Karnataka High Court to clarify scope of 2025 Ordinance against coercive loan recoveries

The Karnataka High Court on Tuesday reserved its verdict on a petition questioning the constitutional validity of the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 [Karnataka Hire Purchase Association v. State of Karnataka and ors]..The Ordinance, which took effect last month, is aimed at protecting economically vulnerable or poor people from coercive loan recovery practices.Justice M Nagaprasanna briefly heard the matter yesterday when he noted that the prime concern appeared to be whether the Ordinance would apply to lenders other than micro-finance institutions (MFI) and transactions entered into by borrowers with MFIs..Advocate General for Karnataka Shashi Kiran Shetty asserted that the Ordinance is only meant to protect vulnerable borrowers who borrow microfinance loans. He contended that the petitioner-association that has challenged the Ordinance (Karnataka Hire Purchase Association) may not be affected by it at all. .The High Court, however, noted that there was some substance to the petitioner's apprehension that their loan recoveries may also be affected by the Ordinance. "You should be clear in what you want. You are wanting only to protect only the microfinance (borrowers)...Then why do you add ‘money lending agencies, organisations, lenders, under an agreement, orally or in writing?'" the judge asked the AG.AG Shetty replied that micro-financing may happen in many ways. He added that the State did not specifically define what a "microfinance" loan is, since the Reserve Bank of India has already defined this term as "a collateral-free loan granted to a household with an annual income of up to ₹3 lakh."He further argued that the Ordinance was introduced to protect vulnerable borrowers after a spate of suicides by such persons due to distress on account of pending loans. .The Court acknowledged the concern and indicated that it would clarify the application of the Ordinance in its verdict."I will consider AG’s submission that the definition of ‘lender’, though it refers to so many things, it is only with regard to microfinance institutions…These are poor people who take money and they are tortured to the hilt…This is made for the purpose of a poor man not to get tortured…They (petitioner association) are here only because of ambiguity in the definition," the judge said. .The Ordinance in focus prohibits collateral-based loans and requires microfinance institutions and other such lenders to release securities already taken from borrowers. Among other provisions, it also discharges 'vulnerable' borrowers from loans taken before the Ordinance came into force if the loans were given by unregistered or unlicensed micro-finance institutions/lenders.However, the Karnataka Hire Purchase Association - an association representing motor vehicle/asset financiers - argues that the Ordinance fails to properly distinguish between predatory creditors and law-abiding lenders. They have highlighted that their business of motor vehicle or asset financing differs from conventional money lending as it helps in asset creation for borrowers and contributes to economic growth and financial inclusion.The Association, therefore, filed a writ petition challenging the constitutionality of the 2025 ordinance..Representing the Association, Senior Advocate Udaya Holla on Tuesday argued that the definition of terms such as "borrower" or "lender" to whom the Ordinance is applicable is without any application of mind.."Vulnerable" borrowers have been defined without any income criteria, which could lead to the misuse of the ordinance, the petition added.The Ordinance would undermine existing contractual obligations and set a bad precedent, as borrowers may default on obligations anticipating similar relief measures in future, the plea further stated."(Section 6 of the ordinance) effectively eliminates any legal claim that unregistered lenders may have on outstanding loans provided to vulnerable borrowers before the enactment of the Ordinance. While ostensibly aimed at alleviating financial distress, it places an undue burden on lenders who have advanced credit in good faith under existing legal frameworks. The blanket waiver could set a precedent that disrupts the financial ecosystem by discouraging legitimate lending to low-income groups, thereby reducing access to credit for those who need it most."It would affect the financiers' freedom of trade and rights to property, the plea added.The petitioner has urged the High Court to either strike down the Ordinance as arbitrary and unconstitutional or to clarify that motor vehicle or asset financing businesses are outside its purview..The plea has been filed through Advocate Sanjay H Sethiya.