Predatory Lending Laws
Predatory Lending Laws
Predatory lending in India is controlled by the Usurious Loan Act, 1918. The objective of the Act is to protect borrowers from avaricious money lenders who, taking advantage of borrowers in need of money, charge excessively high rate of interest. The Usurious Loan Act, 1918 mainly applies lending by private parties. The lending by Banks and Financial Institutions are controlled by the Reserve Bank of India and the Fair Practices Code for Lenders.
Usurious Loans Act, 1918
The Usurious Lans Act provides power for the Courts to intervene with respect to any loan transaction, where a Court has reasons to believe that:
- The interest charged is excessive; and
- The transaction between the parties was substantially unfair;
In case of an predatory lending, then the Court has the option to exercise the following powers:
- Re-open the transaction and relieve the debtor of all liability in respect of any excessive interest;
- Relive the debtor of all liability in respect of any excessive interest and if anything has been paid in excess, order the creditor to repay any sum which it considers to be repayable;
- Set aside either wholly or in part or revise or alter any security given or agreement made in respect of any loan and if the creditor has parted with the security order him to indemnify the debtor in such manner and to such extent as it may deem just;
Unfair Interest Rate
The Usurious Loans Act does not provide any specific manner for determining if excessive interest has been charged. The Courts are free to determine if excessive interest has been charged based on the circumstances surrounding the transaction. Some of the factors considered while determining charge of unfair interest rate are:
- Amount charged
- Amount paid
- Expenses, fines, bonuses, premiums, etc.,
- Compounding of interest rate
- Period of compounding
- Circumstances surrounding the loan transaction
- Necessities of the borrower at the time of the loan
Its important to note that the Usurious Loans Act is only applicable to private loans or loans made in the unorganised sector. Banks and financial institutions in India are governed by the Reserve Bank of India (RBI), Fair Practices Code. In case of predatory lending or charge of very high interest rate by a lender, you can consult a lawyer for redressal mechanism available under the Indian Law.
