Micro Finance: Karnataka Governor returns Ordinance, questions its need when there are other laws

Governor Thaawarchand Gehlot has returned the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 to the State Government 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.

Chief Minister Siddaramaiah said his government would protect borrowers from coercive recovery of loans and proposed the ordinance.


The Governor, however, did not agree with a provision in the draft Ordinance which sought to bar civil courts from initiating proceedings against borrowers for recovery of loans including interest. The Governor said every person has a right to fight for his rights and legal remedies as a principle of natural justice.

The Governor also wondered how the proposed law could impose a fine of Rs 5 lakh when the maximum loan itself was Rs 3 lakh. In the same way, the Governor said the term of punishment proposed in the ordinance was disproportionate and at variance with the jail term prescribed for similar offences in other laws. The Ordinance, the Governor felt, would go against the interests of self-help groups (SHGs) engaged in social inclusion.

The state already has its police force and other departments and laws to check forceful recovery of loans, while wondering about the need for a new law, the Governor said. He agreed that the proposed law will benefit borrowers but would surely hurt lenders who are also part of the same society. Hence the issue needs discussion in the legislature, he said.

Sections of ministers believe in their aggressive drive to expand market and turn-over, many small lenders have issued loans to people far beyond their repayment capacity.

"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.