The short and sweet answer to your question is No, lending money with interest is not illegal in India. But yes, there are a few things you must think over, especially the state and RBI laws, rules and regulations regarding lending money to someone. Let’s get to just that.
See, in India, lending money is regulated by several laws including the Reserve Bank of India Act, the Banking Regulation Act, and different Moneylenders Acts specific to each state. Such rules help protect the person lending out the money and the person borrowing, making sure that deals are made fairly and the interest rate is done properly. Though, keep in mind that these would be the national or state laws of wherever the lending would take place and also the kind of lending.
Lending Money with Interest: What’s Legal?
The Indian legal rules permit lending money with interest under strict rules. Reserve Bank of India and State laws prescribe maximum interest rates that can be enforced. If you charge more than these rates, you could face legal consequences and fines. In case you would want to make a loan, this limitation is set here so that you are aware of it and do not have any legal implications. You may also need an operating license, and the rules for obtaining that license differ between states, depending on how much you lend.
Different Kinds of Lenders and Lending Methods
Institutions include banks, and some non-institutions, such as private lenders or a peer-to-peer lending platform. Each type of lender adheres to different rules: for example, banks have tight regulations by banking laws, while private lenders have a practice dictated by state money-lending laws. Peer-to-peer lending, which is pretty new, follows some guidelines that have been put by the Reserve Bank of India. Thus, it would act as an encouragement for people to lend money directly to each other without having their noses poked by traditional banks. The method has been regulated by the Reserve Bank of India in the eyes of the interest that lenders and borrowers have. P2P platforms are bound by some rules regarding who lends the money out, how much one can lend, and how the money has to be paid back.
All in all, to lend money safely in India, it’s wise to create a formal loan agreement. The contract should clearly outline each and every detail about the loan, right from the amount to the interest rate, and the date on which it is to be paid back, among other very important details.
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