Karnataka enacts ordinance to curb harassment by microfinance companies

The Karnataka government has notified the ordinance to curb harassment of borrowers from microfinance companies following the governor’s approval. 

The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance 2025, which comes into effect immediately, has stringent provisions including imprisonment of upto 10 years and a fine of Rs 5 lakh for violation of the law. 

Governor Thawarchand Gehlot had previously returned the ordinance seeking clarification on certain clauses which he perceived as “unjust” to the genuine lenders and a violation of principles of lending and also natural justice. He also advised the government to deliberate on it in the upcoming budget session of the state assembly before enacting a law. However, the government sought approval of the governor stating that the government was reining in unregistered and unlicensed companies that were flouting the Reserve Bank of India’s norms as well as resorting to unlawful means to recover the loans. 

Even as rural Karnataka reported a spate of suicides and forced migration due to harassment by recovery agents hired by microfinance institutions and private money lenders, the government hopes to provide immediate respite to the aggrieved with the new law that comes into force immediately. The government also plans to introduce a bill in the state legislature next month. 

The ordinance meant to “protect” and “relieve” the economically vulnerable groups and individuals, especially farmers, women and women self-help groups from undue hardship due to exorbitant interest rates on loans and coercive means of recovery by microfinance institutions and money lending agencies, mandates registration of all MFIs within the next 30 days, with details of their area (town) of operation, rate of interest being charged, system of conducting due diligence and effective recovery, and the list of persons authorised to carry out these functions. 

The agency should keep records of the name and address of the borrower, the total principal amount lent, the amount already recovered from the borrower, the balance amount to be recovered, and a written undertaking that it shall always act in conformity with the provisions of this ordinance. 

No lender can seek any security from a borrower by way of pawn, pledge or other security for the loan and any such security obtained earlier should be released to the borrower. A loan card is to be issued in Kannada to the borrower which carries details of the effective rate of interest charged, terms and conditions attached to the loan, borrowers’ identity, acknowledgements for all repayments including instalments received and the final discharge. The effective rate of interest charged by the company should be prominently displayed in all its offices and websites. 

The lender needs to submit a quarterly statement and annual statement to the registering authority before the tenth day of ensuing quarter and financial year, and those who fail to do so will be liable for punishment with imprisonment for a period of six months or with a fine upto Rs 10,000. 

Lender is barred from using any coercive action either by itself or by its agents for recovery of money from the borrower and any form of coercive recovery shall be liable for punishment – a prison term of upto 10 years and a fine of Rs 5 lakh,  besides suspension or cancellation of registration. The offences under this ordinance are cognizable and non-bailable.