The collection by the lenders in Karnataka is likely to be affected as a second order impact with the state government rolling out the new laws for small-ticket loans. Experts attribute two-fold reasons for the same.
As Viral Shah, equity analyst at IIFL Securities points out in his report, collections are likely to be impacted as it becomes difficult to explain the distinction to borrowers and local authorities. Secondly, most regulated entities, whether banks including small finance banks, NBFCs and NBFC-MFIs, often engage with business correspondents (BCs) and field agents for some parts of their operations. Invariably, this is for disbursement and collection of loans.
While the newly-introduced state-specific law excludes any banking and non-banking finance companies registered with the Reserve Bank of India, BCs and agents are not regulated entities. They act on the authorisation of banks and NBFCs. "Will these entities also need registration to work in Karnataka is something which is not clear yet. Ideally since they work on behalf of the REs, they would not require registration. But these are operational things where clarity will emerge over time," said a CEO of an NBFC-MFI.
For these reasons, while the microfinance industry is not expecting a repeat of what happened in Andhra Pradesh back in 2010 or in Assam just ahead of Covid, they are bracing for some second order impact due to the ordinance.
"For the last one month to 45 days, we have cut down our disbursements in Karnataka because of collections related issues," said a senior executive of a small finance bank.
To put things in context, sparked by cases of harassment in collection of loans which led to a few cases of suicides, the Karnataka state government promulgated The Karnataka Micro Loan And Small Loan (Prevention Of Coercive Actions) Ordinance, 2025 on February 12.
The ordinance is aimed at tackling the menace of unregistered and unregulated lenders and lending outfits. It specifically exempts banks and NBFCs from its ambit.
The ordinance seeks to protect economically vulnerable groups, including farmers, women, and self-help groups, from excessive interest rates and coercive recovery methods employed by Microfinance Institutions (MFIs) and money lenders in Karnataka.
“All MFIs and money lending agencies operating in Karnataka must register within 30 days of the ordinance coming into effect, while new entities must obtain registration before engaging in lending or loan recovery activities. The registration remains valid for one year and may be renewed based on performance evaluation and public objections,” the ordinance states.
Non-compliance with ordinance could result in a fine of Rs five lakhs and/or imprisonment up to 10 years.
According to the IIFL Securities' report cited above, CreditAccess Grameen, Ujjivan Small Finance Bank, L&T Finance, AU Small Finance Bank, and Spandana Sphoorty have 10-32 percent exposure in Karnataka, and 15-55 percent across Karnataka, Tamil Nadu, and Bihar.
"There is also risk of other states enacting similar laws, if it becomes popular amongst the electorate," the report noted, while adding that the asset quality stress has expanded from borrowers having more than four loans to those having less than three loans, with delinquencies increasing approximately 50 percent quarter-on-quarter to 4 - 8 percent or approximately accounting for two-thirds of incremental delinquencies.
A recent report by CRIF Highmark notes that asset quality of microlenders in Bihar, Uttar Pradesh and Kerala deteriorated sharply in September 2024. The portfolio at risk (PAR) for the Kerala in 31-180 days went up to 7.2 percent as on September 2024 from 2.1 percent a year back. PAR for Bihar and Uttar Pradesh touched 5.5 percent and 4 percent respectively as against 1.9 percent and 0.9 percent a year ago.
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