Money lending and pawnbroking: Read what Supreme Court said on State Restrictions

The Supreme Court today held that the business of money lending or pawnbroking is usurious business and the Government may rightly impose onerous conditions to restrict or even discourage people from entering into such business..In the process, it upheld the (amended) provisions of the Karnataka Money Lenders Act (ML Act) and the Karnataka Pawn Brokers Act (PB Act) while declaring that the same shall not apply retrospectively..The judgment was delivered by a Bench of Justices Madan B Lokur and Deepak Gupta..The Karnataka ML Act was enacted in the year 1961 with a view to regulate and control the transactions of money lending in the State while the simultaneously enacted Karnataka PB Act was introduced with an aim to regulate the business of the pawnbrokers..Both the Acts mandated that persons desirous of carrying on the said business would have to procure a license in accordance with the provisions laid down in the Acts..The dispute arose when in the year 1985, amendments were made to both the Acts. The amendments provided that persons desirous of obtaining a license will have to deposit a certain amount of security based on a pre-fixed slab.This prompted the money lenders and the pawnbrokers to challenge the amendments in the Karnataka High Court. One ground for challenge of the amendments was that there was no provision for payment of interest on the security amount..The Division Bench of the Karnataka High Court upheld the said provisions. However, it ruled that money lenders and pawnbrokers are entitled to receive interest on their security deposits at the prevailing rate of interest payable by the scheduled banks on a fixed deposit for a period of one year..It, therefore, directed the State Government to make proper rules in this behalf..Subsequently, the State in the year 1998, enacted the Karnataka Money Lenders (Amendment) Act, 1998 and a similar amendment was also made to the PB Act. The amendments contained in sub-section 3 of Section 7-A and 4-A of both the Acts were inserted with retrospective effect from 1985 and excluded payment of interest on security deposit..The Constitutional validity of the 1998 amendment was challenged in the Karnataka High Court by money lenders and pawn brokers. The matter was initially dismissed by a single-judge Bench. On appeal, a Division Bench of the High Court held that though all other amendments made to Sections 7-A and 7-B of the ML Act and Sections 4-A and 4-B of the PB Act are constitutionally valid and legal, the provisions providing for non-payment of interest on security deposits were held to be Constitutionally bad and were, therefore, set aside..This led to the appeal in the Supreme Court by the State of Karnataka..The State of Karnataka represented by Additional Advocate General Devadatt Kamath, argued that there is no fundamental right or legal right to claim interest and the State is legally competent to enact a provision that no interest shall be paid on the amount of security deposited..However, it was the case of the respondents’ association represented by Senior Advocate Gurukrishna Kumar that the judicial decisions which have become final, cannot be set at naught by the legislature. It was further contended by them that the statute cannot nullify the Mandamus issued in the earlier judgment without removing the basis of the judgment..It was, therefore, argued by him that both under the law and equity, a person is entitled to compensation by way of interest for the period for which the money has been retained by the other party. He submitted that the provisions prohibiting the payment of interest are arbitrary and are liable to be set aside..The Bench observed that the businesses of money lending and pawnbroking are usurious businesses and the Government may rightly impose onerous conditions to restrict or even discourage people from entering into such businesses. It held that the legislature can decide whether it should make it more difficult for people to engage in the business of money lending and pawnbroking..The Bench cited that there are various instances where schools, educational institutions, clubs, and societies ask for refundable deposits on which no interest is payable. It observed that,.“These are accepted to be normal routine practices because these bodies are not engaged in commercial activities. Even a pawnbroker pays no interest on the value of the security pledged with him.”.The Bench also observed that,.“A moneylender or a pawnbroker applies for licence to do this business knowing fully well that the security that he shall deposit shall not earn any interest. Nobody forces a person to engage in the trade of money lending or pawnbroking. Therefore, the impugned provisions cannot be held to be unreasonable.”.The Court, therefore, ruled that the provisions prohibiting payment of interest on security deposits cannot be said to be arbitrary or violative of Article 14..Thus, Section 7-A & 7-B of the M.L. Act and 4-A & 4-B of the PB Act were held to be valid from the date of their enactment. However, provisions making these amendments retrospective were declared illegal and invalid..Read the judgment below.