A Bill 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 or Money Lending Agencies or Organizations operating in the state of Karnataka and for matters connected therewith and incidental thereto.
1. Short title, commencement and application.-(1) This Act may be called the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Act, 2025.
(2) It shall deemed to have come into force with effect from 12th day February, 2025.
(3) Nothing in this Act shall be applicable to legal, registered and regulated bodies like Banks (including Small Finance Banks, Local Area Banks, Regional Rural Banks and Business Correspondents of Banks) regulated by RBI, all Co-operative Banks and all Non-Banking Financial Companies and Housing Finance Corporation, registered with RBI.
(4) The provisions of this Act shall be in continuation of and not in derogation of any existing law for the time being in force.
2. Definitions.- (1) In this Act, unless the context otherwise requires,-
(a) "Borrower' means an individual or a Self Help Group (SHG) or Joint Liability Group (JLG) or group of individuals who avail money in the form of a loan for any purpose from Micro Finance Institutions or Money Lending Agencies or Organizations or Lender under an agreement either orally or in writing with terms and conditions that the money shall be repaid within a certain period of time.
(b) "Coercive Action" means the Coercive Action as explained in section 8.
(c) "Interest" for the purposes of the terms defined under the provisions of this Act means a return on the amount lent by the Micro Finance Institutions or Money Lending Agencies or Organizations or Lender in cash or kind as the case may be, to a Borrower and includes interest charged on daily, weekly, monthly or yearly basis;
(d) "Loan' means micro loan, small loan and an advance or hand loan. whether of money or in kind such as seed, fertilizer, etc, given to the borrower at interest explicitly or otherwise.
(e) "Lender" includes Micro Finance Institutions (MFI) or Moncy Lending Agencies or Organizations and any partnership firm or person or group of persons or digital lending platform whose principal or incidental activity is to lend money or offer financial support of whatsoever nature, in cash or kind to earn profit by charging interest on daily, weekly. monthly or yearly basis.
(1) "Registering Authority" means the Deputy Commissioner of the concerned District:
Provided that, the State Government may by notification appoint such other designated officer as Registering Authority.
(g) "Vulnerable section of the society" means and includes farmers, women. self help group of women, agricultural labours, workmen, footpath vendors, other vendors who move from one place to other, worker working in milk dairy, construction workers, migrant workers, those group of people who are disadvantaged as compared to others mainly on account of reduced access to their basic services and the underlying determinants of health, housing sanitation etc. and the people who are economically backward, low on livelihood patterns with no regular source of income.
(2) Words used but not defined in this Act, shall have the same meanings. respectively assigned to them in the relevant Acts and rules made thereunder.
3.Registration of Micro Finance Institute or Money Lending Agencies or Organizations or Lender.- (1) All Micro Finance Institutions or Money Lending Agencies or Organizations or Lender operating in the State of Karnataka as on the date of the commencement of this Act, shall within thirty days from the date of commencement of this Act, apply for registration before the Registering Authority of the district specifying there in the villages or towns in which they have been operating or propose to operate, the rate of interest being charged, system of
conducting due diligence and system of effecting recovery and list of persons
authorized for conducting the activity of lending or recovery of money which has been lent and the name and address of the borrower, the total principal amount lent to the borrower, the amount already recovered from the borrower, the balance amount yet to be recovered from the borrower, and a written undertaking that it shall always act in conformity with the provisions of this Act.
(2) No Micro Finance Institutions or Money Lending Agencies or Organizations or Lender operating or intending to start the business of lending money after the commencement of this Act shall grant any loans or recover any loans without obtaining registration under this Act from the Registering Authority.
(3) The Registering Authority shall verify the details furnished by the Micro Finance Institutions or Money Lending Agencies or Organizations or Lender and accord registration in such manner as may be specified for operation of Micro Finance Institutions or Money Lending Agencies or Organizations or Lender for a period of one year.
(4) Where the Micro Finance Institutions or Money Lending Agencies or Organizations or Lender applies for renewal of registration, an application for that purpose shall be filed by the Micro Finance Institutions or Money Lending Agencies. or Organizations or Lender within sixty days before the expiry of the period of one year referred to in sub-section (3) and the Registering Authority shall decide either to grant renewal or refuse renewal of registration at least fifteen days before the date of expiry of registration, after due verification of the performance of the Micro Finance Institutions or Money Lending Agencies or Organizations or Lender in the field level and after hearing objections, if any, from the general public regarding extension of registration.
(5) Every Registering Authority shall maintain registers as specified for the area under its jurisdiction of all Micro Finance Institutions or Money Lending Agencies or Organizations or Lender having valid registration.
