Karnataka Legislative Assembly passes Microfinance Bill

Bengaluru: Karnataka Legislative Assembly on Monday passed a Bill aimed at protecting borrowers from harassment by microfinance institutions (MFIs), with penal provisions including a jail term up to ten years, and fine as high as Rs five lakh for violation.

The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Bill, 2025, piloted by Law and Parliamentary Affairs Minister H K Patil on behalf of Chief Minister Siddaramaiah, was passed unopposed with a voice vote.

The Bill seeks to replace the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, that was promulgated on February 12.

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

According to the Bill, all microfinance institutions, money-lending agencies and lenders have to register with deputy commissioners within 30 days.

The Bill prohibits 'coercive' loan recovery methods, and action can be taken by authorities against microfinance companies or lenders if they use pressure, violence, insults, private/outsourced agencies, persons with a criminal background and so on.

It also prohibits seeking to forcibly take any document from the borrower which entitles the borrower to a benefit under any government programmes.

Piloting the Bill for the consideration of the House, Patil, explaining the circumstances which led to the government brining in this legislation, said predatory loan recovery methods led to some borrowers losing self confidence and about 15 people committed suicide, and in several instances borrowers fled their homes or villages.

This Bill is aimed at becoming a deterrent against predatory loan recovery methods that are in violation of human rights, and to protect the dignity of the borrowers, he said and added, "According to study in our state about Rs 40,000 crore loan is given by unregistered institutions and money lenders. Where is this money coming from? It is black money? For investing black money one gets an average 40-50 per cent profit." Clarifying that the government is not against MFIs recovering the loan amount, the minister said what the government is saying is that the interest charged should be in accordance with rules.

For the police to act against violators necessary legislation is required, he said, the legislations so far for predatory loan recovery methods were very "loose", as they had very less punishment or fine, which would get police station bail.

Most of these money lenders who charge 40-50 per cent interest are applicants for MLA tickets, he further said, "black money, big profit, and political power is destroying the health of the society, and this should be stopped."

The Bill proposes for the government appointing an ombudsman to act as a mediator between the borrower or lender to settle loan disputes, and it also provides police officers not below the rank of Deputy Superintendents of Police powers to file cases suo-motu.

As per section 15 of the Bill: every loan advanced before the commencement of this section, including the amount of interest, if any payable by the borrower to MFIs or money lending agencies or organisations or lenders shall be deemed to be wholly discharged of "vulnerable sections of the society" if unregistered and unlicensed MFIs or money lending agencies resort to coercive action.

No civil court shall entertain any suit or proceeding against the borrower for the recovery of any amount of such loan including interest, it said.

Vulnerable sections means- farmers, women, agricultural labourers, footpath vendors, dairy workers, migrant workers and "people who are disadvantaged".

Leader of the Opposition, R Ashoka said, according to his information, about 30 people have lost their lives upset with predatory loan recovery methods, and if corrective measures were taken immediately, these lives could have been saved.

He told the government to ensure that there is nothing in the Bill that is contrary or in violation of RBI rules, while cautioning that if not, it may be challenged in the court and be quashed.

Stating that, as per his information, two people have died by suicide after the government bringing in the bill/ordinance, Ashoka said, brining the Bill is not important, how it is implemented is important. "So many have died. Has one finance person been put behind bars or taken action against? We are not sending a message." Three other Bills that were passed by the Assembly on Monday are: Karnataka Pawn Brokers (Amendment) Bill-2025, Karnataka Prohibition of Charging Exorbitant Interest (Amendment) Bill-2025, and Karnataka Money Lenders (Amendment) Bill-2025.

Amendments have been brought to these existing acts to ensure they are on par with the provisions in the microfinance bill aimed at making them more stringent and to provide protection to weaker sections by increasing the fine for violation to Rs 5 lakh and jail term up to ten years, to make the punishment cognisable and non bailable, said Cooperation Minister K N Rajanna, who piloted these bills.