Govt sends microfinance ordinance to governor again with explanation

The Karnataka Microfinance (Prevention of Coercive Actions) Ordinance 2025 includes strict penal provisions, including a jail term of up to 10 years and a fine of ₹5 lakh for violations.

The Karnataka government on Monday once again submitted the microfinance ordinance to Governor Thaawarchand Gehlot, after addressing concerns raised by him earlier. The ordinance, which seeks to curb aggressive loan recovery practices, was initially sent back by the governor with multiple objections. However, the government has reiterated the necessity of the law without making modifications to its provisions.

The Karnataka Microfinance (Prevention of Coercive Actions) Ordinance 2025 includes strict penal provisions, including a jail term of up to 10 years and a fine of ₹5 lakh for violations. (HT PHOTO)

“A comprehensive explanation regarding the microfinance ordinance has been sent back to the governor as per his request,” stated the chief minister’s office (CMO).

The Karnataka Microfinance (Prevention of Coercive Actions) Ordinance 2025 includes strict penal provisions, including a jail term of up to 10 years and a fine of ₹5 lakh for violations. The government decided to promulgate the ordinance following reports of suicides and numerous complaints from across the state about predatory loan recovery methods used by microfinance firms.

“Seeking the governor’s approval, the state has urged reconsideration of the ordinance, arguing that it is designed to safeguard vulnerable borrowers without adversely affecting legitimate financial transactions,” an official of the CMO said on condition of anonymity.

Governor Gehlot had returned the ordinance to the government, citing concerns about regulatory overreach. He noted that the ordinance proposed discharging all pending loans, including interest, once it comes into effect and that no civil court would be allowed to entertain any proceedings against borrowers.

“But if all pending loans with interest are discharged, lawful and genuine lenders may face difficulties. Furthermore, they will have no legal remedy to recover their dues,” the governor said.

He also raised concerns that preventing lenders from seeking legal recourse could violate fundamental rights. “Preventing individuals from fighting for their rights may lead to a violation of fundamental rights guaranteed under Articles 19 and 32 of the Constitution of India,” he said.

The governor further noted that the ordinance’s provisions could impact Karnataka’s business environment by affecting self-help groups, which play a crucial role in supporting vulnerable communities. He acknowledged that while the ordinance aims to regulate unregistered and unlicensed lending agencies, some informal lenders serve as an important credit source for those excluded from the formal banking system. “When managed responsibly, they expand access to credit and contribute to the robust growth of the financial sector,” Gehlot said.

He also criticised the ordinance’s penal provisions, calling them excessive compared to existing laws. “The punishment provisions — 10 years of imprisonment and a ₹5 lakh fine — are disproportionate compared to those in existing laws for similar offences,” the governor said.