Karnataka High Court dismisses petition against microfinance ordinance

Bengaluru: The High Court of Karnataka on Monday dismissed a petition against the microfinance ordinance, now an Act — the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Act, 2025. 

Dismissing the petition filed by the Karnataka Hire Purchase Association, Justice M Nagaprasanna observed that the thread of reasonableness runs through the object of the law.

The petitioner is an association of motor vehicle/asset financiers engaged in the business through hypothecation, hire purchase and leasing models. 

It challenged the ordinance, contending that it takes away the right of its members under the Contract Act and other modes of business that they are doing.

The petition also contended that by commanding immediate release of security and prohibiting future collateralisation, the ordinance imperils the very lifeblood of their business. 

However, Advocate General (AG) K Shashikiran Shetty submitted that the ordinance is restricted to microfinance rendered to vulnerable groups. He noted the microfinance is granted without any security and therefore the petitioner cannot project that it is aggrieved. 

The AG further submitted that microfinance, as defined by the Reserve Bank of India in terms of a circular, means a loan granted to the needy with their annual income of Rs 3 lakh or less. Shetty stated that the ordinance has been replaced by a legislative enactment. 

The court noted that the ordinance was promulgated for the protection of the vulnerable class of society from the hands of recovery agents.

“The ordinance stemmed from suicides attributed to exploitative lending and aggressive loan recovery methods which sparked outrage. Precious lives were lost due to coercive actions and recovery measures. Therefore, there is nothing that can be called manifestly arbitrary in the promulgation of the ordinance,” Justice Nagaprasanna said. 

The court further noted that the petitioner does not come within the ambit of the ordinance and that petitioner is still permitted to run its business in terms of other legislations.

“The ordinance does not traverse into the realm of secured transactions undertaken by the regulated entities like the petitioner. On the contrary, it carves out a protective shield specifically for those trapped in the labyrinth of unsecured micro loans extended without collateral, targeting an annual income of Rs 3 lakh or less, which is clearly defined by the Reserve Bank of India. Therefore, the ordinance has taken birth from the womb of social justice, it nowhere depicts arbitrariness. The grievance of the petitioner is, on the face of it, imaginary and unacceptable. The issue is thus answered against the petitioner,” the court said.