Not Registration but Caution: What Tamil Nadu  Coercive Actions Law Means for NBFCs

Subhojit Shome & Simrat Singh | Finserv@vinodkothari.com 

Two notifications issued under the Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Act, 2025 are in the news, as they lay down the registration framework for money-lending entities operating in Tamil Nadu. We have already clarified in our earlier write-up that the TN Act does not apply to NBFCs therefore there is no question of them going ahead and registering under the same. However, the provisions dealing with coercive recovery practices are very much applicable to NBFCs and unfortunately are quite widely worded as well.

At first glance, this may appear to be a double whammy for NBFCs. On the one hand, NBFCs are already subject to detailed recovery and customer conduct requirements prescribed by the RBI. Notably,  RBI has also proposed a uniform framework on recovery practices across all REs which we had covered here. On the other hand, the Tamil Nadu legislation introduces state-level consequences where recovery practices are alleged to be “coercive”. In our view, if an NBFC follows the RBI framework in letter as well as spirit, it is unlikely to face any difficulty under the State law. 

That said, given the fact that a defaulter would never be happy with any recovery measures, it is quite possible that NBFCs face complaints by borrowers in terms of recovery action under section 20. Section 21 provides for severe criminal consequences. Defaulting borrowers may be a bit more active or aggressive than lenders who have been defaulted against. For example, even while the Act is being comprehended, there is already a case registered under sections 20 and 21 against a recovery agency. 

One might then ask who exactly is intended to be covered under the Act, given that banks (commercial as well as cooperative) and NBFCs are outside the registration framework. It so appears that informal money-lending activities and so-called ‘loan sharks’ are quite active in the State. It has historically taken legislative steps to curb such practices. For instance, the State had earlier enacted the Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003 to deal with usurious interest-charging practices. The present law continues that policy objective by requiring such money-lending entities to register before carrying on lending activities.