Karnataka Governor Thawar Chand Gehlot on Wednesday, February 12, approved the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, after accepting clarifications from the state government.
The Governor had initially returned the proposed ordinance on February 7, directing the government to reconsider aspects of the law. He pointed out that while the ordinance seeks to absolve outstanding loans and interest given by unlicensed and unregistered microfinance institutions, it could also undermine the rights of legitimate lenders to recover dues through legal means.
He also stressed every individual's right to pursue legal remedies, citing potential violations of fundamental rights under Articles 19 and 32 of the Constitution of India.
In response to this, the government said that unlicensed and unregistered lenders charging excessive or penalty interest are acting unlawfully and such loan practices are illegal. The government and courts do not entertain such loan recovery practices. According to the ordinance, using illegal methods for loan recovery, resorting to violence, applying pressure tactics, or causing harassment is prohibited. The ordinance does not prohibit the recovery of loans provided by registered institutions.
The Governor also expressed apprehensions on the adverse impact on governmental banking practices and the state's economic climate. He criticised the severity of penalties outlined in the ordinance—up to 10 years of imprisonment and a Rs 5 lakh fine—as disproportionate compared to existing laws for similar offences.
He noted that, given that the maximum loan amount that can be sanctioned is Rs 3 lakh, imposing a Rs 5 lakh fine goes against natural justice.
The state government, in its response, said that no penalty or punishment has been imposed considering the loan amount. Instead, the ordinance proposes penalties and punishment for recovery practices involving harassment, pressure tactics, violence, or intimidation during the loan recovery process. “Therefore the government has not proposed any measures that go against natural justice,” the government said.
The Karnataka government had introduced the ordinance to tighten regulatory oversight over microfinance institutions (MFIs) and money-lending agencies following several tragic incidents, including the reported suicide of Sharanabasava, a borrower from Raichur district. His death allegedly followed harassment by an unregistered MFI for loan repayment, prompting a public outcry. Recently, his widow, Parvati, protested by sending her mangalsutra (a sacred thread worn by married women) to Home Minister G Parameshwara along with a plea for justice.
Read here to know what the draft ordinance says.