4. Power to cancel or suspend Registration.- (1) 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 a Micro Finance Institution or Money Lending Agencies or Organizations or Lender after hearing and after assigning sufficient reasons in writing for such cancellation and no order of cancellation of the registration shall be passed without issuing notice to the Micro Finance Institution (MFI) or Money Lending Agencies or Organizations or Lender intimating the facts upon which the prima-facie decision to cancel the registration. has been taken and the Micro Finance Institution (MFI) or Money Lending Agencies Organizations or Lender shall be afforded a reasonable opportunity of being heard against such notice.
Explanation: For the purposes of sub-section (1), conviction of a Micro Finance Institution (MFI) or Moncy Lending Agencies or Organizations or Lender for an offence of violation of any of the provisions of this Act shall be sufficient cause for cancellation or recommend to cancellation of its registration.
(2) Pending enquiry under sub-section (1), the Registering Authority may, for sufficient reasons to be recorded, suspend the registration, of a Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender.
5.Lending Norms. The Government may, by notification, specify the lending norms, collection and recovery practices.
6.Micro Finance Institutions or Money Lending Agencies or Organizations or Lender not to seek security. No Micro Finance Institution (MFI) or Money Lending Agencies or Organizations 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 Act shall forthwith stand released in favor of the borrower.
Explanation: For the purpose of this Act "security" means, any form of collateral.
7.Transparency in rates of interest charged by Micro Finance Institutions or Money Lending Agencies or Organizations or Lender.- (1) There shall be only four components in the pricing of the loan viz. the interest charge, the processing charge, the insurance premium and delayed penal payment.
(2) There shall be a standard loan agreement as specified.
(3) Micro Finance Institutions or Money Lending Agencies or Organizations or Lender shall provide the borrower a loan card reflecting.
the effective rate of interest charged;
(ii) all other terms and conditions attached to the loan;
(iii) information which adequately identifies the borrower; and
(iv) acknowledgements by the Micro Finance Institution (MFI) of all repayments including installments received and the final discharge;
(v) all entries in the Loan Card shall be in Kannada.
(4) The effective rate of interest charged by Micro Finance Institution (MFI) or Money Lending Agencies or Organizations or Lender shall be prominently displayed in all its offices and in the literature issued by it and on the website.
(5) All borrowings by a borrower from Micro Finance Institutions (MFI) or the Money Lending Agencies or Organization or Lender shall be entered in the manner, wherein the process of sanction and disbursement of loans shall comply that,-(i) all communications to the borrower shall be in the kannada;
(ii) Loan application forms shall include necessary information which may affect the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other Micro Finance Institutions (MFI) or Money Lending Agencies or Organization or Lender can be made and a proper decision can be taken by the borrower. The loan application form shall indicate the documents required to be submitted with the application form.
(6) Every Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender shall keep and maintain a cash book, a ledger and such other books of account as may be specified.
(7) Every Micro Finance Institution (MFI) Money Lending Agencies or Organization or Lender shall deliver or cause to be delivered, to the borrower within one day before the date on which a loan is made, a statement in the specified form showing in clear and distinct terms the amount and date of the loan and of its maturity, the name and address of the functionary of the Micro Finance Institution. (MFI) or the Money Lending Agencies or Organization or Lender and the effective rate of interest charged;
(8) Every Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender shall have a registered office in the local arca.
(9) No Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender shall receive any payment from a borrower on account of any loan without giving him/her a duly signed receipt for the payment.
(10) A Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender shall, on a demand in writing by the borrower, supply a copy of any document relating to a loan obtained by him/her, or if the borrower so requires, to any person specified in that behalf in the demand:
Provided that, in respect of loans given prior to the commencement of this Act, it shall be obligatory for the lender to specify if any security was accepted from the borrower.
(11) Every Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender shall submit a quarterly Statement and annual statement to the Registering Authority before 10th day of ensuing quarter and financial year. as the case may be, giving therein the list of borrowers, the loan given to each and the interest rate charged on the repayment made.
(12) The Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender who fails to submit the quarterly Statement and annual statement shall be punishable with imprisonment for period of six months or with fine which may extend to Ten Thousand rupees or with both.
8. Penalty for coercive actions against Micro Finance Institutions (MFI).- Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender shall not use any coercive action either by itself or by its agents for recovery of money from the borrower and any form of coercive recovery shall be liable for punishment under the provisions of this Act and empower the Registering Authority to suspend or cancel the Registration of such Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender as provided under the provisions of this Act.
