Harnessing Legal and Technological Frameworks to Combat Unlicensed Money Lending and Enhance Tax Compliance: An Examination of Cheque Bounce Cases and Civil Suits as Tools for Identifying and Curbing
DOI:
https://doi.org/10.47672/ajf.2675Abstract
Purpose: Unlicensed money lending has become a pervasive issue in India, deeply affecting the financial stability of vulnerable populations. Unlike regulated financial institutions, these lenders operate outside the purview of legal frameworks, exploiting borrowers through exorbitant interest rates that often range from 120% to 360% annually. Known colloquially as “loan sharks” or “hudkhoors” they prey on individuals in desperate need of immediate cash, creating a vicious cycle of debt and financial ruin. The Karnataka Prohibition of Charging Exorbitant Interest Act caps interest rates at 18% annually, yet unlicensed lenders continue to charge far beyond permissible limits. Furthermore, coercive recovery tactics such as harassment and threats exacerbate the plight of borrowers, leading to extreme consequences like suicides and mass migrations. Despite existing laws, enforcement remains weak, allowing these predatory practices to thrive unchecked.
Materials and Methods: This study adopts a qualitative legal research methodology combined with doctrinal analysis and technological assessment to explore how legal and technological frameworks can combat unlicensed money lending and improve tax compliance in India.
Findings: The results of this research underscore the imperative need for wide-ranging policy reforms that deal with the causative factors of unregulated lending while promoting tax compliance through increased transparency.
Unique Contribution to Theory, Practice and Policy: Tax Compliance, Increased Revenue Collection for Government, Reigning Unlicensed Money Lending.
Downloads
References
Bhattacharya, P., Kumar, P., & Bhattacharya, R., "Covid-19 Pandemic in India and Impact of Microfinance Companies and Non-Financial Banking Companies Microcredit Loans to Poor's Households through the Self Help Groups (SHG) in West Bengal State and also in India," (April 27, 2023).
Dhns., Private lenders can levy interest up to 18% yearly, Deccan Herald (n.d.), Available at: https://www.deccanherald.com/india/karnataka/bengaluru/private-lenders-can-levy-interest-up-to-18-yearly-2965830 (Last Visited on March 25, 2025).
Bhattacharya, P., Kumar, P., & Bhattacharya, R., Covid-19 Pandemic in India and Impact of Microfinance Companies and Non-Financial Banking Companies Microcredit Loans to Poor's Households through the Self Help Groups (SHG) in West Bengal State and also in India (April 27, 2023).
Shrivastava, A., Will Regulate “Shylockian” Lenders: Supreme Court Raises Concerns Over Unlicensed Money Lending Business (Live Law, 17 December 2024), Available at: https://www.livelaw.in/top-stories/will-regulate-shylockian-lenders-supreme-court-raises-concerns-over-unlicensed-money-lending-business-264594, accessed 25 March 2025.
Shrivastava, A., Will Regulate “Shylockian” Lenders: Supreme Court Raises Concerns Over Unlicensed Money Lending Business (Live Law, 17 December 2024), Available at: https://www.livelaw.in/top-stories/will-regulate-shylockian-lenders-supreme-court-raises-concerns-over-unlicensed-money-lending-business-264594, accessed 25 March 2025.
Vidhi Centre for Legal Policy. (2022). Mediating cheque bounce cases will not solve judicial delays. Retrieved from https://vidhilegalpolicy.in/blog/mediating-cheque-bounce-cases-will-not-solve-judicial-delays/
V. Krishnamohan and N. Srinivas, “E-payment trends in India amendments in the income tax Act for cashless economy” 57 The Management Accountant Journal 42-48 (2022).
Niranjan Swain, Restriction on Cash Transactions under Income Tax Act, TAX BULLETIN (The Institute of Cost Accountants of India, Nov. 2017).
Niranjan Swain, Restriction on Cash Transactions under Income Tax Act, TAX BULLETIN (The Institute of Cost Accountants of India, Nov. 2017).
Raj, J., Rath, D. P., Mitra, P., & John, J., "RBI Working Paper No. 14/2020: Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data", Reserve Bank of India, December 15, 2020.
G. Pathak and P. Jain, “Critical Analysis of Section 138 of Negotiable Instruments Act, 1881” 2 Indian J. Integrated Rsch. L. 1 (2022).
