In a move to protect economically vulnerable groups, the Karnataka government has proposed the Karnataka Micro Finance (Prevention of Coercive Actions) Ordinance, 2025. The ordinance, sent to Governor Thawar Chand Gehlot for approval, aims to bring microfinance institutions (MFIs) and money-lending agencies under stricter regulatory oversight.
The decision follows public outrage over exploitative practices by unregistered MFIs, including high interest rates and coercive loan recovery tactics that have led to financial distress and even suicides among borrowers. The push for stricter regulation follows a series of tragic incidents, including the death of Sharanabasava, a borrower from Raichur district, who died by suicide after being harassed by an unregistered MFI over loan repayment. His widow, Parvati, sent her mangalsutra (sacred thread worn by married women) to Home Minister G Parameshwara in January 2025, along with a petition seeking action against the MFI staff. The incident sparked widespread outrage, prompting Chief Minister Siddaramaiah to chair a high-level meeting to address the issue.
What are microfinance institutions?
Microfinance institutions (MFIs) are registered and unregistered entities that provide loans to individuals and groups, primarily in rural areas. While some operate within the regulatory framework, many unregistered MFIs have been accused of predatory lending, charging usurious interest rates, and employing coercive methods for loan recovery.
Chief Minister Siddaramaiah highlighted the unethical practices of some MFIs, noting that unregistered entities often charge exorbitant interest rates far exceeding the RBI's cap of 17.07%. Reports indicate some MFIs charge between 21-29%, aggravating financial woes for borrowers. “Goondas and rowdies are being used to recover loans,” he said, stressing the need for regulation.
Revenue Minister Krishna Byre Gowda noted that MFIs in Karnataka have disbursed loans totalling Rs 59,000 crore, with several violating RBI norms. Gowda warned against loan amounts exceeding RBI’s Rs 2 lakh cap, stating that loans as high as Rs 5-6 lakh have been granted without assessing borrowers’ repayment capacities.
Key provisions of the ordinance
The ordinance, which is set to come into force upon approval, introduces a comprehensive framework to regulate microfinance institutions and money-lending agencies operating in Karnataka. The draft ordinance states, “Every loan advanced before the commencement of the ordinance, including the amount of interest, if any, payable by the borrower to the micro finance institutions which are unlicensed and unregistered, shall be deemed to be wholly discharged.”
The proposed ordinance said that “no civil court shall entertain any suit or proceeding against the borrower for the recovery of any amount of loan including interest.” It said all suits and proceedings pending against borrowers for the recovery of loans would be closed.
Here are the key highlights:
1. Registration of microfinance institutions
All MFIs operating in Karnataka must register with the district’s Registering Authority (typically the Deputy Commissioner) within 30 days of the ordinance’s commencement.
The registration process requires MFIs to disclose critical details, including the areas of operation, interest rates charged, recovery practices, and a list of authorised personnel involved in lending and recovery activities.
Registration is valid for one year and can be renewed upon application, subject to performance reviews and public feedback.
2. Prohibition of coercive recovery practices
The ordinance explicitly bans coercive actions by MFIs or their agents for loan recovery. Coercive actions include intimidation, violence, harassment, or any form of undue pressure on borrowers or their families.
Violations of this provision can lead to the suspension or cancellation of the MFI’s registration and may attract criminal penalties, including imprisonment and fines.
3. Transparency in lending practices
MFIs are required to maintain complete transparency in their lending practices. This includes providing borrowers with a loan card detailing the effective interest rate, terms and conditions, and repayment acknowledgements.
All loan agreements must be in the regional language (Kannada) or a language understood by the borrower.
MFIs must prominently display interest rates in their offices, literature, and websites.
4. Protection for vulnerable borrowers
The ordinance defines "vulnerable sections of society" to include farmers, women, agricultural labourers, migrant workers, and economically backward individuals. These groups are given special protection under the law.
MFIs are prohibited from seeking security (such as pawn or pledge) from borrowers for loans. Any security taken before the ordinance’s commencement must be released immediately.
5. Penalties for non-compliance
MFIs that fail to comply with the ordinance’s provisions, including submitting quarterly and annual statements, can face imprisonment for up to six months or fines up to Rs 10,000, or both.
Coercive actions by MFIs can lead to imprisonment ranging from six months to three years and fines up to Rs 5 lakh. Offences under the ordinance are cognisable and non-bailable.
6. Appointment of an ombudsperson
The government may appoint an ombudsperson to mediate disputes between borrowers and lenders, ensuring a fair and impartial resolution process.
7. Relief for borrowers from unregistered MFIs
Loans advanced by unlicensed or unregistered MFIs before the ordinance’s commencement are deemed fully paid, providing significant relief to borrowers.
Civil courts are barred from entertaining suits or proceedings for the recovery of such loans.
The state's microfinance sector has seen rapid growth, with the gross loan portfolio rising from Rs 16,946 crore in March 2019 to Rs 42,265 crore in March 2024, according to the Microfinance Industry Network (MFIN). Karnataka accounts for 11% of the country’s microfinance loans, serving over 63 lakh borrowers. The state ranks among the top five in outstanding microfinance loans, alongside Bihar, Tamil Nadu, Uttar Pradesh, and Madhya Pradesh. The number of microfinance clients in Karnataka has nearly doubled over the past decade, rising from 4.2 million in 2013 to 9.9 million in 2022. The total loan outlay by microfinance institutions (MFIs) in the state is estimated to be around Rs 42,000 crore.