Details of micro loan ordinance released
Karnataka Governor Thaawarchand Gehlot on Wednesday gave his approval to the ordinance, after receiving clarifications from the state government.
The Karnataka chief minister’s office (CMO) on Thursday released the fine print of the Karnataka Micro Loan and Small Loan (Prohibition of Coercive Measures) Ordinance, 2025, which came into effect on February 12. The ordinance seeks to “regulate the burden imposed on borrowers due to high-interest rates” and curb “coercive recovery practices” by microfinance institutions (MFIs) and unregulated moneylenders.
Karnataka Governor Thaawarchand Gehlot on Wednesday gave his approval to the ordinance, after receiving clarifications from the state government.
According to the ordinance, “microfinance institutions shall not collect any security from borrowers,” a move aimed at preventing the exploitation of vulnerable groups such as women, farmers, and self-help groups. To ensure transparency, it further mandates that “microfinance institutions must provide a written disclosure of interest rates to customers.”
The government has stated that the ordinance applies only to unregistered MFIs, while institutions registered with the Reserve Bank of India (RBI), central, or state government remain outside its purview. The government estimates that ₹60,000 crore has been disbursed to 10.9 million borrowers through registered MFIs, whereas unregulated lenders have provided approximately ₹40,000 crore in loans, though comprehensive records remain unavailable.
The ordinance makes it mandatory for MFIs operating in Karnataka to register with district authorities. “Microfinance institutions must register with district collectors and furnish details regarding the interest rates they charge, borrower information, and outstanding loans (susthi loans),” it stated.
Furthermore, it mandates that these institutions must submit “quarterly and annual business reports to the district administration.” Non-compliance will invite strict penalties, with the ordinance stating that “failure to provide required information may result in imprisonment of up to six months or a fine of ₹10,000, or both.”
The ordinance also introduces stringent measures against coercive loan recovery practices. “Any individual engaging in coercive recovery measures shall face up to 10 years of imprisonment and a fine extending to ₹5 lakh,” the document said. The provisions classify such offences as “cognizable and non-bailable,” making it clear that “no police officer shall refuse to register a case against those engaging in coercive recovery.” Additionally, it authorises a deputy superintendent of police or higher-ranking officer to file cases suo motu against violators.
To further safeguard borrowers, the ordinance allows the government to “appoint ombudsmen through official notifications” for dispute resolution. It also said that “the government retains the power to issue additional directives from time to time to ensure the proper enforcement of the ordinance.”
The Karnataka government has justified the ordinance as a crucial step toward strengthening financial discipline among unregulated MFIs and ensuring relief for borrowers. The document asserts that “these measures will protect borrowers from harassment and financial distress while ensuring a more accountable lending environment.”
The ordinance was initially returned by the governor on February 7, with concerns about its impact on legal loan recovery processes. He had pointed out that while it seeks to waive loans and interest imposed by unlicenced and unregistered microfinance institutions, it may also interfere with the rights of legitimate lenders to recover dues through legal means. Additionally, he highlighted possible violations of fundamental rights under Articles 19 and 32 of the Constitution, which protect an individual’s access to legal remedies.
Responding to these concerns, a senior home department official said, “The government said that unlicenced 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.”
Governor Gehlot also raised concerns regarding the economic implications of the ordinance, particularly the severity of penalties, which include imprisonment of up to 10 years and fines as high as ₹5 lakh. He argued that such penalties are disproportionately harsh compared to existing laws governing similar offences. Furthermore, he noted that with the maximum loan amount under microfinance capped at ₹3 lakh, imposing a ₹5 lakh fine could contradict principles of natural justice.
In its response, the state government clarified that the ordinance does not impose penalties based on loan amounts but rather focuses on punitive measures against aggressive recovery tactics. “Therefore, the government has not proposed any measures that go against natural justice,” the official added.
The ordinance was introduced following several distressing incidents linked to coercive microfinance recovery methods. Among them was the case of a borrower from Raichuru district, who reportedly died by suicide due to harassment from an unregistered lender over loan repayment. His widow later staged a symbolic protest by sending her mangalsutra to Karnataka home minister G Parameshwara, seeking justice for her deceased husband.