Karnataka brings into force law to prevent coercive loan recoveries in microfinance sector

“Those who have been harassed after taking out loans through microfinance can file a complaint with the police, and they will receive greater protection under the new law. I am confident that through our efforts, the harassment and abuse of microfinance, finance, and moneylenders in the state will end,” he said.

The chief minister said the government would ensure that the new law would not be misused, as apprehended by the governor.

The ordinance proposed by the Congress government was initially rejected by the governor, who sought clarifications while returning the ordinance on February 7. The government sent the ordinance back to the governor on February 10 with clarifications but with no changes to the legal provisions.

The ordinance has proposed stringent punishment for the use of coercive tactics by moneylenders of all forms to collect dues from borrowers. The ordinance was proposed in the wake of several suicides in the state linked to coercive tactics—including the use of criminal intimidation—by moneylenders.

“The clarifications sought by the Governor to the microfinance ordinance have been sent back to the Governor with full details,” Siddaramaiah’s office said on February 10.

The governor earlier objected to the ordinance on the grounds that the punishment of 10 years and a fine of Rs 5 lakh proposed under the law is excessive and that existing laws can be used by the police department to control the situation.

The governor said the law should be reconsidered since it can have a negative impact on microfinance and stifle the sources of credit available to the poor in the state.

The governor had said the state should use the forthcoming budget session next month to enact a proper law “instead of bringing an ordinance in a hurry”. “I advise the state to deliberate this issue in detail and bring an effective enactment in the interest of the affected people and to protect their rights,” the governor said in his reply on February 7.

One of the key proposals in the ordinance is to ban microfinance institutions from outsourcing loan recovery to anti-social elements who tend to harass borrowers with extreme measures.