Karnataka Governor Returns Microfinance Ordinance, Cites 'Disproportionate' Punishment And Potential Impact On Lenders

The Governor said the Ordinance focuses only on protecting the interests of the borrowers, and not the lenders who are also part of the society.

Bengaluru: The Karnataka government's efforts to rein in unregistered and unlicensed microfinance companies from unleashing coercive actions on borrowers hit a roadblock as Governor Thawarchand Gahlot on Friday sent back the ordinance submitted by the former seeking its promulgation for protecting the borrowers from the alleged harassment by microfinance companies.

On Tuesday, State Home Minister G Parameshwara informed that they have sent the draft of Karnataka Micro Finance (Prevention of Coercive Actions) Ordinance 2025 to the Governor’s office. However, the ordinance was returned by the Governor who expressed concerns over 'disproportionate' punishment and its potential impact on the microfinance sector.

The Ordinance which was passed by the state Cabinet last week proposed upto 10 years of imprisonment and sought to impose upto Rs 5 lakh fine on microfinance companies for violating provisions of the ordinance. "The term of punishment proposed is disproportionate. When the maximum amount of loan that can be lent is Rs 3 lakh, the proposed fine of Rs 5 lakh itself is against natural principles," the Governor said.

At the same time, the Ordinance sought to provide relief to the borrowers by giving a whole discharge from every loan advancement including interest as on the date of the Ordinance, and barred courts from entertaining proceedings against borrowers besides abetting all pending proceedings in any courts for loan recovery in case of violation of its provisions.

"If all the pending loans with interest are discharged, the lawful and genuine lenders may face trouble. The ordinance offers no remedy for them to recover their pending amounts. It is as good as preventing a person from fighting for his rights and legal remedies which is a violation of fundamental rights provided under the Constitution," Governor opined.

Following a slew of reports of alleged harassment of gullible borrowers by microfinance companies and consequent suicides by some borrowers across the state over the past two months, the state government decided to take the ordinance route to bring microfinance companies under the ambit of law to put a check on their activities.

However, highlighting the Ordinance provisions that make lenders not to seek any security from the borrowers, the Governor said the Ordinance as a whole seems to be against the principles of lending and it will affect the business as well as small borrowers who have no access to lending by banks. "It (ordinance) has the ability to erode the goodwill and comradery in the society as it seeks to benefit the borrowers while negatively affecting lenders," he said.

He also indirectly questioned the very need of the ordinance, saying that existing laws are effective enough to deal with unauthorised lenders. Efficient implementation of existing frameworks by enforcement machinery is all that is needed to deal with such problems in an efficient manner, the Governor said.

Asking the State Government to re-submit the ordinance addressing his concerns, the Governor advised to bring an effective enactment after a detailed deliberation in the budget session starting next month, instead of rushing through the Ordinance.

Read More