A. Patwa, “An Analysis of the Decriminalisation of Section 138, Negotiable Instruments Act, 1881” 4(6) Indian Journal of Law & Legal Research 1 (2022).
A. Patwa, “An Analysis of the Decriminalisation of Section 138, Negotiable Instruments Act, 1881” 4(6) Indian Journal of Law & Legal Research 1 (2022).
Ridhi, Abhishek, Vijay, Chhabria, H., Irfan, Jhamb, D., … Pilkhwal, K. S. (2023). Section 138 of NI Act, 1881: All you need to know about Cheque Bounce Notice. Retrieved from https://www.scconline.com/blog/post/2023/03/11/ni-act-cheque-bounce-notice-explainer-legal-research-knowledge/
G. Pathak and P. Jain, “Critical Analysis of Section 138 of Negotiable Instruments Act, 1881” 2 Indian J. Integrated Rsch. L. 1 (2022).
Rao, M. (2019). Judges, lenders, and the bottom line: Courting firm growth in India. Working paper.
Fischer, A. M., and Storm, S., "The return of debt crisis in developing countries: shifting or maintaining dominant development paradigms?” Development and Change, Vol. 54, No. 5 (2023), pp. 954-993.
Sarkar, A., "Aspect of criminality in default of loans given by banks: the Indian scenario" 10(2) Asian Journal of Law and Economics 20190002 (2019).
Harriss-White, Barbara, the Question of Traders as Credit Agents in India, in Financial Landscapes Reconstructed 325-340 (Routledge, 2019).
S. Storm, “Financialization and Economic Development: A Debate on the Social Efficiency of Modern Finance” 49 Development and Change 302-329 (2018).
M. Sinha, H. Majra, J. Hutchins & R. Saxena, “Mobile Payments in India: The Privacy Factor” 37 Int’l J. Bank Marketing 192-209 (2019).
K. Leong, H. Li, N. Pavanini, and C. Walsh, “The Welfare Effects of Law Enforcement in the Illegal Money Lending Market,” 2022.
Dasari, P., "Digital Lending in India: Harassment, Settlements, and the Rise of Financial Exploitation," (2025) January 01.
Charles Spinosa, “The Transformation of Intentionality: Debt and Contract in the Merchant of Venice” 24 English Literary Renaissance 370-409 (2008).
Tampuri, M. Y., Digital lending in emerging economies: the nexus between financial innovation and consumer protection, American Journal of Finance and Accounting, Vol. 7, No. 2, pp. 145-168 (2023).
Jia Xiao, et.al. "The impact of corporate social responsibility on tax avoidance: Evidence from China" 29 Journal of International Accounting, Auditing and Taxation 100522 (2023), available at https://www.sciencedirect.com/science/article/abs/pii/S0890838923001269, last seen on 25/03/2025.
Benjamin Hermalin, Andrew K. Rose, Peter M. Garber, Andrew Crockett & David W. Mullins, Jr., Risks to Lenders and Borrowers in International Capital Markets, in Martin Feldstein (ed.), International Capital Flows 363-420 (University of Chicago Press, 1999).
European Parliament, The Impact of Artificial Intelligence on International Trade (Directorate-General for External Policies, Policy Department, 2024) https://www.europarl.europa.eu/RegData/etudes/IDAN/2024/754450/EXPO_IDA(2024)754450_EN.pdf accessed 25 March 2025.
Economic Laws Practice, Balancing Regulation and Accessibility: Addressing Unregulated Lending in India with a Comprehensive Approach (2025), https://elplaw.in/wp-content/uploads/2025/01/Balancing-Regulation-and-Accessibility-Addressing-Unregulated-Lending-in-India-with-a-Comprehensive-Approach.pdf.
Chairman, CBDT, Measures to Tackle Black Money in India and Abroad (Govt. of India, Ministry of Finance, 2012).
André Maio, Tax Evasion and Money Laundering in the 21st Century: Challenges and Strategies for Combat (Lusíada University of Lisbon, January 2025), available at https://www.researchgate.net/publication/389901313_Tax_Evasion_and_Money_Laundering_in_the_21st_Century_Challenges_and_Strategies_for_Combat.
