Bengaluru: After multiple iterations, Karnataka govt has sent its ordinance to governor Thaawar Chand Gehlot, proposing severe penalties for microfinance institutions (MFIs) found guilty of coercive loan recovery practices.
Under the revised draft, it will be considered a criminal offence for MFIs to use violence, intimidation or any form of coercion against borrowers or their families. The ordinance also prohibits use of external agencies to threaten or pressure borrowers into repayment and bans the frequent visitation of borrowers’ homes or places of work.
The Karnataka Micro-Finance (Prevention of Coercive Actions) Ordinance, 2025, which has already received the cabinet’s approval, has suggested up to 10 years in prison and a fine of Rs 5 lakh for MFIs involved in harassment. “It was three years (in the initial draft), now we have increased it to 10 years. This is to ensure that the heat of the law is felt (by violators),” home minister G Parameshwara announced the revision Tuesday.
The ordinance, which has seen eight revisions in the past few weeks, is now awaiting the governor’s assent.
The decision to issue the ordinance comes in the wake of rising suicides and widespread complaints about predatory loan recovery practices used by MFIs. These firms have been accused of using coercive methods which have pushed borrowers, particularly farmers, women and self-help groups, to the brink of financial ruin.
“The ordinance aims to protect and provide relief to economically vulnerable groups and individuals from undue hardship caused by usurious interest rates and coercive recovery methods,” Parameshwara added.
Any attempt to force-seize documents that entitle borrowers to government benefits is also deemed illegal. Violations of these provisions will allow borrowers to file complaints with local police stations, and a police officer not below the rank of DySP will have the authority to file a suo motu case.
The ordinance ensures any loan from unlicensed and unregistered MFIs, including interest, will be considered fully discharged, and no civil court can entertain a suit to recover such amounts.
“The government is committed to protecting the interests of borrowers while ensuring responsible lending,” said Parameshwara, highlighting that an ombudsman may also be appointed to mediate between lenders and borrowers for resolving disputes.