Money lending and mediation: Why reforms are needed

A judge recording statement in a money lending case does not inquire about the source of income of the loan provider. In loan cases, the source of income remains outside the purview of judicial determination.

Jivesh Jha

  • Read Time 5 min.

In order to overcome the problems introduced by the litigation process and to speed up the entire adjudication process by reducing the cost, the governments round the globe have recognized arbitration, mediation and conciliation as a mechanism of Alternative Dispute Resolution (ADR). ADR is the mechanism of resolving disputes by way of arbitration, mediation, conciliation or neutral evaluation as per the prevailing laws of the land.

In Madhesh, if there is something which is profitable it’s none other than the money lending business. It’s a general practice of lending money to the needy people and asking the loan debtor to agree on the loan deed of three times higher the amount actually taken from the creditor. As the deed, which is duly signed, has an evidentiary value, the creditors knock the door of the court at the instance of non-realization of the loan amount within a stipulated time frame set under the deed.

Mediation in Nepal

The Mediation Act (2011) and its Rules framed in 2013 provide for the procedure of mediation to settle a dispute in a speedy and simple manner. Section 3 of this Act provisions that, in case, parties intend to settle a case which is pending before the court through mediation and such dispute may be settled through compromise, the adjudicating authority may pass an order to refer the case into mediation center for reaching into a compromise. In Nepal, it’s a general trend of the courts to refer the civil cases, including that of matrimonial disputes and land encroachment issues, into mediation.

The National Civil Code (2017), which is a general substantive law in Nepal, contains provisions for mediation in civil matters. Take an example of divorce. Section 97 of the Code provides that if a petition has been filed in district court for divorce by husband or wife, the court would have to compulsorily pass an order, directing the parties to sit for the mediation.

As law recognizes documents the courts pass judgments in favor of money lenders who have produced the original copy of the loan deed. Thus money lending business has become an easy means of earning out of proportion.

The Civil Procedure Code (2017), which is a civil procedural law, under Section 193 provides that if a case is sub judice and the parties wish to enter into a compromise at any stage, they may make a joint petition, stating that the matter has to be resolved on certain grounds. If, in reading out the contents of the deed of compromise, the parties agree to enter into a compromise, the judge shall cause both parties to affix their respective signature and thumb impression on such a deed of compromise and authenticate that the deed of the compromise has been executed in his or her presence, attach one copy with the concerned case file and give one copy each to the plaintiff and defendant.  Section 194 further clarifies that disputes may be settled through mediation. However, there are some cases which cannot be mediated. Section 195 envisages that a case instituted where the government of Nepal is a plaintiff and a case related to public, government or community property shall not be settled by a compromise or mediation. However, for maintaining the property of the government, mediation could be undertaken.

The cases such as dishonor of cheque, forgery, criminal trespass and looting mentioned under Schedule 4 of National Criminal Procedure Code (2017) could be mediated. In addition to this, cheating cases (which is a matter of Schedule-1 of the National Criminal Procedure Code) instituted by an individual can be mediated but if the matter relates to the looting or misappropriation of government property, then it cannot be mediated. Similarly, cases of contempt of court and Public Interest Litigations cannot be resolved through mediation. 

Most importantly, the laws in Nepal provide economic benefits to the litigants if they resolve their issues by way of amicable settlement. If the parties reach a compromise before the court passes the orders for evidence collection, the party would have to bear only 25 percent of the court fee. But, if the compromise is reached after the collection of evidence, the party would have to bear 50 percent of the court fee. This shows that the dispute settlement by way of compromise is better from a financial perspective as well. 

Money lending in Madhesh

Money lending has become an evil culture in Madhesh where it’s a popular practice of taking loan from the money lenders at the time of need. In fact, borrowing and lending is not an illegal tender but truth and fairness ought to be the two attributes that need to be upheld in the entire money-lending business.

 In Tarai, there is a practice of making loan deeds of much higher principal amount than the real transaction undertaken between the parties. If a loan debtor pays the amount to the creditor on time, then in such a case, he would have to bear the actual principal amount along with its interest. But, if he fails to reimburse the loan amount on time, the creditor would invoke the jurisdiction of the court by producing the loan deed, which generally sees an agreement between the debtor and creditor where the debtor has agreed to pay the amount within a stipulated time frame and in case of otherwise, the creditor would have all rights to realize the money by all legal means.

Generally, if the debtor pays the loan on time, then he would have to pay the actual principal amount, which is much lesser than the amount appearing on the deed, and its interest. But at the occasion of his failure to pay the loan, then he has to bear the principal amount plus interest which is, generally, much higher than the actual amount he has taken from the creditor. In fact, the actual transaction does not appear on paper. Rather, it’s a subject of mutual understanding. The creditors often maintain a personal diary where they maintain an unofficial record of actual transactions.

Let me explain this situation with an example.

If Mr A, who is a money lender, provides loan to Mr B with a sum of NPR 500,000, then Mr A will prepare a loan deed of NPR 1500,000 in which Mr B will agree, on record, to pay 1500,000 with interest at the rate of 10 percent annually within a stipulated period which is prescribed in the deed. This has become a reality in Tarai. 

The high voltage drama starts in case of any default or breach of agreement, or say, in case of non-payment of loan on time. The money lenders find the Benches of courts as perfect forums for realizing their claims. As law recognizes documents, which have evidentiary value, the courts pass judgments in favor of money lenders who have produced the original copy of the loan deed. So, the money lending business has become an easy means of earning out of proportion.

A judge recording statements in a money lending case (or cases relating to loan deeds) does not inquire about the source of income of the loan provider. In courts, there is an established practice of not asking a money provider to prove if there was any banking transaction done by him on the date on which he has provided the sum to the borrower. So, in loan cases, the source of income remains outside the purview of judicial determination.

Generally, the deed is made in backdate–before Bhadra 1, 2075 (17 August 2018), the date of implementation of National Civil Procedure Code (2018). After all, the 2018 Code requires the loan deeds of 50,000 and more to be registered at local bodies. Tamasuk (loan deed) stands valid for ten years from the date of its making.

Need for reformsGiven the misuse of law and lenders’ attitude of earning out of proportion through Tamasuk, the government could adopt a law seeking the source of income of loan providers. Along with this, there could be a legal arrangement demanding proof of banking transactions done between loan debtor and creditor on the day of making of Tamasuk. Like in India, money lending should not be done without a license. In case of Tarai-Madhesh, courts could adopt a practice of mandatorily referring the loan cases, where both parties are present before the court, into mediation for amicable settlement. It’s high time the money lending business is reformed. Above all this, government and private banks should introduce easy schemes of providing loans to the needy ones at the time of their need.