Compliance
The Kerala money lending licence: a rate formula in the Act, and a prison sentence behind it
CS Manoj Famra · 2026-10-09 · 10 min read (estimated)
Two neighbouring states, two money lending Acts of almost the same vintage, and two completely different exposures. In Tamil Nadu, lending without a licence is a fine of up to one thousand rupees. In Kerala it is imprisonment of not less than three months.
That is not a detail. It is the whole reason "state money lending compliance" cannot be written once and applied across the south, and it is why this page exists separately from the Tamil Nadu one.
Everything below is quoted from the Kerala Money-Lenders Act, 1958 (Act 35 of 1958). Read the caution on currency at the end before relying on a figure.
Who needs a licence, and how many
Section 3(1). From the date the Act is brought into force in an area, "no person, firm or joint family [or unincorporated association of individuals] shall commence or carry on or continue business as a money-lender at any place in such area without a licence obtained under this Act or in contravention of the terms thereof."
With a proviso Tamil Nadu does not have: "nothing in this section shall be deemed to prohibit a person who has applied for a licence to carry on or to continue business as a money-lender pending orders on his application." An applicant may trade while the application is pending.
Section 3(2) — one licence per place of business, in the same wording as Tamil Nadu: a lender with more than one shop or place of business, in the same town or in different towns or villages, "shall obtain a separate licence in respect of each such shop or place of business."
Section 3(3) sets who holds it: a registered firm in the firm's name; an undivided joint family in the name of the manager, karanavan or yajaman, described as such; any other association of individuals, a separate licence for each individual describing himself as a member.
What the licence costs, and the condition attached to deposits
Section 4(1): the application is in writing to the licensing authority, in the prescribed manner. A person under eighteen, or a lunatic as defined in the Indian Lunacy Act, 1912, may apply only through a guardian — and a guardian who obtains a licence is "subject to all the provisions of this Act as if the licence has been granted to himself."
Section 4(2) makes the licence subject to conditions including:
- "payment of a licence fee of five thousand rupees";
- payment of security under sub-section (2A);
- and — the one worth stopping on — *"that deposits shall be accepted only in accordance with the
provisions of the Reserve Bank of India Act, 1934"*, at rates of interest not exceeding a specified level.
A Kerala money-lender may take deposits, and the Act anticipates it. Section 7(4) reinforces this by prohibiting presents, gifts or commission "to any depositor in connection with the deposits received by such money-lender". This is a structural difference from Tamil Nadu, where the Act contemplates lending only.
It is also where state and central regulation meet: the licence condition points at the RBI Act, 1934, so a Kerala money-lender accepting deposits is answering to both.
The interest ceiling — and Kerala puts a formula in the Act
Section 7(1):
*"No money-lender shall charge interest on any loan at a rate exceeding two per cent above the
maximum rate of interest charged by commercial banks on loans granted by them: Provided that a
money-lender shall be entitled to charge a minimum of one rupee as interest on any transaction."*
And a further proviso: "the Government may specify, by notification, the rate of interest under sub-section (1) from time to time."
So Kerala gives you both a formula and a notification power. Tamil Nadu gives only the notification power, with the rate "correlated to" RBI's bank rates and no formula at all. A lender working across both states cannot carry one ceiling between them, and the Kerala figure moves with commercial bank lending rates rather than with a gazette entry alone.
Section 7(2): charges as may be prescribed. Section 7(3): nothing in excess of sub-section (1). Section 7(4): no presents, gifts or commission either way — to a depositor, or from a borrower.
The records a Kerala money-lender must keep
Section 9(1) — "Every money-lender other than a pawn-broker shall" — and that carve-out is itself worth noting, because a Kerala pawn-broker is outside this section:
(a) Keep an account for each debt separately, showing:
- *"the date of the loan, the amount of the principal of the loan and the rate of interest charged
on the loan"*; and
- *"the amount of every payment received by the money-lender in respect of the loan, and the date of
such payment."*
Note the difference from Tamil Nadu: TN's clause (a)(i) also requires the nature of the security taken. Kerala's does not. And Kerala says "for each debt separately" where Tamil Nadu says "for each debtor separately" — a debtor with three loans is three accounts in Kerala.
(b) Give a receipt for every payment, "duly signed and, if necessary, stamped at the time of such payment."
(c) Furnish a statement of account on written requisition, to the debtor or a person named by him, signed, showing the clause (a) particulars and the amount outstanding on principal and interest, for a prescribed fee.
(d) Submit returns to the Inspector — "submit to the Inspector concerned such returns relating to the loans advanced by him, in such form and at such times as may be prescribed."
As in Tamil Nadu, every form, the return and its timing are in the rules, not the Act. A compliance plan built from the Act alone is missing all of them.
