State Enactments Like Kerala/Gujarat Money Lenders Act Have No Application To NBFCs Registered Under RBI Act: Supreme Court

The Supreme Court has held that the state enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011 will have no application to Non Banking Financial Companies (NBFC) regulated by the Reserve Bank of India (RBI).The bench comprising Justices Hemant Gupta and V. Ramasubramanian observed that the Chapter IIIB of the RBI Act is a complete code in itself and the power of intervention available for the RBI over NBFCs, is 'from the cradle to the grave'."It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in", the court added.BackgroundChallenging the move of Government of Kerala insisting upon NBFCs to take a license under the Kerala Act, NBFCs filed a batch of writ petitions before the High Court of Kerala seeking a declaration that NBFCs registered under the RBI Act will not come within the purview of the Kerala Act. In Gujarat, the Bombay Money Lenders Act, 1946, which was applicable in the State of Gujarat, was invoked by the Registrar in the office of the Prevention of Money Lenders, against NBFCs operating in the State. The High Court of Gujarat (Division Bench), disagreed with the Kerala HC view and allowed the special civil applications holding that Gujarat Act 14 of 2011 is ultra vires the Constitution for legislative incompetence, to the extent that it seeks to have control over NBFCs registered under the RBI Act. The State Government was restrained from applying the provisions of the Gujarat Act against NBFCs registered under the RBI Act.Issue Before the Apex Court, the issue raised by NBFCs (challenging Kerala HC judgment) and State of Gujarat (challenging Gujarat HC Judgment) was whether NBFCs regulated by the Reserve Bank of India, in terms of the provisions of Chapter IIIB of the Reserve Bank of India Act, 1934 could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011?Chapter IIIB is a complete code in itselfReferring to the scheme of Chapter IIIB of the RBI Act, the bench observed thus:The above scheme of Chapter IIIB of the RBI Act shows that the power of intervention available for the RBI over NBFCs, is from the cradle to the grave. In other words, no NBFC can carry on business without being registered under the Act and a NBFC which takes birth with the registration under the Act is liable to be wound up at the instance of the RBI. The entire life of a NBFC from the womb to the tomb is also regulated and monitored by RBI.Chapter IIIB of the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their birth (by way of registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of RBI. As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the State enactments gets subsumed in the provisions of Chapter IIIB.RBI can control the rate of interest charged by NBFCsThe court also disagreed with the contention raised by the State of Kerala that the Reserve Bank of India does not control the rate of interest charged by NBFCs on the loans advanced by them and that, therefore, a State enactment which seeks to control this aspect, namely, the rate of interest cannot be said to be repugnant."NBFCs which play a very vital role in contributing to the financial health of the country and whose operations are controlled by RBI with the avowed object of operating the currency and credit system of the country to its advantage, have as their life line, the income received by way of interest on the loans advanced. Therefore, to say that RBI has no say in such a matter of vital interest, will strike at the very root of the statutory control vested in RBI. ...It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in. The power to determine policy and issue directions, available under Section 45 JA can always be invoked by RBI."..The fact that RBI generally leaves it to the market forces to determine the rate of interest, without any direct intervention, is not something that could be taken advantage of by the State of Kerala to step in and prescribe the maximum rate of interest chargeable by NBFCs on the loans advanced by them.The court observed that even assuming that the Kerala Act was valid in its application to NBFCs when it was made, on the ground that the business of money lending is traceable to Entry 30 of List II, it has to give way for the...

State Enactments Like Kerala/Gujarat Money Lenders Act Have No Application To NBFCs Registered Under RBI Act: Supreme Court

Ashok KM

Tags