All the loans disbursed by unregistered lenders before the passage of the ordinance stand discharged and all suits and proceedings against such loans are cancelled.
Published Feb 13, 2025 | 12:15 PM ⚊ Updated Feb 13, 2025 | 12:15 PM
Indian currency. (iStock)
Synopsis: Karnataka Governor Thaawarchand Gehlot gave assent to the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025. It is to protect and relieve economically vulnerable groups from the undue hardship of usurious interest rates and coercive means of recovery by lenders. The ordinance includes penal provisions such as a jail term of up to 10 years and a fine of up to ₹5 lakh for violations.
On Wednesday, 12 February, Karnataka Governor Thaawarchand Gehlot gave assent to the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025.
The ordinance, which came into force immediately after the Governor’s assent, was promulgated following a spate of suicides and several complaints against predatory loan recovery measures, includes penal provisions such as a jail term of up to 10 years and a fine of up to ₹5 lakh for violations.
According to the ordinance, it is to protect and relieve the economically vulnerable groups and individuals, especially farmers, women and women’s self-help groups from the undue hardship of usurious interest rates and coercive means of recovery by Microfinance Institutions or Money Lending Agencies or Organizations operating in Karnataka.
In recent months, at least 14 deaths by suicide have been reported across the state, allegedly due to harassment from microfinance company staff and agents who resorted to aggressive recovery methods.
These incidents prompted Chief Minister Siddaramaiah to hold meetings on 24 January with MFI leaders, cabinet colleagues, and senior officials from revenue and police departments to assess the situation and plan corrective measures.
All the loans disbursed by unregistered lenders before the passage of the ordinance stand discharged and all suits and proceedings against such loans are cancelled.
According to the ordinance, all microfinance institutions, money lending agencies, organisations or lenders operating in Karnataka shall apply for registration before the registering authority of the district specifying there in the villages or towns in which they have been operating or propose to operate.
They should also inform the authorities of the rate of interest, system of conducting due diligence and system of effecting recovery, list of persons authorised for the recovery of money, the total principal amount lent to the borrower, the amount already recovered from the borrower, the balance amount yet to be recovered from the borrower, and a written undertaking that it shall always act in conformity with the provisions of the ordinance.
It said that no lender would be allowed to disburse loans without proper registration. The registration will be provided for a year and the lenders should apply for renewal 60 days ahead of the expiration date. Authorities concerned will decide on the renewal and inform the lenders about its decision fifteen days prior to the expiration date, following verification.
Registration authorities are required to maintain a database of all lenders under their jurisdiction and have the power to cancel the registration at any point in time over valid reasons after sending them a notice.
The state government will soon specify the lending norms, collection and recovery practices.
The ordinance strictly mandates that lenders should not take any coercive action either by itself or by its agents for recovery of money from the borrower and any form of coercive recovery. Any such action would be liable for punishment under the provisions of the ordinance and could lead to the cancellation of the lender’s registration.
It also says that the registration authority has the power to verify whether the lenders are functioning in accordance with the provisions of the ordinance. The authority can also ask them to produce any record or document relating to the business and conduct inspections as and when required.
The registering authority can also search the premises and seize any record and document and can retain them for a period required for the examination, prosecution or other legal action. It has the power to summon and examine the lenders and ask them to furnish relevant information.
Complaints against the lenders can be filed before the concerned/ jurisdictional police station and the concerned police officer and no police officer should refuse to register a case. However, only the officers with or above the rank of Deputy Superintendent of Police (DSP) are empowered to file suo-motu cases.
The government can appoint an ombudsperson to act as a mediator between the borrower or lender, for settling the disputes. It can also create rules through a notification in the official gazette to implement the ordinance effectively.
However, before finalising the rules, they must be published in advance to allow for public awareness and possibly feedback. Once a rule or notification is made, it must be presented before both Houses of the state Legislature for 30 days. This period can span one or multiple sessions.
If both Houses modify or reject the rule/notification within this timeframe, it will be enforced only in its modified form or will cease to have effect. However, any actions taken before such modification or annulment remain legally valid.
(Compiled by Muhammed Fazil.)
