Microfinance menace: Unregistered firms to face heat in K’taka

Bengaluru, Feb 13 (IANS) With the implementation of the Karnataka Microloan and Small Loan (Prohibition of Coercive Measures) Ordinance, 2025, the microfinancing institutions (MFIs) operating without license will face the heat as the new law proposes punishment of up to 10 years and a fine of up to Rs 5 lakh.

The ordinance came into effect on February 12 and the Chief Minister’s Office (CMO) has shared the key highlights of the new act aimed at preventing the menace of MFIs indulging in highhandedness forcing people to commit suicides and desert their houses.  

According to the new law: “If coercive recovery methods are used, the responsible individuals will face legal action, which includes up to 10 years of imprisonment and a fine of up to Rs 5 lakh. These offences are classified as cognizable and non-bailable, meaning police officers cannot refuse to register such cases.”

This ordinance applies only to unregistered microfinance institutions that are not registered with the Reserve Bank of India (RBI) or the central and state governments.

It does not apply to RBI-registered microfinance institutions. It is estimated that around Rs 60,000 crore in loans have been taken by approximately 1.09 crore borrowers from registered institutions, while borrowers have taken an estimated Rs 40,000 crore in loans from unregistered institutions, though exact data is unavailable, stated CMO.

It is mandated that the registration with district authorities is mandatory for microfinance institutions operating in each district. The institutions are directed to provide details of interest rates, borrower information, and loan repayment status to the district authorities.

Microfinance institutions must submit quarterly and annual business reports to the respective district authorities. Failure to provide this information will result in a fine of up to Rs 10,000 or imprisonment of up to six months, or both, the law says.

Other key facts regarding the new law include, that the ordinance aims to regulate the burden on borrowers caused by high-interest rates imposed by microfinance institutions, other lending agencies, or moneylenders and to prevent harassment due to coercive recovery methods.

It will particularly benefit vulnerable sections, women, farmers, and women’s self-help groups by protecting them from harassment in loan repayment.

Microfinance institutions are prohibited from taking any collateral from borrowers.

Microfinance institutions must transparently disclose the interest rates they charge to borrowers in written form.

The government may appoint ombudsmen through official notification to resolve disputes related to microfinance institutions.

The ordinance clearly defines prohibited coercive recovery methods. A police officer of the rank of Deputy Superintendent of Police (DySP) or higher is authorised to register cases suo moto (on their own initiative).

The government holds the power to issue guidelines from time to time to ensure effective implementation of the ordinance. The ordinance will enhance financial discipline in unregistered microfinance institutions, ensuring protection for borrowers from harassment and coercive recovery practices.

Karnataka Governor Thaawarchand Gehlot on Wednesday approved the ordinance promulgated by the Congress-led government to tackle the Microfinancing Institutions' (MFIs) menace.

Earlier, the Governor had rejected the ordinance, stating that the punishment of 10 years and a fine of Rs 5 lakh is "excessive."

The Governor had also suggested that the police could have used existing laws to control the situation.

This ordinance is likely to negatively impact microfinance, which in turn, will affect the poor, the Governor had opined.

--IANS

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