Karnataka Guv okays ordinance to check harassment of borrowers by MFIs

Karnataka Governor Thaawarchand Gehlot on Wednesday (February 12) gave his assent to the ordinance to check harassment by microfinance companies of its borrowers, said government sources.

The ordinance has a provision for imprisonment for a term which may extend to ten years and with a fine which may extend to Rs 5 lakh.

The offences under this ordinance are cognisable and non-bailable.

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The Karnataka Micro Finance (Prevention of Coercive Actions) Ordinance 2025 aims 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 microfinance institutions or money lending agencies or organisations operating in the state, the government said.

Firms have to register

The microfinance companies have to apply for registration within 30 days from Wednesday. They also need to specify the village, town and district they are operating in.

The firms will also have to specify the rate of interest, system of due diligence and recovery, and list of persons authorised for conducting the money lending activity.

"No microfinance institutions or money lending agencies or organisations 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 ordinance read.

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The government said the registering authority holds the right to cancel or suspend the registration on its own or on receipt of complaint.

"No Micro Finance Institution (MFI) or Money Lending Agencies or Organisations or Lender shall seek any security from a borrower by way of pawn, pledge, or other security for the loan, provided that any such security obtained from a borrower before the date of commencement of this ordinance shall forthwith stand released in favour of the borrower," the ordinance said.

The government has also insisted upon transparency in rates of interest charged.

Penalty for coercive actions

There is provision for penalty for coercive actions by MFI to recover money from borrowers.

Coercive action has been defined as exerting pressure or obstructing or using violence to or insulting or intimidating the borrowers or their family members and persistently following the borrowers, their family member from place to place or interfering with any property owned by them or used by them or depriving them of, or hindering them in the use of any such property.

Frequenting the house or other places where borrowers reside, outsourcing the recovery of money, and forcibly taking any document from borrowers will also invite penal action.

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Any person who contravenes the provisions of this ordinance will be tried and attract punishment by the Judicial Magistrate First Class, "with imprisonment for a term which may extend to ten years and with fine which may extend to rupees five lakh. The offences under this ordinance are cognisable and non-bailable."

"Every officer of the government and every person acting under the provisions of this ordinance shall be deemed to be a public servant within the meaning of sub-section (28) of section 2 of the Bharatiya Nyaya Sanhita, 2023," the ordinance said.

Ombudsman

The government has also made provision for appointing an ombudsman who can act as mediator between the borrower and lender and for settling the disputes.

Following reports about many people dying by suicide, fleeing homes, and being tortured by the recovery agents of the microfinance companies operating in the state, the government had brought the Karnataka Micro Finance (Prevention of Coercive Actions) Ordinance 2025.

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However, the provisions did not impress Gehlot as he returned it to the government on February 8 saying that in its current form, the lenders, who are also part of the society, are being done a great injustice.

Gehlot had also given reasons and suggestions while returning the ordinance. Addressing his concerns, the Karnataka government again sent the ordinance on February 10.

On Wednesday, the Governor gave his assent to the ordinance. It is learnt that he has asked the government to table the bill in the next legislative session.

(With agency inputs)