Karnataka Enacts Ordinance to Protect Borrowers from Microfinance Harassment

Bangalore, February 12, 2025—In a significant move towards safeguarding borrowers, Karnataka Chief Minister Siddaramaiah announced on Wednesday the immediate enactment of the Karnataka Microloan and Small Loan (Prohibition of Coercive Measures) Ordinance, 2025. This decisive action follows the approval of the ordinance by Governor Thaawarchand Gehlot, aiming to curb the coercive practices of microfinance institutions (MFIs) in the state.

Protecting Borrowers from Harassment

The ordinance is designed to address the widespread issues of harassment, mental abuse, and unlawful actions perpetrated by microfinance entities during loan recovery processes. Chief Minister Siddaramaiah articulated the government’s commitment, stating, “To regulate and restrict these inhumane actions, we have enacted this law which is now in effect immediately.”

Under the new law, individuals who have experienced harassment from microfinance loans are encouraged to file complaints with the police. This legislative measure is expected to provide greater protection to borrowers, ensuring their rights and well-being are prioritized. The Chief Minister expressed confidence that the ordinance would effectively put an end to the harassment tactics employed by certain microfinance entities.

Legislative Journey of the Ordinance

The ordinance was a response to growing concerns regarding the operations of MFIs, some of which are not regulated by the Reserve Bank of India (RBI) and operate without necessary licensing. Some instances have arisen where aggressive loan recovery practices have led to tragic outcomes, including reported suicides and people deserting their homes.

Earlier developments revealed that the Karnataka Governor had initially rejected the ordinance due to concerns over the suggested penalties, which included potential imprisonment of up to ten years and fines of Rs 5 lakh for violations. The Governor had raised objections regarding the severity of these punishments and suggested that existing laws could be sufficient for addressing these issues. However, the Congress-led government was able to address these concerns and ultimately secured the Governor’s approval.

Impact on Microfinance Sector

The enactment of this ordinance is anticipated to have a mixed impact on the microfinance sector. While the law aims to protect vulnerable borrowers from exploitation, the Karnataka government has acknowledged that it may also challenge the operational framework of existing MFIs within the state. There are concerns that stricter regulations could limit the services provided to the economically disadvantaged populations who rely on microfinance for their livelihoods.

In response to the escalating tensions surrounding borrower treatment, the Microfinance Industry Network (MFIN) has begun public outreach efforts. These initiatives involve publishing advertisements that feature the names of registered MFIs, underscoring the importance of accountability within the industry.

Conclusion

With the implementation of the Karnataka Microloan and Small Loan Ordinance, the state government has taken a proactive stance against the predatory practices of microfinance institutions. As enforcement of the law begins, all eyes will be on its effectiveness in curbing harassment and ensuring that microfinance services can operate in a fair and humane manner, ultimately supporting the individuals they are meant to serve.