Explanation: For the purposes of this section, "coercive Action" by a Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender against the borrowers include the following, namely:-
(i) exerting pressure or obstructing or using violence to or insulting or intimidating the borrower or his/her family members, or
(ii) persistently following the borrower, his/her family member from place to place or interfering with any property owned or used by him/her or depriving him/her of, or hindering him/her in the use of any such
property, or (iii) frequenting the house or other place where the borrower resides or works, or carries on business, or happens to be, with an intension of taking coercive action, or
(iv) using the service of private or outsource or external agencies, criminal background to negotiate/urging the borrower to make payment using coercive and undue influence, or
(v) Seeking to take forcibly any document from the borrower which entitles the borrower to a benefit under any Government programme.
9. Power to require production of records or documents and power of entry, inspection and seizure. (1) The Registering Authority or any officer authorized by him/her in this behalf may, to verify whether the business of the Micro Finance Institution (MFI) or Money Lending Agencies or Organization Lender is being carried on in accordance with the provisions of this Act, enter the premises of the Micro Finance Institution (MFI) or Money Lending Agencies Organization or Lender office or of any person who in his/her opinion is carrying on the business of lending and call upon him/her to produce any record or document relating to such business and every such Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender shall allow such inspection and produce such record or document during such inspection and as and when required.
(2) The Registering Authority may, for the purposes of sub-section (1) search the premises and seize any record and document as may be necessary and the record or document seized shall be retained only for such period as may be necessary for the purposes of examination, prosecution or other legal action.
(3) The Registering Authority or the other officer referred to in sub-section (1), shall also have power to summon and examine the Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender any person who in his/her opinion is in a position to furnish relevant information.
10. Complaints. A complaint can be filed regarding violation of the provision of this Act by Micro Finance Institution (MFI) or Money Lending Agencies or Organization or Lender before the concerned/jurisdictional police station and the concerned police officer. No police officer shall refuse to register a case:
Provided that, a Police officer not below the rank of Deputy Superintendent of Police shall be empowered to file a suo-moto case.
11. Appointment of an Ombudsperson. The Government may by notification, appoint an Ombudsperson who can act as mediator between the borrower or lender, for settling the disputes.
12. Grievances redressal forum. The Government shall establish suitable grievance mechanism. The procedure and guidelines for grievance mechanism shall be in the manner may be prescribed.
13. Penalty for contravention of section 8 of the Act. Any person who contravenes of section 8 of this Act, shall be tried and punishable 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 Act are cognizable and non-bailable.
14. Every officer to be public servant. Every officer of the Government and every person acting under the provisions of this Act shall be deemed to be a public servant within the meaning of sub-section (28) of section 2 of the Bharatiya Nyaya Sanhita, 2023 (Central Act 45 of 2023).
15. Relief to borrower from coercive action by the unlicensed and unregistered Micro finance institutions or Money Lending Agencies or Organizations or Lender. Notwithstanding anything in any law for the time being in force or in any contract or instrument having force by virtue of any such law and save as otherwise expressly provided in this Act, with effect from the date of commencement of this section,
(a) Every loan advanced before the commencement of this section including the amount of interest, if any, payable by the borrower to Micro finance institutions or Money Lending Agencies or Organizations or Lender shall be deemed to be wholly discharged for "Vulnerable section of the society if unregistered and unlicensed Micro finance institutions or Money Lending Agencies or Organizations or Lender resort to coercive action.
(b) No Civil Court shall entertain any suit or proceeding against the borrower for the recovery of any amount of such loan including interest, if any,
Provided that, where a suit or proceeding is instituted jointly against the borrower and any other person nothing in this section shall apply to the maintainability of the suit or the proceeding in so far as it relates to such other. person.
(c) All suits and proceedings (including appeals, revisions, attachments or execution proceedings) pending on the said date against any borrower for the recovery of any such loan shall abate.
16. Power to remove difficulties. If any difficulty arises in giving effect to
the provisions of this Act, the State Government may, by an order, published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act which appear to it to be necessary or expedient for the purposes of removing the difficulty:
Provided that, no such order shall be made under this section after the expiry of the period of two years from the date of commencement of this Act.
17. Power to give directions. The Government may, from time to time, issue such orders, instructions and directions by specifying the Registers, Forms, Online procedures, Portals, Help Centers not inconsistent with the provisions of this Act and the rules made thereunder to the officers, Micro Finance Institutions (MFI) or Money Lending Agencies or Organizations, borrower, lender for the purpose of proper implementation of the Act and such officers and all other persons employed in the enforcement of the Act, shall comply with such orders, instructions and directions.
18. Power to make rules. (1) The State Government may, by notification in the Official Gazette make rules to carry out the purposes of this Act.
(2) The power to make rules conferred by this section shall be subject to the condition of the rules being made after previous publication.
(3) Every rule or notification made under this Act shall be laid as soon as may be after it is made, before each House of the State Legislature while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions and if before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or notification or both Houses. agree that the rule or notification should not be made, the rule or notification shall, from the date on which the modification or annulment is notified have effect only in such modified form or be of no effect as the case may be; so, however, that any such modification or annulment shall be without, prejudice to the validity of anything previously done under that rule or notification.
