February 28, 2019

New Deposit Regulations in India Could Raise Risks for Many

What doesn’t come under the Ordinance?

Lately, on 21 Feb 2019, an ordinance has been passed by the government of India. This ordinance has been termed as “The Banning of Unregulated Deposit Schemes Ordinance, 2019’. This has been primarily intended to protect susceptible investors from dubious outfits selling ponzi and pyramid schemes, but the timing of its passing and likely ramifications have stunned experts. Some have compared it with demonetisation, which was aimed at restriction of black money and announced less than three months before the 2017 Uttar Pradesh elections.

As reported, the banning is well-intentioned and is predestined to prohibit acceptance of deposits by unscrupulous persons, causing loss of savings of common people. Since the ordinance has been coming out everyone has started talking that new deposit regulations in India could raise risks for many. Several concerns have been expressed that the law is extremely harsh and will lead to hardship for many individuals, small businesses, etc.

Let us understand the major impact of this ordinance in respect of individuals and small borrowers-

With the new ordinance, the government has banned taking up all sorts of loans or advances which have not been taken from banks, financial Institutions or relatives of an individual or entity. if you did take deposits from personal relation, there are a host of claws you must follow, and if hampered the rules an investigation will be set up against you.

Generally, when an individual is not able to bear the burden of taking a loan from banks due to its interest rates, conveyance charges, tenure and EMI, they eventually look up to personal borrowings. In taking loan from an internal source, helps to eliminate the need for a bank’s procedures. This now will not be possible, as they have now become an illegal practice.

Moreover, doubts have been uttered as to whether personal loans are covered by the ban under the Ordinance. In such case, a student will not be able to accept loan scholarship from a charitable trust, or a household help will not be able to take advance from the employer.

As mentioned earlier, this ordinance will also create roadblocks for regular business transactions and will chock acceptable funding routes like demonatisation. For instance, a limited liability partnership can accept deposits from partners as ‘partner’s capital input’ but not as ‘loan’. On the other hand, a partnership can benefit of loans from his/her relatives but not from partners.

Worst hit from this ordinance will be multi-state cooperative societies and chit funds, which raise funds for lending to companies and entities serving as fronts for political funding. Even the real estate sector will also be the biggest strike, say experts.

What doesn’t come under the Ordinance?

For the ban to apply, the receiving of deposit must fall within the category of UDS. If the acceptance of loan or deposit is not in the course of business, it is fully out of the purview of section 3 of the Ordinance.