Courts Must 'Nip In The Bud' Proceedings By Unlicensed Money Lenders; Investigation Against Them Need Not Await New Law : Supreme Court

The Supreme Court recently clarified that its earlier order closing the suo motu proceedings on unauthorised money lending should not be construed to mean that no law presently exists on the subject or that enforcement actions must wait for fresh legislation by States or Union Territories.

The Court clarified that existing provisions under the State money lending laws and the Bharatiya Nyaya Sanhita be invoked against unlicensed money lenders.

The Court stated :

"It is pertinent to note that for unlicensed money lending against the promissory notes, whether accompanying with any other security such as cheque, title deeds or not, there already exists a Statutory Bar in State Money Lending Law. There is also a bar of “Dam Dupat” even under a moneylending licence i.e. against charging interest more than the principal amount actually disbursed. There is a further statutory disability against the enforceability of such loan amount by unlicensed money lender. Moreover, such money lending is a punishable offence under the State Money Lending Law."

Therefore, the Courts should "nip in the bud" proceedings instituted by unlicensed private money lenders, without awaiting any new legislation by the States/UTs.

A bench of Justices Pankaj Mithal and Vipul M Pancholi said,

"Therefore, the Courts should ensure that the proceedings instituted by such private money lender are nipped in bud, whether Civil or Criminal, unless the money lender at the threshold produces license for money lending or shows that money was not advanced by him at interest."

It further added,

"...commencement of investigation of any offence punishable under State Money-lending law by any unlicensed money lender and under Indian Penal Code, 1860/Bharatiya Nyaya Sanhita, 2023 shall also not await the legislation by the respective States/Union Territories."

The order was passed in a miscellaneous application filed in a special leave petition seeking quashing of summons in a cheque dishonor case.

In July, 2024, the Court took suo moto action in the main case to address the menace of unlawful money lending in society. It highlighted the growing menace of unlicensed money lending leading to severe consequences for borrowers, including financial ruin and even suicide.

The Court observed that the practice of lending money on interest without proper licensing and securing the loans with cheques or title deeds is not different from the business of money lending. However, under the Punjab Registration of Money Lenders Act, 1938, such activities would not be considered as business of money lending unless they involve continuous transactions of a similar nature. To evade the law, such persons advance loans only intermittently, the Court noted.

The Court compared such lenders to the character Shylock in Shakespeare's play Merchant of Venice, who advances a loan to the protagonist with “a pound of flesh” as security. It expressed that such Shylockian lenders cannot be allowed to continue unabated. Owing to the concerns, it suo motu impleaded the Union of India and the Government of the National Capital Territory (NCT) of Delhi as parties to the proceedings.

Subsequently, the Union informed the Court about an intention to bring in a new legislation to control unlicensed money lending, that too, at exorbitantly high rates of interest. In February this year, the suo motu action was closed, while recording that a draft Bill was in circulation between the States/UTs (which had to bring about the legislation).

"In view of the stand taken by the Union of India before us, we direct for the closure of the suo moto action taken by this Court and expect for a fair and proper legislation by all States/Union Territories to strictly check the unauthorised business of money lending", the Court observed in the Febraury order closing the proceedings.

Thereafter, the present miscellaneous application was filed seeking clarification of the February order, as it was being understood to mean that no law exists against unlicensed money lending and all actions must await the new enactment by States/UTs.

In this backdrop, the Court highlighted in the present order the statutory bars existing under State Money Lending laws.

Case Title: RAJ KUMAR SANTOSHI VERSUS PRASHANT MALIK, Miscellaneous Application No. 1176/2026 in SLP(Crl) No. 5485/2024

Citation : 2026 LiveLaw (SC) 342

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