Karnataka govt sends microfinance ordinance back to Governor Gehlot with explanations

Bengaluru: The Karnataka government on Monday said it has re-sent the ordinance aimed at protecting borrowers from harassment by microfinance institutions (MFIs) to the Governor once again for his assent, along with the explanations he had sought.

Governor Thaawarchand Gehlot had recently returned the ordinance to the government, citing regulatory excesses.

The Karnataka Micro Finance (Prevention of Coercive Actions) Ordinance 2025 includes penal provisions such as a jail term of up to ten years and a fine of up to Rs 5 lakh for violations.

The government decided to promulgate the ordinance in response to a spate of suicides and multiple complaints from various parts of the state against predatory loan recovery methods adopted by microfinance firms.

"The ordinance on microfinance has been sent back to the Governor along with all the explanations sought by him," the Chief Minister's Office said.

The Governor, while returning the ordinance to the government, had noted the state government was proposing to discharge all pending loans, including interest, once the ordinance comes into effect, and that no civil court shall entertain any proceedings against borrowers.

"But if all pending loans with interest are discharged, lawful and genuine lenders may face difficulties. Furthermore, they will have no legal remedy to recover their dues," the Governor stated.

He emphasised that, as a principle of natural justice, every person has the right to seek legal remedies for their grievances.

"Preventing individuals from fighting for their rights may lead to a violation of fundamental rights guaranteed under Articles 19 and 32 of the Constitution of India," Gehlot added.

He also said this goes against the principles of lending followed by government banks.

Further, he noted that the proposed ordinance could negatively impact the state's business prospects by affecting self-help groups, which play a crucial role in uplifting the most vulnerable sections of society.

The ordinance aims to regulate only unregistered and unlicensed lending agencies, he said. However, he emphasized that some of these lenders, who are genuine individuals with a conscience, often serve as a lifeline for those overlooked by the traditional credit system.

"When managed responsibly, they expand access to credit and contribute to the robust growth of the financial sector," Gehlot said.

The Governor said that the punishment provisions—10 years of imprisonment and a Rs 5 lakh fine—are disproportionate compared to those in existing laws for similar offences.

He further noted that, given that the maximum loan amount that can be sanctioned is Rs 3 lakh, imposing a Rs 5 lakh fine goes against natural justice.

The Governor pointed out that to curb forceful and unlawful activities by unscrupulous lending agencies, the state government, through its police and relevant departments, already has legal provisions under the Karnataka Money Lenders Act, 1961, the Negotiable Instruments Act, 1881, the Karnataka Debt Relief Act, 1976, the Indian Penal Code, and the Karnataka Police Act to address such violations.

Gehlot said that effective enforcement of existing laws by the authorities would be a more efficient way to regulate the issue.

He also advised that, since the Budget Session is set to commence next month, instead of rushing through an ordinance, the state government should deliberate on the issue in detail and introduce a well-structured law in the interest of the affected people and to protect their rights.