Archive for year: 2026

By Aditya Iyer ( reachable at – adityaiyer20@gmail.com). Aditya, a former colleague, wrote this piece for the Financial Services Division (finserv@vinodkothari.com) 

The new Bihar MFI Bill appears to have triggered first reactions, which, looking at stock prices of some of the players, are quite adverse. However, for regulated entities, it is important to chart out the next steps based on concrete and reasonably forecastable compliance obligations (given that it is still a Bill), rather than first impressions.

Given that Bihar has a deep penetration of microfinance (an estimated 16% of the nation’s share), and relative to other states, the income level of the rural population is low, as is that of financial literacy, the concerns of the State Govt seem to have been rooted in the increasing level of the bottom-of-the-pyramid indebtedness.

  I. At a glance – some applicability for NBFCs and Banks

Avowed  intent of the bill: The Bihar Micro Finance Institutions (Regulations of Money Lending and Prevention of Coercive Actions) Bill, 2026 (“Bihar MFI Bill” / “Bill”) was passed by the assembly on 26th February 2026, with an explicit intention to “prohibit coercive and unethical recovery practices, ensure transparent lending operations with fair interest rates, protect vulnerable borrowers from exploitation through comprehensive safeguards, and establish effective mechanisms for dispute resolution and borrower relief while maintaining a balanced regulatory framework that promotes financial inclusion”

Applicability on banks and NBFCs: While section 2(2) does appear to carve out an exception for regulated entities, it has been explicitly clarified under Section 2(3) of the Bill, that the provisions pertaining to “prohibition of coercive recovery practices”, “borrower protection measures”, and “fair recovery practices” shall apply to regulated entities such as Banks and NBFCs as well – insofar as they “engage in recovery of loans from borrowers within the State of Bihar”.
Hence, the Bill contains provisions and compliances for Banks and NBFCs engaged in lending and loan recovery in the State of Bihar, no matter where the entity is registered or headquartered. Penalties for non-compliance are captured under Chapter VI of the Bill, and include imprisonment of up to three years, punishment under Section 108 of the Bharatiya Nyaya Sanhita (abetment of suicide), fines upto Rs  five lakhs, etc.
Directors’ and officers to be liable unless proved diligent:  While attributing a corporate offence to a director/officer are quite common (usually provided that the directors did not have a mere supervisory role, and acted in a way that directly connects their conduct to company’s liability, see here for more), the Bill brings a specific provision [under Section 19] which goes to escalate the apparent responsibility for an offence under the Bill to “every director, partner, manager, or officer who was in charge of and responsible for the conduct of business at the time of violation”. Therefore, the only escape for the accused will be to prove that the person was clean, by evidencing that the offence occurred without such director/partner/manager/officer’s knowledge, and crucially, that they exercised the “due diligence” to prevent such a violation.

Hence, while commentators have duly observed that only the provisions pertaining to coercive recovery practices and the like are applicable to regulated entities (such as NBFCs), what must also be noted is the additional penalties by way of fines and imprisonment, introduced for a breach of the same.

How should one exercise this “due diligence” in a manner consistent with the RBI obligations? In the author’s view, creating an audit trail through the routine gap-assessments, ensuring Policy safeguards, ensuring that the recovery agents sign the code of conduct and are briefed on the same, etc, would be one such method.

II. Economic and social relevance of the Bill

Bihar’s portfolio: The changes, though applicable to a particular state, assume importance at a macro-level, because per data from September 2025, Bihar’s outstanding MFI portfolio stood at approximately 45,000 crores, and accounted for 16% of the nation’s market share (refer Equifax Report here) ^[1]. Hence, it has been stated to be the largest state in terms of NBFC-MFI’s AUM share (refer Care Edge Ratings Report here)^[2].  Interestingly, the state’s population relative to the nation’s is an estimate of 9% (relying on census projections)^[3], and the state contributes approximately 3% of the Nation’s GDP.

Impact of the Bill on NPAs, loan recoveries, and book-size: Some of the requirements under the Bill are consistent with the extant RBI regulations, whereas others impose more onerous standards, such as with respect to loan recovery practices, hours of contacting the borrower, lender-cap for the borrower, approaching the borrower at the workplace, etc.  In the author’s view, such measures proposed to be implemented via the Bill, especially where ambiguous, may likely stall recoveries further, increase operational costs for lenders, and might balloon NPAs in the state (resulting also in higher provisioning for the Banks and NBFCs). It may also further lead to the shrinkage of loan books and present more difficulties for MFIs conducting business in the region to meet their qualifying asset criteria (as has emerged in recent times).

