Note on Charitable trust’s loan giving powers.

Issue at hand
1. Can charitable trusts in india give out interest free loans, if so can they be binding
by RBI guidelines.

Laws to be noted
1. RBI act
● Section 45I of the RBI act, under ‘provisions relating to non-banking institutions
receiving deposits and financial institutions’ the definition for the term ‘financial
institutions’ is as follows,
● 45I. Definitions.
In this Chapter, unless the context otherwise requires,–
[(a) ‘‘business of a non-banking financial institution’’ means carrying on of the
business of a financial institution referred to in clause (c) and includes business of
a non-banking financial company referred to in clause (f);],,,,
(c) ‘‘financial institution’’ means any non-banking institution which carries on as
its business or part of its business any of the following activities, namely:–
(i) the financing, whether by way of making loans or advances or
otherwise, of any activity other than its own:
(ii) the acquisition of shares, stock, bonds, debentures or securities issued
by a Government or local authority or other marketable securities of a like nature:
(iii) letting or delivering of any goods to a hirer under a hire-purchase
agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972:
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other
capacity, of chits or kuries as defined in any law which is for the time being in
force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by
whatever name called, monies in lumpsum or otherwise, by way of subscriptions
or by sale of units, or other instruments or in any other manner and awarding
prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to
persons from whom monies are collected or to any other person, 2 [but does not
include any institution, which carries on as its principal business,–
(a) agricultural operations; or (aa) industrial activity; or]
 (b) the purchase or sale of any goods (other than securities) or the providing
of any services; or
(c) the purchase, construction or sale of immovable property, so however,
that no portion of the income of the institution is derived from the financing of
purchases, constructions or sales of immovable property by other persons;]
(f) ‘‘non-banking financial company’’ means–
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in any other
manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the Bank
may, with the previous approval of the Central Government and by notification in the
Official Gazette, specify;]

Furthermore, definition of a non banking financial institutions have been given by the
RBI circular to Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998, it also defines financial institutions.

(viii) “lending public financial institution” means –

a. a public financial institution specified in or under section 4A of the Companies
Act, 1956 (Act 1 of 1956);
b. a State Financial, Industrial or Investment Corporation; or
c. a scheduled commercial bank; or
d. the General Insurance Corporation of India established in pursuance of the
provisions of section 9 of the General Insurance Business (Nationalisation) Act,
1972 (Act 57 of 1972); or e. any other Institution which the Bank may, by
notification, specify in this behalf.

Note,
1. As seen above, the definitions of ‘financial institutions’ or ‘non banking financial
companies’ have no definitions made out to define a charitable trust.
2. Also to note that the parameters laid down by RBI to define a financial institutions
does not fit with the functions of a charitable trust, and thus cannot be treated as
such
3. Further to note, a non banking financial institution according to the RBI website
mentions the need for such institutions to be registered under the companies act,
 but since charitable trusts come under the ‘trusts act’, it cannot be treated as such
too.
4. Owing to all the above mentioned factors we can come to the understanding that
since a charitable trust has no definition under rbi, it does not have to abide by any
regulations made by them, hence they can give out interest free loans