Karnataka governor clears ordinance to curb coercive micro-loan recoveries

Governor Thaawarchand Gehlot has cleared the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, with his assent. This would now allow the government to notify the ordinance to check unlawful and coercive recovery of loans from borrowers.

The Governor's action came after he found the explanation offered by the state government convincing. The Raj Bhavan had returned the Ordinance draft to the government last week, seeking its clarification on six points.

The government had proposed an ordinance after reports of suicides and people fleeing their villages emerged from districts due to alleged harassment from agents of micro-finance firms. Some of the lenders, both with a license and without one, also employed goondas to forcibly recover loans from borrowers.


The proposed ordinance proposes a fine of up to five lakhs and jail term of up to 10 years for the executives of micro finance institutions (MFIs) using coercive tactics to recover loans.

The proposed Ordinance requires micro-finance firms to register with the competent authorities in districts within a month of the notification of the new law. They will have to maintain transparency in the rate of interest they levy and collect from borrowers.

"The MFI portfolio at risk has increased from 1.5% to 6% in about six months while 2 % is advisable. This rapid increase indicates high risk lending," a top government source said.

"People are also borrowing recklessly. And they now don’t want to and cannot repay. All said and done, MFIs are necessary for financial inclusion. Lakhs of people who cannot step into a bank are able to get loans from MFI," he said.