19. Repeal and savings. (1) The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 (Karnataka Ordinance No. 02 of 2025) is hereby repealed..
(2) Notwithstanding such repeal, anything done or deemed to have been done or any action taken or deemed to have been taken under The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 (Karnataka Ordinance No. 02 of 2025) shall be deemed to have been done under this Act.
STATEMENT OF OBJECTS AND REASONS
1. The micro loan, small loan, private finance and other unregulated lending mafia are harassing and strangulating the borrowing community like poor rural indigents, urban workers, weaker and vulnerable section of the society. The borrower is constrained to pay sometimes double the amount or more, towards interest. The borrower is driven to streets and driven to commit suicide, on account of lenders. The proposed Legislation is to protect and rescue the helpless who happen to borrow loans and then are doomed in debts.
The proposed Legislation is to protect and relieve the economically vulnerable groups and individuals, especially women and women self help groups. from the undue hardship of usurious interests rates and coercive means of recovery by Micro Finance Institutions or Money Lending Agencies or Organizations involved in buying and selling Agricultural commodities by accepting agricultural produce from farmers or money lenders who lend money to poor and extract the principal with interest in form of cash or kind or shop or commercial establishment or estate entity and for this purpose to create an effective mechanism to regulate the Micro Finance Institutions or Money Lending Agencies or Organisations operating in the state of Karnataka and for matters connected therewith and incidental thereto.
2. The primary objective of the proposed Legislation is to protect helpless borrowers from coercive and unlawful recovery practices, which aligns with:
(a) Article 21-Right to Life and Personal Liberty. The Supreme Court has repeatedly held that economic exploitation and harassment infringe upon the dignity of individuals. The proposed Legislation seeks to prevent financial distress that has led to suicides and severe hardships, thereby ensuring the protection of fundamental rights.
(b) Articles 38 and 39 of the Directive Principles of State Policy. The State has a duty to reduce inequalities and prevent the concentration of wealth. in a few hands. The proposed Legislation addresses this by regulating unregistered lenders who operate outside legal frameworks.
(c) The principle of reasonable classification under Article 14 (Right to Equality) allows the State to treat different categories of lenders differently based on legitimate concerns. The proposed Legislation applies only to unregistered and unregulated lenders, who are not subject to RBI oversight.
d) Article 19(6)-Reasonable Restrictions on Trade and Business which allows the State to regulate professions in the interest of the general public. The proposed Legislation does not prohibit lawful lending but restricts coercive recoveries, which have been a cause of public concern.
(e) The Supreme Court, in cases like State of Gujarat v/s Mirzapur Moti Kureshi Kassab Jamat (2005), has upheld State intervention when public welfare is at stake. Given that coercive lending has led to numerous cases. of farmer suicides and financial ruin, the proposed Legislation is a proportional response to a pressing social issue.
3. The proposed Legislation imposes penalties, including imprisonment and fines.
(a) The punishment aligns with the doctrine of deterrence, as seen in financial laws like the Prevention of Money Laundering Act (PMLA), 2002, which imposes strict penalties for financial misconduct.
(b) The Supreme Court has upheld the power of the legislature to determine penalties unless they are manifestly arbitrary (State of Andhra Pradesh v/s McDowell & Co., 1996). Given the impact of coercive lending, the penalties serve as a necessary deterrent.
4. The proposed Legislation mandates the release of securities taken by unregistered lenders. While this differs from banking practices, it is justified because:
(a) Article 39(c) Directive principles of state policy, mandates that the State prevent economic exploitation. Unlike banks, unregistered lenders operate without regulatory oversight and often acquire securities through coercion.
(b) Existing legal mechanisms have failed to protect borrowers, necessitating stronger interventions. The Supreme Court, in D.S. Nakara v. Union of India (1983), upheld that the State can take proactive measures for the socio-economic welfare of vulnerable groups.
(c) The Supreme Court, in Krishna Kumar Singh v. State of Bihar (2017), held that Legislation must be based on immediate necessity. The urgency of borrower protection justifies the proposed Legislation.
The proposed Legislation is a necessary and legally sound intervention to address financial exploitation and does not violate any fundamental rights but rather strengthens protections for vulnerable borrowers. The principles of social justice, economic fairness, and the protection of life and dignity justify the need for immediate enforcement.
As the matter was urgent and both the Houses of the State Legislature were not in session, the Karnataka Micro Loan and Small Loan (Prevention of Coercive
Actions) Ordinance, 2025 (Karnataka Ordinance No. 02 of 2025)was promulgated to achieve the above object.
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