Many small restaurateurs at mercy of informal lenders

The maximum interest licensed financiers can charge is 16% per annum but informal lenders in Bengaluru routinely flout the law

Informal lenders are pushing many small businesses to distress by charging more than double the rate of interest allowed legally.

Last week, Dayananda, owner of an eatery in Dobbespet in Tumkur Road, allegedly died by suicide as he was being harassed by a financier to repay a loan of Rs 1 lakh.

Similar incidents are being reported from other parts of Karnataka. Borrowing went up significantly following loss of business during the lockdowns, many in the restaurant business say.

Under the Karnataka Money Lenders and Pawn Brokers Act, 1961, and Karnataka Money Lenders Rules, 1965, licensed financiers can charge a maximum annual interest of 14% for secured loans and 16% for unsecured loans.

However, most informal lenders charge around 24% to 36% a year. Some charge even higher, with a daily computation of interest.

In Bengaluru, high rates of interest are referred to as ‘meter baddi’ to suggest that they keep ticking away like a meter.

Little awareness

Many who are new to the hoteliering industry fall into the trap of informal lenders, says P C Rao, president of Bruhat Bangalore Hotels Association.

“They don’t know what equipment to buy, where to buy what, and what rent is viable. They either quit an IT job or take voluntary retirement, and jump into the field with whatever money they have,” he says. Such entrepreneurs end up having to borrow money on the side. “To continue their business or expand, they borrow from informal lenders at exorbitant interest rates,” Rao adds.

At meetings conducted by the Association, bank loan options are discussed. “Nationalised bank representatives and private bank managers also take part in our sessions,” he explains.

Restaurateurs have access to loans from The Hotel Industrialists Cooperative Bank. Owner of Vidyarthi Bhavan Arun Adiga, and a director of the bank, says, “We have around 14,000 members to whom we give loans against collaterals.” He says the process is easier than at the nationalised banks.

Cooperative banks charge about 1% more interest than nationalised banks, but they are still way cheaper than informal lenders, he observes.

Adiga notes that businesses that started after 2017 will take time to break even, especially due to the pandemic situation that followed.

“Every business takes three to four years to recover capital invested in it. Also for businesses located around IT parks, generating revenue will take time due to the continuing work-from-home option,” he says.

Informal lenders provide loans without collaterals, which is what makes them attractive, but they also use strong-arm methods and often send hooligans to recover their money.

Karunakar Hegde, vice president of the Federation of Wine Merchants’ Association, Karnataka, says banks weren’t financing liquor businesses earlier, “which made everyone turn to informal lenders”. Things have changed significantly now, he says.

Why go to them?

Mukesh Tolani, head of the Bengaluru chapter of the National Restaurant Association (NRA), says many businesses, like his microbrewery, were refused loans by banks, despite a good balance sheet, healthy turnover, and a clean record, during the pandemic.

However, now, even though banks are ready to lend to businesses, cash transactions and poor accounting habits create hurdles. “If businesses don’t have proper records of GST paid and other documents, the bank won’t lend to them,” he says.

Legal side

What laws can such financiers be booked under? Criminal advocate Indra Dhanush says, “In case of a grievous incident like Dayananda’s death, the financiers and their allies can be booked under Section 306 of IPC (abetment of suicide), Section 34 IPC (acts done by varied persons with a common intention), and Section 384 (punishment for extortion).”

Private financiers who charge
exorbitant interest can be booked under the Karnataka Lenders Act 1961 and the Karnataka Prohibition of Charging Exorbitant Interest Act 2004 and other IPC provisions. They can be penalised and jailed for up to 3 years or more.

Police: Tell us about such lenders

In 2021, police booked 14 cases against such financiers. The number this year is 16, says Sandeep Patil, additional commissioner of police (West), Bengaluru City Police. He says the police have been requesting people to share information about money lenders charging illegal rates of interest.

Illegal money lending apps are also ripping off borrowers. “They provide small amounts and collect access to mobile phone contacts, which further leads to harassment on defaulted payments,” he told Metrolife.