The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025

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The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, has been enacted to regulate microfinance activities and protect borrowers from coercive recovery practices. The key provisions of the ordinance are as follows:

1. Mandatory Registration:

  • All microfinance institutions (MFIs) and lending agencies are required to register with the designated district authorities within a specified timeframe.

2. Prohibition of Coercive Recovery Practices:

  • The ordinance strictly prohibits the use of coercive tactics for loan recovery. Violations can result in penalties of up to ₹5 lakh and imprisonment of up to 10 years.

3. Loan Pricing Components:

  • Loans are permitted to include only the following components:
    • Interest charges
    • Processing fees
    • Insurance premiums
    • Penalties for delayed payments

4. Establishment of an Ombudsman:

  • An Ombudsman will be appointed to mediate disputes between borrowers and lenders, ensuring fair resolution of conflicts.

5. Discharge of Certain Loans:

  • Loans extended to vulnerable sections of society prior to the ordinance’s implementation are considered discharged, including interest, if the lending MFI is unregistered or unlicensed.

6. Transparency and Accountability:

  • MFIs are required to maintain transparency in their interest rates and other charges, providing clear information to borrowers.

This ordinance reflects the Karnataka government’s commitment to protecting borrowers from predatory lending practices while ensuring that legitimate lenders operate within a regulated framework.

 
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