The story so far
On February 12, 2025, after days of deliberations, the State government promulgated the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, which aims to crack down on unregistered and unlicensed microfinance institutions (MFI) and moneylending agencies or organisations that employ forceful means to recover loans given to poor people.
The new legislation seeks to regulate the actions of such illegal MFIs, thereby protecting economically vulnerable groups and individual defaulters from the undue hardship of usurious interest rates and coercive means of recovery.
What were the allegations against MFIs?
Over the last few months, incidents have been reported from across the State of large-scale harassment of those who had availed loans from microfinance institutions.
MFIs were accused of overlending without assessing borrowers’ repaying capacity, thus trapping them in an endless debt cycle, of levying exorbitant interest rates ranging between 21% and 29%, and outsourcing loan recovery to rowdies and agents.
While over a dozen people ended their lives, many have had to leave their villages with their families due to harassment from recovery agents.
Following public uproar, the Siddaramaiah-led Congress government decided to take the Ordinance route to protect the interests of small borrowers, such as farmers, women and women’s self-help groups, vendors, migrant workers, and other disadvantaged groups. It exempts banks and NBFCs registered with the RBI from its ambit.
However, Governor Thaawarchand Gehlot returned the draft Ordinance on February 7, seeking six clarifications. This included reservations over the Ordinance benefiting only borrowers with no provision to protect lenders, the “excessive” penal provisions of ₹5 lakh fine and 10-year imprisonment, among others.
The government resent the Ordinance to the Governor without any changes on February 10 but provided a detailed explanation to the issues flagged by Mr. Gehlot.
Chief Minister Siddaramaiah, Deputy Chief Minister D.K. Shivakumar, Minister of Revenue Krishna Byre Gowda and officials having a meeting on Micro Finance in Bengaluru.
| Photo Credit:
HANDOUT E MAIL
What is the procedure for registration/renewal of MFIs?
The legislation mandates all existing and new MFIs, money lending agencies, organisations and lenders to register with the Registering Authority – who are Deputy Commissioners of the district – within 30 days from the date of commencement of the Ordinance.
Lenders should specify the villages or towns in which they have been operating or propose to operate, the rate of interest being charged, system of conducting due diligence and recovery, list of persons authorised to lend or recover money, details of the borrower and the loan.
Upon verification, the Registering Authority can accord registration of operation to the lenders for a period of one year. Lenders seeking renewal of registration must file an application 60 days before the expiry of the one-year period. The RA holds the power to approve or refuse renewal after verification of the lender’s performance and hearing objections, if any, from the general public.
The authority, either suo motu or upon receipt of complaint by a borrower, is also empowered to cancel the registration of an MFI.
What are the guidelines for lending/borrowing?
To ensure transparency in rates of interest charged by MFIs, the Ordinance lays down only four components in loan pricing – the interest charge, the processing charge, the insurance premium and delayed penal payment. A standard loan agreement should be drawn and the lenders must provide a loan card in Kannada with complete details of the borrower, the loan and rate of interest, terms and conditions, acknowledgements of all repayments as well as final discharge.
The rate of interest charged by MFIs must be prominently displayed in all its offices and on the website. All communications to the borrower should be in Kannada. Loan application forms must include all necessary information to enable comparison of terms and conditions offered by different MFIs and must indicate the documents required to be submitted.
The day before the loan is availed, every MFI should deliver to the borrower a clear statement on the date of the loan and its maturity, the amount and interest rate, the name and address of the MFI functionary. MFIs must compulsorily give the borrower a duly signed receipt for any payment made.
Every MFI must submit a quarterly and annual statement to the Registering Authority with a list of borrowers and the loan and repayment details, failing which the entity shall be punishable with a six-month imprisonment or fine upto ₹10,000 or both.
What’s in it for the borrowers?
In an effort to offer relief to borrowers, the Ordinance wholly discharges those from “vulnerable section of the society” of every loan given before its commencement, including the amount of interest, payable to unregistered and unlicensed lenders.
Further, it says that no civil court should entertain any suit or proceeding against the borrower for the recovery of loan or interest. It states that all suits and proceedings pending against borrowers for the recovery of loans should be closed.
The Ordinance also empowers the State government to specify the lending norms, collection and recovery practices by notification. MFIs are prohibited from seeking any collateral from a borrower by way of pawn, pledge or other security for the loan.
What is coercive action?
The Ordinance states that any form of coercive recovery by MFIs or through agents shall be liable for punishment and to suspension or cancellation of registration. Coercive actions against the borrowers can include:
1) Exerting pressure, using violence or insulting or intimidating the borrower or his/her family.
2) Persistently following the borrower, his/her family members or interfering with, depriving or hindering the use of any property owned/used by him/her.
3) Frequenting the house or other place where the borrower resides or works, conducts business.
4) Using the service of private or external agencies, criminals to urge the borrower to make payment using coercive and undue influence.
5) Forcibly taking any document from the borrower which entitles the borrower to a benefit under any government programme.
What are the penalties?
According to the Ordinance, people can file a complaint regarding violation of a provision of the proposed Ordinance at a police station. No police officer can refuse to register a case. A police officer not below the rank of Dy.SP is empowered to file a suo moto case.
It also enables 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.
What are the Governor’s suggestions?
While giving his nod to the Ordinance, the Governor suggested that the government study its “legal and social impact in detail in both the legislature Houses,” and include any corrective measures in the Bill that would replace the Ordinance.
The Governor advised the State government to ensure that the legislation is not misinterpreted or misutilised to harass genuine lenders such as legal and registered bodies like banks regulated by RBI, as well as cooperative banks, non-banking financial companies and housing finance corporations, registered under RBI.
Any misuse of the Ordinance could leave genuine lenders with no remedy to recover their pending amounts, which may then lead to legal battles and burdensome litigations, he pointed out.
What power does the State hold?
For the next two years, the State government has the power to make additional provisions to remove any difficulty that could hinder implementation of the existing provisions in the Ordinance through an order published in the Official Gazette. The government can also issue orders, instructions and directions regarding rules for registers, forms, online procedures and portals, help centers.
The rules made by the State Government to carry out the Ordinance must be presented before both Houses of the Legislature for a total period of 30 days, which may be comprised in one session or in two or more successive sessions.
What are the concerns?
According to the Microfinance Industry Network (MFIN), a Self-Regulatory Organisation (SRO) recognised by the RBI, microfinance institutions currently serve over 63 lakh unique individual borrowers of microcredit loans In Karnataka.
The total gross loan portfolio of MFIs in Karnataka – the fourth largest market for microlenders – surged from ₹16,946 crore in March 2019 to ₹42,265 crore in 2023-24, as per the data given by MFIs. The average loan per client in Karnataka is ₹44,036.
Experts in microfinance companies say that the Ordinance would adversely impact the recovery of loans both by both registered as well as unlicensed and unregistered MFIs. It could also be be challenged in court.
Despite the Ordinance excluding banks, NBFCs and non-banking finance companies-microfinance institutions, an analysis by India Ratings and Research (Ind-Ra) has said it could have short-term disruptions, impact customer discipline in the near term and lead to an increase in delinquencies in 4QFY25 for NBFC-MFIs.
Published – February 18, 2025 09:00 am IST