G. Tripathi, M.A. Ahad, and G. Casalino, "A comprehensive review of blockchain technology: Underlying principles and historical background with future challenges," 9 Decision Analytics Journal 100344 (2023).
Chandrababu Kuraku, Hemanth Kumar Gollangi, and Janardhana Rao Sunkara, "Biometric Authentication in Digital Payments: Utilizing AI and Big Data for Real-Time Security and Efficiency," Educational Administration Theory and Practice Journal, 26(4) (2020): 954-964, DOI: 10.2139/ssrn.4977530.
Aya Aljaradat, Gargi Sarkar, and Sandeep K. Shukla, "Modelling cybersecurity impacts on digital payment adoption: A game theoretic approach," Journal of Economic Criminology, vol. 5, September 2024, 100089, available at https://doi.org/10.1016/j.jeconc.2024.100089.
Olawale, Olufunke, Ajayi, Funmilayo Aribidesi, Udeh, Chioma Ann, and Odejide, Opeyemi Abayomi. "RegTech Innovations Streamlining Compliance, Reducing Costs in the Financial Sector." GSC Advanced Research and Reviews, vol. 19, no. 1, Apr. 2024, pp. 114-131. DOI: 10.30574/gscarr.2024.19.1.0146.
Press Information Bureau, Aadhaar: Revolutionizing Technology across India, Empowering Citizens, and Transforming Governance, (Oct. 27, 2020), <https://pib.gov.in/PressReleasePage.aspx?PRID=2067940>
Hari Prasad Josyula, “Digital Identity Verification: Transforming KYC Processes in Banking through Advanced Technology and Enhanced Security Measures” 5 International Research Journal of Modernization in Engineering Technology and Science 128-137 (2023). DOI: 10.56726/IRJMETS44476.
Santosh Kumar, Sheetal Angral, Kamna Lakaria & Madiha Iqbal, Aadhaar: Revolutionizing Technology across India, Press Information Bureau (Dec. 26, 2023), available at https://pib.gov.in/PressReleasePage.aspx?PRID=2067940.
R Umesh & Y Nagaraju, Direct Benefit Transfer in India: Progress, Challenges, and the Path Forward [(2025) 7(1)] International Journal for Multidisciplinary Research 1, available at https://www.ijfmr.com/papers/2025/1/34574.pdf.
Rashid Alhajeri, Abdulrahman Alhashem, "Using Artificial Intelligence to Combat Money Laundering," Intelligent Information Management, Vol. 15, No. 4, July 2023, Case Western Reserve University, Cleveland, USA; Naif Arab University for Security Sciences, Riyadh, Saudi Arabia, DOI: 10.4236/iim.2023.154014.
H. Yu, W. Ding, X. Cheng, et al., "A hybrid ensemble learning approach for imbalanced data classification with applications in credit risk assessment," 138 Expert Systems with Applications 110019 (2020), available at https://www.sciencedirect.com/science/article/pii/S0957417421017164 (last visited on Mar. 25, 2025).
Shetty, P., Fraud Detection: A Comprehensive Guide for Lenders (Arya.ai, 2025), Available at: https://arya.ai/blog/fraud-detection-guide-for-lenders (Last Visited March 25, 2025).
Economic Laws Practice, Balancing Regulation and Accessibility: Addressing Unregulated Lending in India with a Comprehensive Approach (Economic Laws Practice, January 2025)
Sinha, Rohan and Tripathy, Anirudh, ‘India’s Advance on AI Regulation’ (Carnegie Endowment for International Peace, 26 November 2024) <https://carnegieendowment.org/research/2024/11/indias-advance-on-ai regulation? center=india&lang=en> accessed 26 March 2025
Olubusola Odeyemi et al., Integrating AI with Blockchain for Enhanced Financial Services Security, 6 Finance & Accounting Research Journal 271 (2024).
Austin, Regina. “Of Predatory Lending and the Democratization of Credit: Preserving the Social Safety Net of Informality in Small-Loan Transactions.” American University Law Review, vol. 53, no. 5, 2004, pp. 1217–57.
International Financial Consumer Protection Organisation, FinCoNet Report on Responsible Lending: Review of Supervisory Tools for Suitable Consumer Lending Practices (July 2014).
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Madhav Ganesh, Dr K Jameela
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
