How the state’s new Ordinance proposes to crack down on microfinance institutions Premium

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.  

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.  

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.