Microfinance Bill proposes to free borrowers from making repayment of loans to unregistered MFIs, lenders in Karnataka

All suits and proceedings pending against borrowers for the recovery of loans would be closed. MFIs or money lending agencies or lenders should not seek security from borrowers by pawn, pledge or any other security for the loans, the Bill states.

In a bid to provide relief to the economically vulnerable groups, individuals, SHGs and small and marginal farmers, the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Bill, 2025, was tabled in the Legislative Assembly on March 6. The Bill proposes to wholly discharge borrowers from making repayment of loans, including rate of interest, taken from unlicensed and unregistered microfinance institutions (MFIs).

Law and Parliamentary Affairs Minister H.K. Patil tabled the Bill that mandates the release of securities taken by unregistered lenders. “It is justified because unlike banks, unregistered lenders operate without regulatory oversight and often acquire securities through coercion,” he said.

The Bill asks borrowers not to repay the loans, including amount of interest, taken from unlicenced leaders.

The Bill states, “Every loan, including the amount of interest, if any, payable by the borrower to the MFIs which are unlicenced and unregistered, shall be deemed to be wholly discharged. No civil court shall entertain any suit or proceeding against the borrower for the recovery of any amount of loan including interest.”

All suits and proceedings pending against borrowers for the recovery of loans would be closed. MFIs or money lending agencies or lenders should not seek security from borrowers by pawn, pledge or any other security for the loans, the Bill states.

The Bill envisages imposition of penalties, including imprisonment and fines. The punishment aligns with the doctrine of deterrence, as seen in the Prevention of the Money Laundering Act, 2002. The Bill proposed imprisonment of up to 10 years and fine of up to ₹5 lakh.

The Bill said there should be only four components in the pricing of the loan, namely, the interest charge, the processing charge, the insurance premium and delayed penal payment.