History shows that in primitive society there was no money lending and people shared their natural resources. In India, the concept of lending has been recorded during the Mauryan age, i.e., 321–185 BCE. Kautilya’s texts mention Rnapatra, Rna panna, Rna lekhaya, which were loan-related documents.
Manusmriti has laid down interest rates for money lending. The rates prescribed were:
Brahmins – 2% p.m.
Kshatriyas – 3% p.m.
Vaishyas – 4% p.m.
Shudras – 5% p.m.
Those classified below Shudras appear to have had no eligibility for loans. By providing job reservation for forward castes by relaxing the norms of income, today forward castes with very little marks can join Union Government and Public Sector jobs. So, laws of Manu apply here not only for lending but also for jobs.
Public Sector Banks are deprived of staff, due to which they find it difficult to finance small borrowers except under the Government-sponsored schemes. This has led a large number of borrowers to depend on Private Banks, Small Finance Banks, Non-Banking Finance Companies (NBFCs), Micro Finance Institutions, and moneylenders, some of whom are registered but many functioning informally using their muscle power. Coercive recoveries and enormous interest on loans have led to suicides and misery.
Even before Independence, laws were promulgated by States, some of which are:
Madhya Pradesh Money Lenders Act, 1934
Madras Debt Reconciliation Act, 1936
Punjab Registration of Money Lenders Act, 1938
Orissa Money Lenders Act, 1939
Bengal Money Lenders Act, 1940
Bombay Money Lenders Act, 1946
Money lending is under the State List as per the Constitution. Using this, some of the States have passed laws to control Micro Finance Institutions and similar organisations lending to small borrowers. This was in addition to the Money Lenders Acts of States, which had very limited jurisdiction.
The first State to enact a law was the combined Andhra Pradesh State Government in 2011, as there were massive agitations by women due to exorbitant interest rates, coercive recovery, and abuses leading to suicides because of loans by MFIs. This was followed by the Assam Government, which was more detailed, covering more borrowers and financial institutions. The Karnataka Government enacted a law in 2025, which has failed in its purpose by excluding NBFCs and MFIs. Tamil Nadu has brought a better law which covers most of the organisations and borrowers with loans up to Rs. 3 lakhs.
The Union Government brought a Bill to Parliament in 2007 titled Micro Finance Bill, but due to many detrimental clauses and usurping of States’ powers, there were massive protests and the Bill did not get Parliament’s nod. Women’s organisations led by All India Democratic Women’s Association submitted an alternative Bill after getting feedback from the grassroots and organised a National Convention. The Bill did not see the light of day. Let’s have a comparison between four State laws.
Comparison of Microfinance Acts: Andhra Pradesh, Assam, Karnataka and Tamil Nadu
All the four Acts are similar. AP Bill is more exhaustive and gives powers to District Rural Development Agencies and officers below them up to panchayat level. However, they are dealing with lending to SHGs alone, as at the time of promulgation of the ordinance suicides were happening among SHG members. However, SKF Micro Finance, a big NBFC-MFI, went to court challenging the law. The High Court ruling said:
Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011 and the Telangana Micro Finance Institutions (Regulation of Money Lending) Act, 2011 are not unconstitutional: Telangana High Court
The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011 and the Telangana Micro Finance Institutions (Regulation of Money Lending) Act, 2011 are not unconstitutional and the NBFCs operating in the States of Telangana and Andhra Pradesh registered with the RBI will be excluded from the purview of these two enactments.
When Assam Govt enacted a law in 2020, the RBI responded to this by accusing the State Government of undermining its authority and demanding that the Bill be repealed. To this, Assam’s State Finance Minister responded with counter claims on their jurisdictional authority as he said:
The RBI wrote a letter to me yesterday and asked to consult it before passing the Bill. How can the RBI come into the picture? This is a privilege of the House. If I place the letter in the House, the RBI will face a privilege motion. (Kalita Citation 2020)
But RBI has coerced the State Govt to amend the law, which was done in 2023. Now NBFCs and MFIs registered with RBI are exempted from these Acts.
In the case of Karnataka, the Act exempts NBFCs and MFIs.
In the case of Tamil Nadu, the Deputy Chief Minister, Mr. Udayanidhi, stated in the Assembly that RBI has asked to exclude NBFCs and MFIs registered with it. However, the Act says they will be covered under the Act if they resort to coercive methods of recovery, which gives some relief to the poor.
To quote Dr. Y.V. Reddy, former RBI Governor, who stated that for-profit MFIs should be treated at par with moneylenders and should not be subject to soft regulation as they are a bigger risk to the system than individual lenders who extend loans out of their own net worth (Lok Sabha Secretariat Citation 2014).
However, under the guidance of the Union Government, to which RBI has become subservient and lost its independent character, RBI is interfering with State laws. Money lending is a State subject and anybody lending in a State should be subjected to scrutiny.
Banks are subjected to scrutiny through State Level Bankers Committee, in which Ministry of Finance in the State is a representative, District Level Bankers Committee of which the DC is the Chairman, and Block Level Bankers Committees.
Who is monitoring NBFCs and MFIs? RBI does not have the wherewithal and has entrusted its job to Sa-Dhan and MFIN, which are supposed to be Self Regulatory Organisations. This is like murderers getting together and self-regulating how murders should be done without much pain. Various studies have shown that NBFCs and MFIs are the modern-day Shylocks.
RBI acts only when many complaints are received and then cancels the registration, but the crores of affected people do not have a remedy. As on Dec 2024, there are 9,291 NBFCs registered and 5,772 whose registration has been cancelled.
Why should RBI and Union Govt not allow States to monitor them?
RBI has not implemented its own decision not to provide more than ₹10,000 crore loan to one corporate by all banks.
RBI has allowed lending to corporates even at less than 5% p.a.
RBI has removed ceiling on interest rates charged by NBFCs.
RBI is interfering with State Governments to protect NBFCs who lend to the poor, SC, ST, OBC, etc. at usurious interest rates and recover money using all abusive methods. Even Small Finance Banks and Bandhan Bank have started doing the same, as many of them were NBFCs earlier and follow the same methods.
That’s why this is equivalent to implementation of Manusmriti, which provided for lower rates of interest for the Brahmins and higher rates for the others as per their caste.
Thomas Franco is the former General Secretary of the All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.
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