One frequently sees advertisements in the newspapers by finance companies offering loans at "low" interest rates of 2-2.5% per month (or 24-30% per year). If there is delay in repayment of the loan, there is a further overdue interest of 3-5% per year. Many people avail of these loans, especially loans secured with gold or ornaments, as they are easier to get than bank loans.
Most people do not realize that these companies are violating State laws against excessive interest. Karnataka Money Lenders Act, 1961makes charging interest at a rate higher than the rate fixed by the Karnataka State Government a criminal offence punishable by imprisonment of upto three months. There is another law, Karnataka Prohibition of Charging Exorbitant Interest Act, 2004, which makes the penalty harsher by extending it to a limit of three years. The maximum interest rate fixed by Karnataka Government is 15% maximum for secured loans and 18% maximum for unsecured loans. If you pawn your valuables to secure the loan, the maximum rate that can be charged is 15% per year.
Many of these companies make the loan receiver sign a document in which he agrees to pay the interest rates charged by the companies. But even if the debtor signs the contract, charging more than government interest rates is illegal. Sec. 28(2) of the Money Lenders Act says, "Notwithstanding anything contained in any law for the time being in force, no agreement between a moneylender and a debtor for payment of interest at a rate exceeding the maximum rate fixed by the State Government under subsection (1), shall be valid and no Court shall in any suit to which this Act applies award interest exceeding the said rates".
If the money lender harasses the debtor for the payment of excessive interest, legal action should be initiated against him under these two acts.
B.V.Shenoy, memeber, Mysore Grahakara Parishat