Bengaluru: Karnataka Governor Thaawarchand Gehlot has approved the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, after receiving clarifications from the State Government.

The Ordinance, aimed at regulating microfinance operations and preventing coercive loan recovery practices, was signed on Wednesday.

The Chief Minister’s Office (CMO) confirmed the development, stating that the Government submitted the Ordinance along with the explanations sought by the Governor.

The Ordinance was initially returned by the Governor on Feb. 7, due to concerns about its impact on legal loan recovery processes. He noted that while it seeks to waive loans and interest imposed by unlicensed and unregistered microfinance institutions, it may also interfere with the rights of legitimate lenders to recover dues through legal means.

Additionally, he highlighted potential violations of fundamental rights under Articles 19 and 32 of the Constitution, which protect an individual’s access to legal remedies.

In response, a senior Home Department official stated, “The Government clarified that unlicensed and unregistered lenders charging excessive or penalty interest are acting unlawfully,                              and such loan practices are illegal. The Government and Courts do not entertain such loan recovery practices.”

The Ordinance explicitly bans violent, coercive or harassing methods for loan recovery while allowing legitimate financial institutions to reclaim their dues through legal channels. “As per the Ordinance, using illegal methods for loan recovery, resorting to violence, applying pressure tactics or causing harassment is prohibited. The Ordinance does not prohibit the recovery of loans provided by registered institutions,” the official added.

Governor Gehlot also raised concerns regarding the economic implications of the Ordinance, particularly the severity of penalties, which include imprisonment of up to 10 years and fines as high as Rs. 5 lakh.

He argued that such penalties are disproportionately harsh compared to existing laws governing similar offences. Furthermore, he noted that with the maximum loan amount under microfinance capped at Rs. 3 lakh, imposing a Rs. 5 lakh fine could contradict principles of natural justice.

In its response, the State Government clarified that the Ordinance does not impose penalties based on loan amounts but rather focuses on punitive measures against aggressive recovery tactics. “Therefore, the Government has not proposed any measures that go against natural justice,” the official added.