The ordinance aims to protect borrowers from harassment by unregistered microfinance institutions through strict regulations and penalties.
Published Feb 07, 2025 | 5:02 PM ⚊ Updated Feb 07, 2025 | 5:02 PM
Karnataka Governor Thaawar Chand Gehlot and Chief Minister Siddharamiah
Synopsis: Governor of Karnataka has returned a proposed microfinance ordinance to the state cabinet, citing concerns over excessive penalties that include up to 10 years imprisonment and ₹5 lakh fines. The ordinance aims to protect borrowers from harassment by unregistered microfinance institutions, following 14 reported suicides allegedly linked to aggressive recovery methods. The Governor’s office raised several concerns about the ordinance, including its impact on civil rights, rural lending, and self-help groups, whilst suggesting that existing laws could adequately address harassment issues.
Karnataka Governor Thaawar Chand Gehlot on Friday, 7 February, returned the state government’s microfinance ordinance to the cabinet, citing excessive proposed penalties among other issues.
The ordinance proposes up to 10 years’ imprisonment, makes offences non-bailable and imposes a ₹5-lakh fine for a maximum loan amount of ₹3 lakh. Raj Bhavan termed these penalties disproportionate to the offences.
The ordinance aims to protect borrowers from harassment by unregistered microfinance institutions through strict regulations and penalties.
“When the maximum amount of loan that can be lent is ₹3 lakhs, the proposed fine of ₹5 lakhs itself is against natural principles”, stated a detailed note returning the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025.
The note highlighted that the file lacked proper statistics and legal advice to support how the ordinance would help curb such incidents.
In recent months, at least 14 deaths by suicide have been reported across the state, allegedly due to harassment from micro finance company staff and agents who resorted to aggressive recovery methods, including public abuse of borrowers, late-night harassment at borrowers’ homes, caste-based abuse targeting women, and forcing them to sell household articles and assets at distress rates to settle dues.
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.
The Governor’s office specifically suggested waiting for the upcoming budget session rather than hastily implementing an ordinance, allowing time for detailed deliberation in the State Legislature.
Raj Bhavan flagged Section 14 of the ordinance as another major issue, which proposed to discharge all existing loans and interest from unregistered lenders. The provision would prevent civil courts from hearing loan recovery cases and terminate ongoing proceedings.
“As a set principal of natural justice, every person has a right to fight for his rights and legal remedies”, the note stated, warning that such restrictions could violate fundamental rights under Articles 19 and 32 of the Constitution.
The ordinance’s prohibition on seeking loan securities raised another concern. The Governor’s office pointed out this contradicts standard practices followed even by government banks.
“[The] proposed provisions has the ability to erode the goodwill and comradery(sic) in the society”, the note stated, particularly affecting small borrowers in remote areas with limited banking access.
While the ordinance excludes Reserve Bank of India-registered banks and Non-Banking Financial Companies (NBFCs) from its purview, Raj Bhavan expressed concern about its impact on self-help groups “which play the biggest part in uplifting the lowest rung of the society”.
The note also emphasised that some unregistered lenders, despite their status, serve a valuable role in the financial ecosystem. “These unregistered and unlicensed lenders who are genuine individuals with a conscience are usually the saving grace for those who are neglected by the traditional credit system,” it stated.
The Governor’s office also asserted that existing laws and police regulations can effectively address harassment issues, suggesting a review of current legal frameworks rather than introducing new legislation.
(Edited by Dese Gowda with inputs from Nolan Patrick Pinto)
