Microfinance Crackdown: Key Features of Karnataka’s New Ordinance

The Governor of Karnataka has promulgated an Ordinance to protect borrowers from the excessive interest rates and harsh recovery practices employed by microfinance institutions, money lending agencies, and organisations operating in the state.

This move follows a series of suicides attributed to exploitative lending and aggressive loan recovery tactics, sparking public outrage. Last week, the Governor rejected the proposed Ordinance, seeking further clarifications. After receiving the necessary clarifications from the government, the Governor has now approved the Ordinance, emphasising the need to prevent any misuse or misinterpretation of the law that could lead to harassment of legal, registered, and regulated banks.

The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, notified on February 12, 2025, has come into force with immediate effect. This Ordinance does not apply to banking or Non-Banking Finance Companies (NBFCs) registered with the Reserve Bank of India (RBI).

Key features of the Ordinance are as follows:

• Obligation to obtain registration – The Ordinance mandates microfinance institutions, money lending agencies, organisations, and lenders to apply for registration before the Registering Authority of the district within 30 days from the date of commencement of the Ordinance, i.e., by March 14, 2025. Details to be specified include the names of the villages or towns in which they operate or propose to operate, the rate of interest being charged, the system of effecting recovery, etc. Advancing or recovery of loans cannot be carried out without securing registration under the Ordinance.

The registration granted would be valid for a period of one year, and the renewal application must be filed within 60 days before the expiry of the said period.

• Collateral cannot be obtained – Microfinance institutions, money lending agencies, organisations and lenders have been barred from seeking any form of collateral for the loan from borrowers.

• Registered office in local area – As per the Ordinance, every microfinance institution, money lending agency, organisation, or lender should have a registered office in the local area.

• Submission of quarterly and annual statements – The Ordinance envisages submission of quarterly and annual statements to the Registering Authority before the tenth day of the ensuing quarter and financial year, as the case may be. The same should contain the list of borrowers, the loan extended to the borrowers and the interest rate charged on the repayment made. Failure to comply with this requirement will result in punishment in the form of a 6-month imprisonment, or INR 10,000 fine, or both.

• Complaint may be filed for violation of provisions by lenders – In case of violation of the provisions of the Ordinance by a microfinance institution, money lending agency, organisation or lender, a complaint may be filed before the jurisdictional police station and the concerned police officer. Further, a police officer not below the rank of Deputy Superintendent of Police will be empowered to file a suo moto case.

• Lenders taking coercive actions to face penalties – The Ordinance prohibits the use of coercive action to recover money from borrowers. Any form of coercive recovery will lead to the imposition of punishment and suspension/cancellation under the provisions of the Ordinance. Contraventions will result in imprisonment for a term which may extend to 10 years and with a fine of up to INR 5 lakh.

• Govt will notify lending norms – The lending norms, collection and recovery practices may be prescribed through government notification.

• Discharge of loans already advanced by unregistered microfinance institutions – Loans advanced before the commencement of the Ordinance payable to unregistered and unlicensed microfinance institutions, money lending agencies, organisations, or lenders, will be deemed to be wholly discharged for the vulnerable section of the society. Here, a vulnerable section of the society includes farmers, women, self-help groups of women, and such other groups as specified in Section 2(1)(g) of the Ordinance.

Additionally, civil courts cannot hear any suit or proceeding against the borrower for the recovery of such a loan. All suits and proceedings pending against the borrower for the recovery of such loan will also abate.

The other provisions of the new Ordinance pertain to the powers of the Registering Authority, the appointment of an Ombudsperson to act as a mediator to settle disputes, etc.