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Governor Thawarchand Gehlot also pointed out that existing laws could have been used by the police to address the issue. He maintained that the ordinance could negatively impact microfinancing and ultimately hurt the poor.
The Karnataka government argued that cases of assault, extortion, and even suicides linked to aggressive recovery methods were rising, while Guv Gehlot rejected the Ordinance.
The Karnataka Microfinance (Prevention of Coercive Actions) Ordinance, 2025, which the state government sought to promulgate to curb suicides linked to the use of coercive loan recovery tactics by microfinance institutions (MFIs) as well as loans being provided by unlicenced moneylenders, has been rejected by Governor Thawarchand Gehlot.
The Governor cited excessive punishment as a key reason, noting that the proposed 10-year prison term and Rs 5 lakh fine were too harsh. He also pointed out that existing laws could have been used by the police to address the issue. Governor Gehlot maintained that the ordinance could negatively impact microfinancing and ultimately hurt the poor.
The Karnataka government argued that cases of assault, extortion, and even suicides linked to aggressive recovery methods were rising, with borrowers reporting to the police that many of the loan recovery agents would use intimidation tactics, including physical force.
The Siddaramaiah government’s draft ordinance had proposed strict measures, including full loan waivers for borrowers who took loans from unlicenced lenders, restrictions on interest rates, and legal immunity from repayment demands. The move came in response to public outrage over a series of suicides allegedly driven by high interest rates and aggressive recovery tactics.
Though the draft ordinance underwent revisions before being sent to the Raj Bhavan, the final version was rejected.
What The Ordinance Said
The ordinance had aimed to stop unfair practices by microfinance institutions (MFIs). It banned them from asking for security deposits like gold, property, or other valuables. Borrowers who faced harassment could file complaints at police stations, and officers were required to register cases.
A DySP or a higher-ranking officer had the authority to take action against MFIs involved in illegal practices. The ordinance also suggested appointing an ombudsperson to settle disputes between lenders and borrowers.
Those found guilty of violating the law will face a prison sentence of up to three years and a fine of Rs 5 lakh, as per the ordinance.
Loan agreements had to be clear, with no hidden charges, and every MFI was required to have an office in the area where it operated.
MFIs had to provide details such as their area of operation, interest rates, loan recovery methods, and records of borrowers, including loan amounts, payments made, and outstanding balances. Registration would be valid for one year, and MFIs had to apply for renewal 60 days before expiry. Authorities could cancel registrations if borrowers filed complaints.
To help borrowers understand loan terms, all communication had to be in Kannada. MFIs also had to provide loan cards showing repayment schedules, interest rates, and borrower obligations. Interest rates had to be clearly displayed in all MFI offices.
The draft stated that courts could not hear loan recovery cases, including those involving interest, and that all pending recovery cases would be dismissed.
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Bangalore, India, India
