Context:
India’s microfinance industry has repeatedly faced crises whether due to state crackdowns, borrower overleveraging, or bad loan. Yet it has always found a way to recover. Now, Karnataka’s new ordinance threatens to shake the industry again.
What are Microfinance Institutions?
Key Provisions of Karnataka’s Microfinance Ordinance (2025)
- Mandatory registration for
- Jail (6 months – 10 years) and fines (up to ₹5 lakh).
- State can cancel registrations if borrowers complain.
- Exemptions for banks & RBI registered NBFCs, but MFIs remain affected.
A Pattern Repeated: Takeaways from AP & Assam
- AP (2010): Tight laws caused the MFIs to collapse, bad loans to surge, and bank funding to be curtailed.
- Assam (2020, 2023 amendment): Identical law enacted, then amended to exempt regulated lenders.
Where Microfinance Currently Stands?
- Loan book at ₹384,396 crore as of Dec 2024. Karnataka ranks 4th.
- Bad loans growing:
- 30+ days overdue: 6.92% (up sharply).
- 90+ days overdue: 3.9%.
- Biggest players: NBFC MFIs (39.1%), private banks (32.5%), small finance banks (16.15%).
The Real Issue: Unregulated Lenders, Not MFIs
- Borrowers can’t distinguish between legal MFIs and illegal moneylenders.
- Local “ring leaders” manipulate borrowers, sometimes pocketing repayments.
- Karnataka’s legislation does not target these shadow lenders, but instead harm the MFIs.
What Will Happen If Karnataka Proceeds?
- MFIs may struggle as it did in Andhra Pradesh.
- Bank funding might dry up, exacerbating the liquidity crisis.
- Defaulters will again seek black market loans, enhancing financial distress.