What happens when it goes wrong, and this is the part to read twice
Section 17 — carrying on without a licence or in violation of its conditions:
*"shall be punished with imprisonment for a term which, in the absence of special reasons to be
recorded in the judgement of the court, shall not be less than three months but which may extend
to three years and with fine which may extend to fifty thousand rupees."*
A mandatory minimum of three months' imprisonment, displaceable only by special reasons recorded in the judgment, and a fine of up to fifty thousand rupees. The Tamil Nadu equivalent is a fine of up to one thousand rupees and no imprisonment.
Section 17 also catches lending "in violation of the conditions of the licence" — not only unlicensed lending. A licensed lender breaching a condition is inside the same section.
Section 18(1) covers everything else: contravening the Act, the rules, or a licence condition, or making a false claim or statement, where no other penalty is provided — fine up to one thousand rupees. Its Explanation records that cancellation of a licence under section 14 "shall not be deemed to be a penalty" for this purpose.
Kerala and Tamil Nadu, side by side
| Tamil Nadu (Act XXVI of 1957) | Kerala (Act 35 of 1958) | |
|---|---|---|
| Interest ceiling | Notification only, "correlated to" RBI bank rates (s.7(1), as substituted 1979) | Formula in the Act — 2% above the maximum rate charged by commercial banks — plus a notification power (s.7(1)) |
| Minimum interest | — | One rupee per transaction |
| Licence fee | Conditions may include a fee "not exceeding one hundred rupees" | Five thousand rupees (s.4(2)(i)), plus security |
| Trading while the application is pending | — | Permitted (proviso to s.3(1)) |
| Deposits | Not contemplated | Contemplated, subject to the RBI Act, 1934 (s.4(2)) |
| Account kept per | Debtor | Debt |
| Nature of security recorded | Yes (s.9(1)(a)(i)) | No |
| Pawn-brokers | Within s.9 | Excluded from s.9 |
| Unlicensed lending | Fine up to ₹1,000 (s.17) | Imprisonment 3 months to 3 years and fine up to ₹50,000 (s.17) |
The last row is the one to act on. A lender treating "state money lending compliance" as one subject across the two states is carrying a Tamil Nadu risk assessment into a jurisdiction with a mandatory custodial minimum.
And West Bengal is a third shape: a ₹200 criminal fine, and an unlicensed lender who cannot obtain a decree at all — the exposure is the whole book rather than the penalty.
And neither is RBI regulation
A money-lender licensed under a state Act is not an NBFC and files no DNBS returns. Nothing about holding a state licence exempts a company from registration under the RBI Act if it crosses the principal business test — the regimes answer different questions, and the Kerala deposit condition is the one place they visibly touch. If what you are forming is an NBFC, that is a different path: NBFC registration and the Certificate of Registration.
A caution on currency
The text read carries amendments through 1963, 1974, 1986 and 1987, with several sections shown as substituted. Before acting:
- Check for amendments after 1987, including any made alongside Kerala's 2012 legislation on
exorbitant interest, which defines its threshold by reference to section 7(1) of this Act.
- Check any notification specifying the rate under the second proviso to section 7(1) — it
overrides the formula.
- Check the rules for the prescribed forms, the return format and its timing, and the
prescribed fee under section 9(1)(c).
- Section 4(2)(iii)'s deposit condition references a specified maximum rate of interest which the
text I read truncates. Confirm it before accepting a deposit.
Written 9 October 2026. Where this page quotes, it quotes the Act. Where the Act says "prescribed", this page says so rather than supplying a figure from somewhere else.
Frequently asked questions
What is the maximum interest a money lender can charge in Kerala?
Section 7(1) sets it at two per cent above the maximum rate of interest charged by commercial banks on loans granted by them, with a minimum of one rupee per transaction. A further proviso lets the Government specify the rate by notification, which would override the formula — so check for a current notification before relying on the formula alone.
Is unlicensed money lending a criminal offence in Kerala?
Yes, and it carries a custodial minimum. Section 17 provides imprisonment of not less than three months, absent special reasons recorded in the judgment, extending to three years, with a fine up to fifty thousand rupees. It applies to lending in violation of a licence condition as well as to lending without one.
Can a Kerala money lender accept deposits?
The Act contemplates it. Section 4(2) makes it a licence condition that deposits be accepted only in accordance with the Reserve Bank of India Act, 1934, and section 7(4) forbids presents, gifts or commission to depositors. That is a point where the state licence and central regulation meet.
Does a Kerala licence cover more than one branch?
No. Section 3(2) requires a separate licence for each shop or place of business, in the same town or in different towns or villages.
Can I lend while my licence application is pending?
The proviso to section 3(1) says the section does not prohibit a person who has applied for a licence from carrying on or continuing business pending orders on the application. Tamil Nadu's Act has no equivalent.
Related: The Tamil Nadu money lending licence · The West Bengal money lending licence · NBFC registration and the Certificate of Registration
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