Karnataka: Governor returns ordinance that seeks to curb menace of microfinance

Karnataka Governor Thawar Chand Gehlot, on Friday, returned the ordinance meant to curb harassment of borrowers by unruly microfinance companies, sent for approval by the Siddaramaiah government.

The ordinance was promulgated by the state government following complaints of coercive action by loan recovery agents and money lenders leading to incidents of suicides and forced migration of people across rural Karnataka.

The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance 2025 was returned by Gehlot citing the terms of punishment – 10 years’ imprisonment and a fine of Rs five lakh— were “disproportionate” to the offence committed and also went against the “principle of natural justice”.

The governor, while returning the ordinance seeking clarifications, also advised the government to deliberate on the issue in the upcoming budget session and bring an effective enactment that would protect the interest of the aggrieved.

The governor made four important observations in the proposed ordinance with respect to the whole discharge of every loan advance and interest as on date of ordinance, the penalty clause, securities, and the limited scope of the ordinance.

Section 14 of the ordinance gives whole discharge from every loan advancement and interest as on date of the ordinance and bars any civil court from entertaining proceedings against the borrowers for loan recovery. But this would land lawful and genuine lenders in trouble. As a set principle of natural justice every person has the right to legal remedy and preventing any person from seeking this is a violation of Article 19 and 32 of the Constitution, said the governor.

When the maximum loan amount permissible is Rs three lakh, the proposed fine of Rs five lakh is against natural justice. The 10-year jail term is disproportionate compared to the provisions already available in other laws for similar offences, noted the governor.

The ordinance proposes the lending agencies not to seek any security from the borrower and also the release of all securities deposited till date. And this goes against the principles of lending which is also followed by the government banks. Such a clause would affect the business in the long run and also impact small borrowers from remote, non-banking areas. It would also affect the self-help groups which play a vital role in uplifting the lower strata of the society, asserted the governor.

The ordinance would not apply to any banking or non-banking finance companies registered with the Reserve Bank of India (RBI), but only to unregistered and unlicensed lending agencies. These unregistered agencies give credit access to the poor who are neglected by the traditional credit system, stated the governor adding that any type of harassment during loan recovery could be addressed under the existing provisions like the Karnataka Money Lenders Act 1961, Negotiable Instruments Act 1881, Karnataka Debt Relief Act 1976, and the Indian Penal Code (BNS).

“Lack of effective implementation of the existing laws and vacuum in policing are responsible for the incidents of harassment being reported. It is better to enforce the existing laws to protect the borrowers from harassment by lending agencies violating the RBI guidelines. Moreover, this ordinance will benefit borrowers, but affects the lenders who are also part of the same society,” observed the Governor, adding that he had found no proper advice or statistics as to how the ordinance would help curb incidents of harassment.