written by | December 23, 2022

The Procedures For Registration Under Money- Lending Laws

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The phrase "lending activities" almost always immediately conjures up images of the Reserve Bank of India (or "RBI"). However, RBI does not have exclusive control over the lending industry. The state laws on money lending have long since been forgotten in the middle of countless RBI regulations covering financial companies.

To prevent unregulated indigenous lenders from offering borrowers high-interest rates, money-lending legislation was developed. These regulations demand that money lenders obtain licenses, have a cap on the amount of interest they can charge, and generally state that a court will not hear a case brought by an unregistered money lender.

Did you know? The Money Lenders Act of 1957 gave the Tamil Nadu government jurisdiction over money lending.

What is a Money Lending License?

People with poor credit histories, no bank accounts, and those unable to take funds from friends or relatives turn to money lenders for credit lines. Money lenders fill a hitherto unregulated market gap by primarily catering to a subset of borrowers that other financial firms, including banks, are unable to reach.

Despite the nation's extensive network of financial institutions, people who live in rural areas frequently lack access to these institutions. Furthermore, banks need help to lend money to small farmers because of their stringent KYC and collateral requirements.

People in dire need of money but do not have a bank account, those with a poor credit history, and those unable to borrow money from friends or family turn to money lenders for credit facilities. In many states of India, the Money Lenders Act governs money lenders.

Every money lender must be licensed to operate. Money-lending laws were created by various legislative bodies to stop uncontrolled indigenous lenders from demanding borrowers' excessive interest rates.

These laws typically indicate that money lenders must have licenses, that the amount of interest they may charge is limited, and that a court will not accept a case brought by an unregistered money lender.

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Why Should You Lend Money With A P2P structure?

Peer-to-peer lending, or P2P lending, is a financial intermediary that enables verified borrowers to request unprotected personal loans from different investors who want to earn a better interest return on their investments.

Before granting the certified borrowers the loan amount, investors can view the borrowers' details from the list of verified borrowers on different P2P lending sites.

Lending a sum to several borrowers allows investors to diversify their investments effectively. P2P lending has a very high success rate in India and has developed into a popular investment platform. The RBI has also taken note of this financial innovation and has developed several rules for simple and secure operations.

P2P license In India

The Certificate of Registration (CoR) issued to NBFCs to launch a P2P Landing platform is the equivalent of a P2P Lending license in India. The CoR is a requirement outlined in the 2017 NBFC Peer-to-Peer Lending Platform Rules. According to the instructions, the applicant NBFC becomes known as an NBFC-P2P Lending platform once it has received the certificate.

A contemporary crowdfunding method involves signing up on a peer-to-peer lending website, where lenders and purchasers communicate directly without using an intermediary. A tech-driven marketplace for lending and borrowing money unites eager lenders and desperate borrowers in one location.

Benefits of P2P lending

A P2P lender should have evidence of loan agreements and accompanying paperwork, as well as prior and express authorization from the participant before accessing their credit card information. 

Additionally, a P2P lender should help with loan disbursement, repayment, and recovery. The P2P platform will use an escrow account system run by a bank-sponsored trustee to move money between users.

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  •  Possibility of Lower Rates

Compared to established lenders like banks, P2P platforms frequently offer loans with reduced interest rates. Through a peer-to-peer platform, the investors lend money instantly to the borrowers. The primary benefit of P2P is that there are no overhead costs involved, and interest rates are set at competitive levels.

  •  Friendly User Interface

Peer-to-peer lending operates purely through an internet portal. As a result, the application procedure is simple and quick. Securing money on the P2P automated platform is convenient.

In general, a peer-to-peer lending network offers a list of investors that combine them through an algorithmic matching process and lend loans to borrowers. It suggests that the turnaround time for receiving the funds may be short, sometimes even just a few hours.

  •  The credit score is unaffected by the initial quote

You will receive a personalized quotation if you apply for a personal loan through a P2P lending platform; this quote won't impact your credit score. It gives a precise image of the potential interest rate offer and the suitability of any potential loans.

So to gain insight into the borrower's financial situation, several reputable P2P platforms run a "soft search" on the borrower's credit record. It guarantees that the search won't come up in subsequent provider searches. As a result, it makes it possible to get information without impacting one's credit score for upcoming loan applications.

  •  Higher Flexibility and Unsecured Debt than Banks

A P2P network, which offers unsecured loans, does not require any security, which is not the case with banks. To complete the loan transaction, you must put up your personal property with the bank. P2P exists solely to support a quicker application procedure and give you quick access to funds.

Also Read: What is Business Loan Project Report | Get Business Loans Easily

Factors To Consider When Lending Your Funds

The borrower must sign the document, governed by Section 4 of the Negotiable Instruments Act of 1881.Sample formats can be found with a quick Google search. Even if it's not required, it's preferable to write the note on stamp paper and get it noted. Any notary (special judicial official) will certify it for a small fee.

However, loan documentation must be written on stamped paper. You can include as many provisions as possible, such as collateral, bankruptcy, termination, and incorporation of legal heirs. You can check a sample loan agreement format below:

Conclusion

Even though having a valid license under the Money Lending Act enables money lenders to operate legally and pursue defaulters in court, the interest rate cap is one of the main barriers to licensing. Many lenders need to be made aware that this registration is necessary. Organizations need to determine whether they are engaging in lending money and whether they have a proper license to do so, given the severe penalties.
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FAQs

Q: What are a borrower's legal rights in India?

Ans:

They still have the right to be considered with respect, to be represented, to adequate notice before asset confiscation, and to receive any surplus money from the net proceeds even though they may have delayed, according to the rights of loan defaulters.

Q: How to invest in peer-to-peer lending?

Ans:

The handiest way to invest in peer-to-peer lending is to make an account on a P2P lending website online and start lending cash to debtors. Those websites normally permit the lender to choose the profile of their borrowers, in order to select between high threat excessive returns or more modest returns.

Q: Who are the largest P2P lenders in the world?

Ans:

The two biggest P2P platforms are Mintos and Twino taking over 60% and 20% of market share respectively.

Q: Is lending money with interest illegal in india money lender license?

Ans:

Money lending is an entirely legal procedure governed by the RBI, ensuring that the rights of both borrowers and lenders are protected. It's done through a variety of online businesses that make it easy for individuals who are looking to finance their endeavors.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.