The Karnataka government on Thursday introduced a bill in the Assembly aimed at protecting borrowers from harassment by microfinance institutions (MFIs), with penal provisions including a jail term up to 10 years and fines of Rs five lakh for violations.
The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Bill, 2025, was tabled by Law and Parliamentary Affairs Minister H K Patil on behalf of Chief Minister Siddaramaiah.
The bill seeks to replace The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance that was promulgated on February 12.
The government had decided on promulgating the ordinance, in response to a spate of suicides and multiple complaints from various parts of the state against predatory loan recovery methods by microfinance firms.
According to the bill, all microfinance institutions, money-lending agencies and lenders have to register with deputy commissioners within 30 days.
The bill prohibits 'coercive’ loan recovery methods, and action can be taken by authorities against microfinance companies or lenders if they use pressure, violence, insults, private/outsourced agencies, persons with a criminal background and so on.
It also prohibits seeking to forcibly take any document from the borrower which entitles the borrower to a benefit under any government programmes.
It proposes for the government appointment of an ombudsman to act as a mediator between the borrower or lender to settle loan disputes, and it also provides police officers not below the rank of Deputy Superintendents of Police powers to file cases suo-motu.
As per section 15 of the bill: every loan advanced before the commencement of this section including the amount of interest, if any payable by the borrower to MFIs or money lending agencies or organisations or lenders shall be deemed to be wholly discharged of "vulnerable sections of the society" if unregistered and unlicensed MFIs or money lending agencies resort to coercive action.
No civil court shall entertain any suit or proceeding against the borrower for the recovery of any amount of such loan including interest, it said.
Vulnerable sections means farmers, women, agricultural labourers, footpath vendors, dairy workers, migrant workers and "people who are disadvantaged".
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