Karnataka Governor Calls for Reconsideration of Microfinance Ordinance

Bengaluru, Karnataka – The Governor of Karnataka, Thawarchand Gehlot, has returned the state’s proposed ordinance aimed at regulating the functioning of microfinance institutions, urging the Congress-led state government to reconsider the law before moving forward. The ordinance, named the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, has raised concerns from the governor regarding its provisions and their potential impacts on both lenders and borrowers in the state.

Excessive Punishments and Existing Legal Framework

One of the main objections raised by Governor Gehlot pertains to the proposed penalties outlined in the ordinance. The draft ordinance includes a punishment of up to 10 years in prison and a fine of ₹5 lakh for violators, which the governor described as excessively harsh. In his response, he emphasized that existing laws could adequately address coercive practices within the microfinance sector.

‘The state should utilize the upcoming budget session next month to enact a proper law instead of rushing through an ordinance,’ Gehlot recommended, returning the ordinance file along with a request for further clarification.

Context Behind the Ordinance

This ordinance was proposed in response to a series of tragic incidents involving borrowers who allegedly resorted to suicide amid extreme pressure from microfinance lenders in rural regions. There has been significant public outcry over the coercive practices employed by some microfinance institutions, leading to the urgent need for regulatory oversight. At the same time, the ordinance faced notable opposition from wealthy and politically connected factions within the microfinance industry.

Key Provisions and Concerns

One of the principal features of the ordinance seeks to prevent microfinance companies from outsourcing loan recovery efforts to elements often linked with harassment and intimidation of borrowers. While acknowledging this aim, Governor Gehlot emphasized the necessity of balancing the rights of both borrowers and the legitimate interests of lenders.

‘The ordinance recognizes the need to tackle harassment and unlawful actions; however, it is imperative to also safeguard the rights of legitimate lenders,’ he stated, highlighting the potential adverse consequences for individuals and organizations that provide lawful credit.

Gehlot also raised concerns regarding a provision in the ordinance that proposes the abatement of all pending loan repayments. He warned that such a measure could disproportionately affect legitimate lenders, leaving them without recourse for recovering dues and potentially leading to lengthy legal disputes.

Potential Effects on the Finance Sector

The governor cautioned that the proposed ordinance may hinder business prospects in Karnataka and negatively impact self-help groups, which play a crucial role in promoting financial inclusion among marginalized communities. He noted that the ordinance would primarily target unregistered and unlicensed lenders, suggesting that these entities often serve those who are overlooked by traditional banking systems.

‘It is crucial to recognize that some unregistered lenders may provide essential services to individuals who struggle to access credit through formal channels,’ Gehlot argued, reinforcing the idea that greater access to credit can drive development within the financial sector when managed appropriately.

Call for Legislative Deliberation

Governor Gehlot urged the state government to conduct an in-depth examination of this issue within the legislative framework. He pointed to existing laws, including the Karnataka Money Lenders Act of 1961 and various other regulations, which are already in place to address predatory lending practices.

‘Efficient implementation of current laws could help regulate these issues effectively,’ he maintained, underscoring the importance of balancing the interests of both borrowers and lenders in the ongoing discourse on financial regulation.

In conclusion, the Karnataka government’s proposed ordinance highlights a pressing social issue, but as Governor Gehlot has indicated, careful consideration and legislative consultation may yield a more balanced and effective approach to reforming the microfinance sector in the state.