The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 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.
Published Feb 12, 2025 | 6:08 PM ⚊ Updated Feb 12, 2025 | 6:08 PM
CM Siddaramaiah and Governor Thawaarchand Gehlot.(X)
Synopsis: The Governor gave consent to the ordinance, meant to protect borrowers from harassment after the government sent it back with clarification. On 7 February, the Raj Bhavan returned the ordinance raising several concerns.
Karnataka Governor Thaawarchand Gehlot has given assent to the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, on Wednesday, 12 February, two days after the government had sent it back to Raj Bhavan with clarifications.
The ordinance, 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.
Earlier on 7 February, Governor Gehlot had returned the ordinance to the government with a direction to reconsider the proposed law. Chief Minister Siddaramaiah’s office on Monday, 10 February, said the ordinance was “sent back to the Governor with full details.”
The ordinance banned microfinance institutions from hiring anti-social elements as loan recovery agents. The Governor had also expressed concern that implementation of the ordinance might affect genuine lenders.
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 principle of natural justice, every person has a right to fight for his rights and legal remedies,” the Governor’s note stated, warning that such restrictions could violate fundamental rights under Articles 19 and 32 of the Constitution.
While returning the ordinance, the Raj Bhavan stated that it could negatively impact microfinance and dry up sources of credit available to the poor. Gehlot also suggested a proper law instead of bringing an Ordinance in a hurry.
While the ordinance excluded 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.
Gehlot also noted that the proposed punishment was disproportionate since the maximum loan amount that could be provided has been capped at ₹3 lakh.
“When the maximum amount of loan that can be lent is ₹3 lakh, the proposed fine of ₹5 lakh itself is against natural principles,” the note to the government said.
While returning the ordinance to the government, the Governor also pointed out that the state already has the Karnataka Money Lenders Act, 1961, the Negotiable Instruments Act, 1881, the Karnataka Debt Relief Act, 1976, and others to deal with microfinance-related issues.
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 microfinance 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.
