State wins battle against moneylenders, pawnbrokers

The State government has won a 20-year-long legal battle against moneylenders and pawnbrokers as the Supreme Court (SC) has now termed these trades “definitely usurious businesses” and held that the “legislature has the power to impose onerous conditions to restrict or even discourage people from entering into such businesses”.

The SC made these observations while upholding constitutional validity of provisions in amendments made in 1998 to the Karnataka Money Lenders Act, 1961, and the Karnataka Pawnbrokers Act, 1961, denying interest on the security amount deposited by moneylenders and pawnbrokers annually while obtaining or renewing licences to carry out these trades.

A Bench of the apex court comprising Justices Madan B. Lokur and Deepak Gupta delivered the verdict on March 15, 2018, while allowing an appeal filed by the State government against the 2006 verdict of the Karnataka High Court (HC), which had held that the government is required to pay interest on the security deposits.

However, the SC said the State cannot include this provision of denying interest with retrospective effect from 1985 while clarifying that the provision is valid from the date of its enactment, in 1998.

“The profession of moneylending may be a trade, but onerous restrictions may be placed on such trade which is definitely usurious. These onerous restrictions would be reasonable keeping in view the nature of the trade. The legislature, in its wisdom, can decide whether it should make it more difficult for people to engage in the business of moneylending and pawnbroking,” the SC said.

Rejecting the contention that denial of interest on security deposit is unreasonable and arbitrary, the SC said “nobody forces a person to engage in the trade of moneylending or pawnbroking. Therefore, the provisions cannot be held to be unreasonable.”

Denial of interest on security deposit cannot be arbitrary or violative of Article 14 (equity before law) of the Constitution, the apex court said while pointing out that many transactions do not yield any interest.

For example, the court said banks do not pay interest on current account. There are various instances where schools, other educational institutions, clubs, and societies ask for refundable deposits on which no interest is payable, the apex court observed while pointing out that “even a pawnbroker pays no interest on the value of the security pledged with him.”