Lending Outside the Purview of RBI and Moneylenders Law: A Regulatory Grey Zone in Indian Finance

India’s lending regulation is founded on a deliberate legal distinction: the law regulates the “business of lending”, not every instance of lending.

Accordingly:

• The Reserve Bank of India (RBI) regulates lending by Non-Banking Financial Companies (NBFCs).

• State Governments regulate moneylenders under local Money Lending Acts.

Yet, a significant and increasingly common practice now sits between these two regimes:

Loans are advanced not by the NBFC, but by an individual promoter or by other group entities in which the promoter has a stake—often to borrowers who originally approached the NBFC itself.

Such lending falls outside RBI regulation and outside State moneylender laws, creating a regulatory grey zone.

Why RBI Regulation Does Not Extend to Individuals and Certain Group Entities?

RBI’s powers under the RBI Act, 1934 extend only to entities carrying on the business of a non-banking financial institution.

The 50–50 Test for NBFCs-

An entity qualifies as an NBFC only if:

• At least 50% of its total assets are financial assets; and

• At least 50% of its total income is derived from financial assets.

This test:

• Applies only to companies;

• Is balance-sheet driven;

• Does not apply to individuals;

• Does not apply to group entities that fail the threshold.

As a result:

• Individual promoters, and

• Investment, trading, or family-owned group entities

may lend extensively without triggering RBI regulation—even where lending is systematic in substance.

Regulatory Blind Spot: Why Such Lending Is Hard to Track:

While State Money Lending Acts apply where a person or entity is shown to be “carrying on the business of money lending”, regulators face structural limits because:

• Individuals and non-financial group entities have:

  • No RBI reporting obligations;

  • No credit bureau reporting requirements;

• Banking channels do not classify transactions as loans;

• Detection is reactive, arising only from:

  • Borrower disputes;

  • Enforcement proceedings.

Is This a Loophole in the Law?

The objective of the regulators was to avoid regulating:

• Family finance;

• Genuine private advances;

• Commercial accommodations.

However, when:

• Lending is repeated and scaled

• Borrowers are sourced from NBFC pipelines

• Group-controlled structures substitute regulated lending

the arrangement begins to resemble regulatory circumvention in substance, even if compliant in form.

Policy Reform Required:

1. Presumption of Money Lending Business:

Introduce a rebuttable statutory presumption of money lending business where:

• Lending crosses a defined monetary threshold;

• Loans are extended to multiple unrelated borrowers;

• Interest income is recurring.

This would:

• Shift the burden of proof to the lender;

• Reduce enforcement opacity;

• Deter structured circumvention.

2. Exclusion Only for Genuine Related-Party Transactions:

Regulatory exclusion should be narrowly confined to:

• Immediate family lending;

• Intra-group loans for bona fide operational needs.

Loans to unrelated third-party borrowers, especially those originating from NBFC customer pools, should not enjoy blanket exemption.

3. Cap on Private Lending Amounts:

Introduce a statutory cap on aggregate private lending per financial year by:

• Individuals;

• Non-financial group entities;

Crossing the cap could trigger:

• Disclosure obligations;

• Registration requirements;

• Conduct-based regulation.

This creates a bright-line distinction between private finance and organised lending.