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Private Money lending for Generating Interest Income

In India, money lenders are governed by the Money Lenders Act in different states. Though universally despised, the “sahukar” (moneylender) plays an indispensable role in most rural communities. For centuries, moneylenders have played very active role in Urban working class & rural Indian credit markets. Moneylenders have been around for generations, but their business has boomed ever since India’s economic priorities shifted, with globalization, from agriculture to industry. In sharp contrast to banks and other lending institutions, there is no steel and glass, neither is there a leather couch or a coffee vending machine at the moneylender’s workplace. Moneylenders give you that instant fix. You aren’t asked for security or guarantors.

Moneylenders are a key part of India’s economy. They charge relatively higher interest rates but require few formal guarantees and offer hassle-free services.

It is possible to get day loans in the vegetable market that provide Rs 100 in the morning but have to be repaid Rs. 101 by dusk. Same way borrow Rs.100 and repay Rs.105 by end of month.

Government has launched MUDRA (Micro-units Development and Refinance Agency), to provide business finances to micro-business units. The loans under the scheme are given on the pretext of ‘funding the unfunded’.

Money Lender Activities

A money lender is someone who lends small amounts of money at a higher rate of interest. The reason for charging higher rates of interest is that the money lender faces a higher risk of default than normal banks due to various reasons. People who are desperately in need of money but at the same time do not have a bank credit history or people with bad credit histories and those who can’t get money from friends or relatives approach a money lender for urgent credit facilities. In India, money lenders are governed by the Money Lenders Act in different states. It is mandatory for every money lender to have a license.

Factors to issue a license

Money lender license is usually granted by the Revenue Department within 3 to 4 months from the date of submission of the application form. Once the application is received, it is valid for one year. However, there are a few factors that have to be taken into consideration while issuing/renewal/endorsement of a license:

· Whether the person has the competency to run a money lending business.

· Whether the applicant’s premise is an apt place to run the business.

· Whether granting the permission would be against the public interest.

Documents Required

The following documents are required to obtain the money lending license.

· Application in prescribed form.

· Passport size photographs.

· Three specimen signatures mentioning the money lenders name or his nominee.

· Submit Application to the nearest Tahasildar office

· Pay prescribed fees

How to carry out Money Lending in Personal Account

When you keep liquid fund in Savings Bank Account, you earn 2.7%-5% p.a. Interest. If you invest in following Financial Instruments you ear slightly higher returns:

1. Bank FDs-5 to 6.5%

2. NSC-6.8%

3. Long Term Debt Mutual Fund-7.0 % to 8.5 %

But Government allows you to earn 18% to 21% p.a. by initiating money lending activities (after obtaining a licence). These returns are much better than Financial Instruments indicated above. We also hear that many Money Lenders charge exorbitant interest rates of 36% to 100% p.a. but that`s not permitted. They may be doing it illegally and such practices should not be a bench mark for prudent & ethical investor.

Default Risk Factors in Money Lending: Most of loans are Unsecured and hence run the risk of default. Borrowers are stressed in their finances and as a last resort they approach Money Lender and hence potential defaulter.

How do you secure your money? Take some asset as Security (Mention this in your Loan Agreement also):

1. Take Gold Jewellery as security. For this get the valuation done from credible Jeweler.

2. Take Car or Bike Papers (original) along with signed blank transfer form. Mention this fact in loan documentation that in the event of default, after giving 10 days’ notice of default , the assets are liable to be possessed and then disposed off to be set off against overdue outstanding.

3. Take Personal Guarantee of 3rd Party of repute, known to you as well as borrower.

4. Give loan to person known to you or known to person amongst your circle. Such people are Vendors (Vegetables & Fruit, News Paper, Fast Food etc.) Peons, Security Person, Drivers, Auto Drivers, Cab Drivers, House hold maids etc. and they will have regular source of Income and more likely to honour their debt.

Documents to be prepared: Loan Agreement, Promissory Note, Loan request letter from Borrower with a rider that they have given PDC in discharge of their Debt and that they will honour these PDCs on due date by making arrangement of funds.

Remember that Agent`s Service charges (who sources borrowers) would be paid by borrower.

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