Read Judgment: NEDUMPILLI FINANCE COMPANY LIMITED v. STATE OF KERALA & ORS 

Tulip Kanth

New Delhi, May 11, 2022: Observing that the question of repugnancy under Article 254 of the Constitution does not arise as RBI Act is traceable only to the Entries in List­ I and the State enactments are traceable only to an Entry in List ­II, the Supreme Court has held that the Kerala Money Lenders Act, 1958 and the Gujarat Money Lenders Act, 2011 will have no application to NBFCs registered under the RBI Act and regulated by RBI.

Allowing the appeals appeals filed by NBFCs against the judgment of the Kerala High Court, the Division Bench of Justice Hemant Gupta and Justice V.Ramasubramanian opined that it may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them but that does not mean that they have no power to step in. The power to determine policy and issue directions, available under Section 45­ JA can always be invoked by RBI.

All the appeals, by the NBFCs operating in the State of Kerala, arose out of writ petitions seeking a declaration that NBFCs registered under the RBI Act will not come within the purview of the Kerala Act.The State of Gujarat had come up with Civil Appeals as a direction was issued by the Gujarat High Court restraining the State Government from applying the provisions of the Gujarat Act against NBFCs registered under the RBI Act.

Observing that Chapter III­B of the Reserve Bank of India Act, 1934 is a complete code in itself, the Apex Court has opined that the RBI generally leaves it to the market forces to determine the rate of interest without any direct intervention and this is not something that could be taken advantage of by the State of Kerala to step in and prescribe the maximum rate of interest chargeable by NBFCs on the loans advanced by them

Affirming that the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the State enactments gets subsumed in the provisions of Chapter III­B, the Bench clarified that once it is found that Chapter III­B of the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their birth (by way of registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of RBI.

The Bench asserted that NBFCs which play a very vital role in contributing to the financial health of the country and whose operations are controlled by RBI with the avowed object of operating the currency and credit system of the country to its advantage, have as their life line, the income received by way of interest on the loans advanced. It was thus concluded that to say that RBI has no say in such a matter of vital interest, will strike at the very root of the statutory control vested in RBI.

Thus, allowing all the appeals filed by NBFCs against the judgment of the Kerala High Court and dismissing the appeals filed by the State of Gujarat against the judgment of the Gujarat high Court, the Apex Court also clarified that thought it had not examined the provisions of the Tamil Nadu Pawn Brokers Act and the Tamil Nadu Money Lenders Act, but the principles of law laid down herein, would apply equally to these State enactments also.

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