Whether charging abnormally high rate is an offence in India?
Query:
Can you let me know if it is an offence to charge interest at abnormally high rate say @10% per month? Is there any legal restriction?
Reply:
Its one of the common question which is often asked by many. Charging interest at abnormally high rate or say at 10% per month (i.e., 120% per annum) is not just commercially excessive but may also be legally problematic, depending on the context and the relationship between the parties.
1. Usurious Interest – Legally Unenforceable in Many Cases:
Courts in India have consistently held that charging exorbitant or usurious interestis against public policy. If the rate is excessively high (like 10% per month), it may be considered oppressive, unconscionable, or arbitrary, and courts can refuse to enforce such terms even if agreed upon.
2. Indian Contract Act, 1872:
Under Sections 23 and 28, a contract with unreasonable or excessive interest may be considered void to that extent or unenforceable.
3. Money Lending Laws:
Most states have their own Money Lending Acts(e.g., Maharashtra Money-Lending (Regulation) Act, 2014) which:
o Require registration/licensing for moneylenders.
o Prescribe maximum permissible interest rates.
o Treat lending without a license or charging beyond limits as an offence, attracting penalties or imprisonment.
If interest is charged without complying with these regulations, it can amount to illegal money lending.
4. Companies and NBFCs:
If lending is done in the ordinary course of business (by NBFCs or banks), they are governed by RBI directions, and such high interest is generally not permissible or justifiable under fair practice codes.
5. Civil Consequences:
Even in personal or commercial agreements, if one party challenges such a high rate in court, the judge may reduce the interest rate using discretionary powers (as seen in several High Court and Supreme Court decisions).
6. Criminal Aspect:
In some cases, especially where coercion, intimidation, or threats are involved in recovery, it can even lead to criminal proceedings under Section 384 IPC (extortion)or other local laws.
Conclusion:
Yes, charging interest @10% per month is legally risky and potentially unenforceable. It may attract civil liabilities, and in certain cases, even criminal consequences. It is advisable to keep interest rates reasonable and well-documented, and ensure compliance.
It is just the opinion of the author and may not be taken as a final verdict.
