Sun Feb 02 21:29:19 IST 2025: ## Karnataka to Forgive Loans from Unlicensed Microfinance Institutions
**Bengaluru, February 2, 2025** – The Karnataka government is poised to introduce an ordinance offering significant relief to borrowers from unlicensed and unregistered microfinance institutions (MFIs). The proposed “Karnataka Microfinance (Prevention of Coercive Actions) Ordinance, 2025,” aims to address a crisis stemming from a spate of suicides attributed to usurious interest rates and coercive debt recovery practices.
The ordinance declares all outstanding loans from unlicensed MFIs, including accrued interest, as fully discharged. It further prohibits civil courts from pursuing any recovery suits against borrowers. Pending cases will be closed. This action follows mounting public pressure on the Siddaramaiah government to intervene.
The total gross loan portfolio of MFIs in Karnataka reached ₹42,265 crore in 2023-24, with an average loan per client of ₹44,036. Experts warn the ordinance may negatively impact loan recovery for both registered and unregistered MFIs and anticipate legal challenges. Concerns have also been raised about its potential impact on the Self-Help Group (SHG) movement, as all SHGs are currently unregistered entities.
The ordinance mandates registration of all MFIs within 30 days of enactment, requiring disclosure of operational details, interest rates, and debt recovery methods. Strict regulations are also imposed, prohibiting security from borrowers, mandating loan cards in the local language, and public display of interest rates. All communication must be in Kannada, and MFIs must maintain a registered local office.
The government will establish an ombudsman to resolve disputes, and violations will be punishable by three years imprisonment and a ₹5 lakh fine. Police are empowered to register complaints and initiate investigations, with a Dy.SP-level officer authorized to file suo moto cases.
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