Vetting of business or friendly loan agreement

Dear Client,

Lending money to a non-relative for business purposes without a license can be legally precariou, as most states require a money-lending license for anyone "carrying on the business of money lending." While a one-off "friendly loan" is generally permissible without a license, lending money for business with interest, especially to multiple people, could be construed as a regulated activity.

If you proceed, it is crucial to document the transaction with a formal, written loan agreement detailing the principal, repayment terms, and interest, which can be a reasonable amount. To secure the loan, you can legally execute a registered mortgage of movable or immovable assets or obtain post-dated cheques, which can be enforced under Section 138 of the Negotiable Instruments Act if they bounce.

In case of a dispute, your legal remedies would include filing a civil suit for money recovery and potentially a criminal case, provided all legal procedures are followed, but remember that the loan may be deemed unrecoverable if you are found to be illegally operating as a money lender.

Dear Client,
In India, moneylenders are governed by the Moneylenders Act, 1957, in different states. Any individual/organization engaged in a money lending business must hold a license from the appropriate authority, such as the RBI or the State Legislature. A money lending license is usually granted by the Revenue Department of the respective state government in compliance with the provisions of the Money Lenders Act and the state-specific rules. If any person or a group of persons is involved in trading of money lending or any other financial transaction without any license or permission of the concerned regulatory authority, then he/they may be booked under the Prevention of Money Laundering Act, 2002 (PMLA) which was enacted to fight against the criminal offense of legalizing the income/profits from an illegal source, once reported to the vigilance cell. The offender can face imprisonment for not less than three years, extending up to seven years. So, in the absence of a valid license, one can serve a legal notice to the lender and bring the matter to the notice of Vigilance Cell and the concerned regulatory authorities under PMLA and State Revenue Deptt who issues license for money lending business. Further, Project VIGEYE (Vigilance Eye) is a citizen-centric initiative, wherein citizens join hands with the Central Vigilance Commission in fighting corruption. Users can lodge their grievances and complaints online.