In a move to provide relief to the economically vulnerable groups, individuals/SHGs and small and marginal farmers, the State government has proposed to promulgate an Ordinance in a couple of days asking them not to repay the loans they borrowed from unlicensed and unregistered microfinance institutions (MFIs)
A draft copy of the Karnataka Microfinance (Prevention of Coercive Actions) Ordinance, 2025, which was almost finalised after several rounds of meetings by the government, has proposed to provide relief to borrowers from coercive action by unlicensed and unregistered MFIs or money lending agencies/organisations.
Following a spate of suicides by borrowers of loans from largely unregistered MFIs, the Siddaramaiah government was under public pressure to enforce the new law to check undue hardship of usurious interest rates and coercive means of recovery by MFIs operating in the State.
The draft Ordinance has clearly stated that “every loan, including the amount of interest, if any, payable by the borrower to MFIs 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.
The proposed Ordinance was drafted under the leadership of Law and Parliamentary Affairs Minister H.K. Patil to be vetted by Chief Minister Siddaramaiah before sending it to Governor Thaawarchand Gehlot for his assent.
The total gross loan portfolio of the MFIs in the State was ₹42,265 crore in 2023-24, as per the data given by MFIs. The average loan per client in Karnataka is ₹44,036.
Impact recovery
Experts in the MFIs say that the proposed Ordinance would adversely impact the recovery of loans both by registered, and unlicensed and unregistered MFIs. It will certainly be challenged in court. Moreover, all SGHs are unregistered entities and the proposed Ordinance would be against the SHG movement, according to experts.
Mandatory registration
As per the draft, all MFIs are required to register with the registering authority (deputy commissioners) within 30 days from the enactment of the law by specifying details about their operations, rate of interest being charged, and system of loan recovery.
The registering authority should verify the details furnished by the MFIs and accord registration for operation of MFIs for a period of one year. The MFIs should apply for renewal of registration, within 60 days before the expiry of the period of one year.
The authority, either suo motu or upon receipt of complaint by a borrower, would be empowered to cancel the registration of an MFI. No MFI should seek any security from a borrower by way of pawn, pledge or other security for the loan, the draft said.
Loan cards
MFIs should issue loan cards to borrowers having all details in the vernacular language understood by the borrower.
The effective rate of interest charged by MFI should be displayed in all its offices. All communications to the borrower should be in Kannada. Every MFI should have a registered office in the local area, the proposed Ordinance says.
Registration of complaints
A complaint can be filed regarding violation of the provision of the proposed Ordinance at the police station. No police officer should refuse to register a case. A police officer not below the rank of Dy.SP should be empowered to file a suo moto case, according to the proposed Ordinance.
It also enabled the government to appoint an ombudsperson for settling disputes between the borrower and the lender. It has proposed a three-year imprisonment and fine of ₹5 lakh for the offences committed under the law.
