The Karnataka High Court is set to rule on the constitutional validity of a new ordinance that aims to shield financially vulnerable borrowers from aggressive loan recovery tactics. However, concerns have emerged that the law’s broad language could have unintended consequences for legitimate lenders.
The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 took effect last month, targeting coercive practices in the microfinance sector. While the government insists that the law is strictly meant to protect borrowers of microfinance loans, industry players argue that its vague definitions may entangle other types of lenders.
During Tuesday’s hearing, Justice M. Nagaprasanna noted that the main question was whether the ordinance applies solely to microfinance institutions or also extends to other lenders operating under written or verbal agreements. The Karnataka Hire Purchase Association, representing vehicle and asset financiers, contends that the ordinance unfairly lumps them in with predatory lenders, despite their role in economic development.
Advocate General Shashi Kiran Shetty defended the ordinance, emphasizing that it was introduced in response to a rise in borrower suicides due to financial distress. He pointed out that microfinance loans are already defined by the Reserve Bank of India as collateral-free credit given to households earning up to ₹3 lakh annually. However, the court acknowledged that the definition of “lender” in the ordinance could create ambiguity.
The ordinance includes stringent measures such as prohibiting collateral-based lending and requiring lenders to return securities already collected from borrowers. It also wipes out loans given by unregistered lenders before the ordinance came into force—an aspect that the petitioner argues could disrupt the financial ecosystem.
Senior Advocate Udaya Holla, representing the Karnataka Hire Purchase Association, argued that the ordinance fails to distinguish between predatory moneylenders and legally compliant financiers. The plea warns that the blanket waiver of certain loans could encourage defaults and undermine legitimate lending practices, ultimately reducing access to credit for low-income borrowers.
With concerns mounting over the law’s potential impact on financial markets, the High Court is now expected to clarify its scope in the coming verdict.
