Bengaluru, DHNS: They will be tried under state laws for lending at high interest rates.Non Banking Financial Companies (NBFC), which lend money to farmers and the general public at exorbitant rates of interest, may be in for trouble. The state government is likely to move the High Court for removal of a stay order that prevents it from taking any “coercive action” against such companies.

On April 5, 2016, the government took the first step towards tightening the noose around these companies by withdrawing exemption given to four of them. Accordingly, Manappuram Finance (Tamil Nadu) Ltd, Coimbatore, Manappuram General Finance and Leasing Limited, Thrissur, Kerala, Muthoot Finance Ltd and Muthoot Fincorp Ltd, Bengaluru, are no longer exempt from Section 2(10) (iv) (b) of the Karnataka Money-Lenders (KML)?Act, 1961, which seeks to crack down on moneylenders. The government action is based on recommendations of the Registrar of Cooperative Societies.

The government is under pressure to avert further farmer suicides. As many as 1,136 farmers have committed suicide in Karnataka, mainly for being unable to repay the loans taken from the NBFCs at high rates of interest, as per the records of the Registrar of Co-operative Societies.

The government feels its hands are tied in the matter since most financial companies claim jurisdiction under the Reserve Bank of India, saying they follow the Fair Practices Code for Lenders and are governed under Chapter 3(B) of the RBI Act, 1934. The companies also argued before the High Court that the RBI Act “overrides” state laws such as the KML Act, 1961, and the Karnataka Prohibition of Charging Exorbitant Interest Act, 2004. Hence, these laws do not apply to them, they maintained.

There are 17,027 NBFCs in Karnataka, according to a source in the Department of Cooperation. Section 28 of the KML Act, 1961, empowers the government to fix the interest rates from time to time. The present interest rate is 14% for secured loans and 16% for unsecured loans. In reality, however, the companies charge between 20% and 35%, making it extremely difficult for the borrower to repay.

There have been many police complaints against the NBFCs. The High Court also heard many petitions and ordered the government not to take any “coercive action” against them until it adjudicates in the matter.

Similar petitions were filed before the High Courts in Kerala and Gujarat. While the Kerala High Court favoured the NBFCs, the latter ruled against them. The matter is now before the Supreme Court, said the source.