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The Karnataka government has introduced the Micro Loan and Small Loan (Prevention of Coercive Actions) Bill, 2025, absolving borrowers from repaying loans taken from unregistered microfinance institutions (MFIs) and mandating the return of securities collected by such lenders. This move follows rising concerns over predatory lending and harassment, highlighted by tragic incidents like a borrower's suicide in Haveri. Karnataka's microfinance sector, supporting over 10 million individuals, has grown rapidly, but aggressive debt collection has led to calls for stronger regulation. While the Bill protects borrowers, analysts stress the need for broader governance reforms to balance accessibility with ethical lending practices.
The microfinance sector in Karnataka has been a double-edged sword, offering easy access to credit without the need for collateral or credit scores while simultaneously exposing borrowers to aggressive collection tactics. In response to growing concerns over coercion and harassment, the Karnataka government has introduced the Micro Loan and Small Loan (Prevention of Coercive Actions) Bill, 2025. This proposed legislation aims to fully absolve borrowers of their repayment obligations, including interest, if their loans were taken from unlicensed or unregistered microfinance institutions (MFIs). Advertisement
Additionally, the Bill mandates the release of any securities collected by unregistered lenders, ensuring that borrowers are no longer held liable for such debts. While this move is seen as a step toward protecting vulnerable borrowers, analysts argue that it highlights deeper flaws within the microfinance ecosystem. They emphasise the need for stronger governance, regulatory oversight, and a more comprehensive approach to addressing systemic issues in the sector.
The government's intervention comes after multiple incidents of harassment by microfinance firms, including a tragic suicide in Haveri, which brought predatory lending practices into the spotlight. Karnataka's MFIs currently support over 10 million individuals, with 6.3 million unique borrowers depending on microcredit. The sector has witnessed rapid expansion, with the total gross loan portfolio surging from INR 16,946 crore in March 2019 to INR 42,265 crore in March 2024. However, this growth has also led to challenges such as repayment difficulties and aggressive debt collection tactics.
While Karnataka's new Bill seeks to curb predatory lending and coercive collection tactics, it also exposes broader weaknesses in the microfinance system. The rapid expansion of the microfinance sector, while beneficial in terms of accessibility, has also led to unethical practices that demand regulatory intervention. Addressing these issues will require not only legal measures but also a more structured approach to governance, ensuring that borrowers are protected without disrupting the essential flow of microcredit in the economy.
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