Fraudulent, predatory lending practices

The city police have identified at least a score of licensed moneylenders and non-banking financial institutions, which they said resorted to ‘fraudulent and predatory moneylending’ practices.

City Police Commissioner P. Vijayan said the intelligence wing had conducted a preliminary audit of the functioning of these institutions following a spate of complaints from the public, mostly the urban poor and also aged and indigent persons.

Most of the errant institutions operated on licences obtained from the Commercial Taxes Department. They charged an usurious rate of interest from their customers, often up to 20 times more than that set by the Reserve Bank of India (RBI), he said.

(As per RBI guidelines registered private moneylending institutions should not charge more than 2 per cent above the interest rate charged by nationalised banks).

The moneylenders did this by imposing penal interest, not sanctioned by law, on defaulters. At the time of origination of the loan, they rarely explained to borrowers the risks and costs involved in the transaction. Contracts involving predatory moneylenders were often a minefield of hidden charges.

Toll on society

The operations of the ‘authorised’ moneylenders had taken the same toll on society as that of their ‘unauthorised’ counterparts. They had impoverished families and driven many to commit suicide, Mr. Vijayan said. “It is a critical area where the intervention of law and society is urgently required,” he said. The police also learnt that several persons, who were arrested under the provisions of the Kerala Moneylenders Act, had moved the Commercial Taxes Department to obtain licences for their businesses. Hence, it would be ideal, if the department crosschecked the antecedents of the applicants with the police before issuing them licences, the officer said.

Chitty fraud

Investigators said they had also found that several illegal moneylenders in the city operated chit funds, a savings scheme peculiar to the country, without mandatory licences.

Since February 30, 2012, chit funds could be operated only by persons who paid an advance fee (50 per cent of the total chit amount) as deposit to the State treasury. A nationalised bank should give guarantee for the rest of the total chit amount. The government had brought in the provisions to reduce the chances of depositors from being cheated of their money by fly-by-night operators.