The short and sweet answer to your question is, No, lending money with interest is not illegal in India, and why should it be? It is a perfectly fine thing because the lenders also want something in return like, or why would anyone lend money to someone without making a profit? That can only be a thing with friends and family, but with licensed lenders, they sure can legally charge you a decent interest rate as per the laws. And let’s talk about just that by going a bit in-depth, shall we?
What’s The Legal Side Of Things When It Comes To Lending Money in India?
The Indian legal framework for lending money is a mixture of central and state laws, just to be clear about that. And yes, the most significant authority among them is, of course, the Reserve Bank of India (RBI), which looks after the financial sector and lays the groundwork for interest charges together with lawful lending practices.
Though, in addition to the RBI, one can find in every state a Moneylenders Act that regulates lending. Some of the rules state that the money that is lent should be in the form of a proper loan with proper paperwork. And just so you know, the Moneylenders Act specifically provides that anyone who lends money on interest in the state is a moneylender and unless he/she has a license from the state authority, he/she will not be allowed to lend by charging interest. The licensing process varies in the states but is generally similar such as application to local authorities and the payment of licensing fees. Not getting such a license and lending money becomes a criminal offense with severe fines or other penalties attached to it, just so you know.
How Much Interest Can You Legally Charge?
Setting the right interest rate when you lend is super important, especially in India. The guidelines of the RBI are clearly mentioned for the interest rates that a person can charge. For example, in Karnataka, private money lenders can charge 18% interest legally in a year. So this means if someone lends ₹100,000, with an interest as per the annual percentage rate, then the borrowers’ interest would be ₹18,000.
But it is equally important to not try charging interest that is markedly higher than normal, which is called “exorbitant.” Such action can go against the law and cause the borrowers to seek legal help. In this case, the court can very easily decide that the borrowers are obliged to return even just the main loan amount and the legally allowed interest, ignoring any excessive claim of interest. And it is seen that in rural parts of the country, there are some lenders who have the license to lend money, but they charge way too much, like up to 36% percent or even more than that, which is illegal, and sure, there can be legal action taken against them. But borrowers usually don’t take such steps because they think that from there on, no one will lend them money in the future.
