Microfinance: Karnataka's draft law proposes 3-year jail, mandatory registration

Bengaluru: The Karnataka government has proposed a three-year imprisonment among other strictures for microfinance companies under a law it has drafted to protect borrowers from harassment even as authorities are likely to drop some 'radical' provisions that may run into legal troubles.

On Thursday, the Cabinet authorised Chief Minister Siddaramaiah to finalise the draft of the Karnataka Micro Finance (Prevention of Coercive and Inhuman Actions) Bill.

The law, which the government wants to enact by promulgating an ordinance, is in response to a spate of suicides and lakhs of complaints against predatory loan recovery methods by microfinance firms.

Penal provisions proposed by the government include a jail term of a minimum six months and up to three years with a fine as high as Rs 1 lakh. Offences under the law will be cognisable and non-bailable.

The law empowers the police to register cases suo motu against microfinance or money-lending agencies. "No police officer shall refuse to register a case," the draft law states.

As per the draft, all microfinance institutions are required to register with the government (deputy commissioners) within thirty days from the enactment of the law by specifying details about their operations, rate of interest being charged, system of loan recovery and so on.

The draft law bars microfinance companies and money-lenders from seeking securities (pawns, pledges etc) from borrowers.

Prohibiting 'coercive and inhuman' loan recovery methods, the government will act against microfinance companies or lenders if they use psychological pressure, violence, unscrupulous persons with criminal background and so on. Also, the government has proposed an ombudsman to act as a mediator to settle loan disputes.

However, some provisions in the draft law forced Siddaramaiah to go back to the drawing board. He huddled with Law Minister H K Patil, Home Minister G Parameshwara, Cooperation Minister K N Rajanna and top officials to review the draft, which sources said was "hurriedly prepared". After the meeting, Patil said the draft Bill should be finalised by Friday evening and then sent to Governor Thaawarchand Gehlot for approval.

One provision, which the government may drop, requires microfinance companies to obtain the consent of an adult family member of a borrower before lending.

Another provision is that the interest amount should not exceed the principal. "Interest rate regulation is not a state subject. So, we may have to drop this provision," a top source in the government said.

The draft borrows heavily from the Assam Micro Finance Institutions (Regulation of Money Lending) Act, 2020. Government sources told DH that a similar law enacted in Andhra Pradesh following a spate of suicides had not yielded the desired results.