Karnataka: Microfinance ordinance gets governor’s nod; violators face up to 10 years in jail, Rs 5 lakh fine

Karnataka Governor signs microfinance ordinance

Karnataka Governor Thawar Chand Gehlot on February 12 approved the Karnataka Microfinance (Prevention of Coercive Actions) Ordinance, 2025, which seeks to curb coercive practices by microfinance institutions (MFIs) in the state.

Earlier, the Governor had returned the ordinance to the state government, seeking clarifications and suggesting modifications. After incorporating the changes, the government resubmitted it for approval.

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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.

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The ordinance mandates that complaints regarding violations be filed with the local police, who are required to register cases. Any coercive recovery measures by MFIs or lenders will be punishable with imprisonment of up to ten years and fines of up to Rs 5 lakh. The government may appoint an Ombudsperson to mediate disputes between borrowers and lenders.

To ensure transparency, MFIs are required to disclose loan terms, interest rates, and repayment details in Kannada.

“No security or collateral can be demanded from borrowers, and loan agreements must follow a standardized format. Borrowers must be provided with a loan card reflecting key loan details, including the effective interest rate, repayment terms, and lender acknowledgments,” the ordinance states.

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The ordinance prohibits any form of coercive recovery, including harassment, threats, persistent follow-ups, unlawful pressure, or the use of third-party agents with criminal backgrounds. “Any violation of these provisions may lead to the suspension or cancellation of registration,” it states.

The registering authority is empowered to inspect records and premises and seize relevant documents in case of suspected violations. MFIs are mandated to submit quarterly and annual financial reports, and failure to do so may result in penalties, including imprisonment or fines.

For the protection of borrowers, all loans advanced by unregistered and unlicensed lenders are deemed void for vulnerable sections of society. “Courts are barred from entertaining suits for loan recovery from such lenders, and any ongoing legal proceedings related to such loans will stand dismissed,” the ordinance states.

The state government retains the power to issue necessary rules, directions, and amendments for the effective implementation of this ordinance. Any rules made under this provision must be approved by the state legislature, it adds.

Siddaramaiah-led Congress government proposed regulating microfinance following a series of suicides and complaints from across the state about predatory loan recovery practices by microfinance firms.

The Governor had returned the ordinance, arguing it favoured borrowers without offering protection to lenders. He had deemed the proposed 10-year jail term and Rs 5 lakh fine excessive, stating existing laws could address the issue. He had also warned that the law might stifle microfinance and limit credit access for the poor. While acknowledging the ordinance aimed to curb harassment by some lenders, he had stressed the need to safeguard the rights of legitimate lenders. He had opposed the provision to write off pending loans, citing risks of legal disputes and financial instability. The Governor had also instructed that the proposed provisions be deliberated in the upcoming assembly session.

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