of money lending laws to regulated NBFCs – https://vinodkothari.com/wp-content/uploads/2017/03/Inapplicability_of_money_lending_laws_to_regulated_NBFCs-1.pdf
2. Registration under Money-Lending Laws – https://vinodkothari.com/2021/09/registration-money-lending-laws/
3. Registration under Money-Lending Laws – https://vinodkothari.com/2021/08/registration-under-money-lending-laws/

[1] https://main.sci.gov.in/supremecourt/2010/1744/1744_2010_10_1501_35747_Judgement_10-May-2022.pdf

[2] Radhey Estate Developers vs Mehta Integrated Finance Co Ltd – https://indiankanoon.org/doc/1357712/

[3] Our detailed article on the Gujarat High Court ruling can be viewed here – https://vinodkothari.com/wp-content/uploads/2017/06/Money-Lending-Laws-NBFCs.pdf

[4] Refer the article in footnote 3 above for more on the Gujarat High Court ruling

[5] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf

[6] Para 37 of the Master Direction – NBFC-ND-SI – https://rbidocs.rbi.org.in/rdocs/notification/PDFs/45MD01092016B52D6E12D49F411DB63F67F2344A4E09.PDF

[7] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1189