A to Z of Karnataka Microfinance Ordinance

Finally, the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 is in place. It was promulgated by the Governor of Karnataka on 12 February.

Earlier, on February 7, Governor Thaawar Chand Gehlot had sent it back to the state government, saying: “Instead of bringing the Ordinance in a hurry, I advise the state to deliberate this issue in details and bring in effective enactment in the interest of the affected people and to protect their rights.” He has pointed out that the Ordinance would benefit the borrowers but affect the lenders and both sections are part of the same society.”

But the state seems to be in a hurry. It did go back to the governor quickly. Now, the Ordinance is in place.

Let’s take a close look at the key issues that the Ordinance has dealt with.

This is an Ordinance to protect and relieve the economically vulnerable groups and individuals, especially farmers, women and women’s self- help groups from the undue hardship of usurious interest rates and coercive means of recovery by Micro Finance Institutions (MFIs) or Money Lending Agencies or Organizations operating in the southern state.

# It comes into force at once.

# Nothing in this Ordinance is applicable to any banking or non banking financial company (NBFC) registered with the Reserve Bank of India (RBI).

All MFIs or money lending agencies or organisations or lenders operating in the State as on the date of the commencement of this Ordinance, will apply for registration before the registering ?authority of the district/villages/towns where they have been operating or propose to operate , within 30 days.

While seeking registration, they need to mention the following:

# The rate of interest being charged

# The system of conducting due diligence and system of effecting recovery

# The list of authorised persons to conduct the activity of lending or recovery of money which has been lent

# The name and address of the borrower

# The total principal amount lent to the borrower

# The amount already recovered from the borrower and the balance amount yet to be recovered

# And, a written undertaking that it shall always act in conformity with the provisions of this Ordinance.

No MFI or money lending agencies or organizations or lender operating or intending to start the business of lending money after the commencement of this Ordinance shall grant any loans or recover any loans without obtaining registration under this Ordinance from the registering authority.

The registering authority may, at any time, either suo-motu or upon receipt of complaint by a borrower cancel or recommend to cancel the registration of an MFI or money lending agencies after hearing and assigning sufficient reasons in writing for such cancellation.

No order of cancellation of the registration shall be passed without issuing notice to the MFI or money lending agencies. The lenders will be given a reasonable opportunity of being heard against such a notice.

What about the lending norms?

The government may, by notification, specify the lending norms, collection and recovery practices.

There must be transparency in rates of interest charged. The lenders must mention

# the effective rate of interest charged

# and, all other terms and conditions attached to the loan.

Finally, all communications to the borrowers shall be in the kannada.

The MFIs or the money lenders cannot not use any coercive action either by itself or by its agents for recovery of money from the borrower. For any form of coercive recovery they will be liable for punishment under the provisions of this Ordinance. Of course, the registering authority can suspend or cancel the registration of such lenders.

Finally, the PENALTY for violating the norms.

# Any entity which violates the norms will be tried and punished by a First Class Judicial Magistrate.

# There could be imprisonment – up to 10 years.

# Maximum fine is Rs 5 lakh.

And, the offences under this Ordinance are cognizable and non-bailable.

Let me end this with a question to the Karnataka State Government. Since nothing in this Ordinance is applicable to ?RBI-regulated banks and NBFCs, why does it need such an Ordinance? If it wants to control/punish those money lenders who have been masquerading as MFIs, it makes senses for the state to closely supervise them. For that, instead of brining in a new legislation, the Money Lenders’ Act can be strengthened. Doesn’t that make sense?

The writer is a Consulting Editor with Business Standard and Senior Advisor of Jana Small Finance Bank.

Writes Banker's Trust every Monday in Business Standard.

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