Microfinance is one business where, as proved empirically in many cases, if new lending shrinks, recoveries shrink much higher. Therefore, if the Bill results in slackening the growth of microfinance, it may result in a sharp drop in collection efficiency.

Recoveries may further be stalled by frivolous complaints launched by unscrupulous borrowers, under the provisions of the Bill, in order to evade recovery (refer Complaint Mechanism under Section 10).

Much ado about MFI lending: State money lending laws, which have existed ever since pre-Independence time, may have been enacted in a social setup where usury was a prominent mode of exploitation. However, over time, the RBI’s market conduct controls, including stipulations on fair lending practices, are at least intended to hold the market in good shape. In this situation, the attempts by some states to regulate what is already regulated by the RBI may appear to be an overdose.  Readers may read our comprehensive comments on the recent Tamil Nadu Act, here, and the Karnataka Ordinance (which was subsequently approved as an Act), here. See also our analysis of state money lending laws here.

If the objective of the Act was to impose tighter standards on recovery practices and coercive practices, it is already well known in regulatory circles that the RBI has released the draft Responsible Business Conduct Amendment directions, applicable to various classes of regulated lenders, which deal with nuanced aspects pertaining to borrower’s privacy, how to approach them for recovery in the workplace, training of the recovery agents, etc.

Further, there is a mandate that all NBFC MFIs shall become members of at least one SRO recognized by RBI, and adhere to the guidelines thereof (see Para 46 of the 2025 NBFC-MFI Directions). These SRO guidelines/guardrails (from MFIN and Sa-Dhan, for instance), in addition to RBI regulation, which prescribe FOIR cap, recovery practices, loan disclosure obligations, and fair practices, also deal with issues such as evergreening, lender-cap, overindebtedness cap, etc. Hence, prudentially speaking, the utilitarian purpose sought to be achieved by such an Act (insofar as it is made applicable to regulated entities) remains to be understood.

III.  Measures proposed via the Bill applicable to Banks and NBFCs

Below are the measures and compliances proposed to be introduced via the Bill, especially for Banks and NBFCs, lending in Bihar, and a note on whether or not they are envisaged to be pain points, viz-a-viz, the existing compliance obligations under RBI regulations.

Lenders conducting business in the region would be well advised to take note and ensure proactively that compliance audit and Policy measures are in place so their directors and KMPs may demonstrate that the “due diligence” required under Section 19 of the Bill has been conducted.

Kindly note: We have provided our readers with a snapshot of the same, extracting the most salient provisions. For a granular reading, the text of the Bill may need to be referred to.

IV.  Question of Jurisdiction

Jurisdictional questions: In the author’s view, the aspect of whether or not such state money lending laws can apply to regulated lenders such as Banks and NBFCs appears to be settled in previous judgments of the Honourable Supreme Court. The Court had ruled on this in Nedumpilli Finance Company Ltd.  v. State of Kerala (in the context of NBFCs, but on a principles basis applicable across other REs mutatis mutandis) that because the RBI Act and control over NBFCs are traceable to entries under List I of the 7th Schedule of the Constitution, Article 246(1) of the Constitution would come into play. This grants parliament exclusive law-making power over said entries. Further, Section 45Q of the RBI Act provides an overriding effect to Chapter III of the RBI Act (dealing with NBFCs), and regulations made thereunder  (which are recognized to be of a statutory nature), over other laws.

As has been clarified in the above judgment, the RBI already regulates lenders like NBFCs from “cradle to grave”. As observed by the Hon’ble Supreme Court, unlike state enactments, which have a one-eyed approach of borrower protection, the RBI Act takes a holistic approach to lending business. And, “all activities of NBFCs automatically come under the scanner of the RBI. As a consequence, the single aspect of taking care of the interest of the borrowers, which is sought to be achieved by the State enactments, gets subsumed in the provisions of Chapter III­B”

V.  Next Steps

The Bill would be awaiting the Governor’s assent. Some prudential next steps (for regulated lenders), should the Bill be enacted, are:

• Gap assessments: Given that there is a requirement for the directors and KMPs of the REs to have exercised due diligence in order to insulate from liability – in the author’s view – the routine internal compliance audits and gap assessments would also need to cover aspects under the Bill to create a demonstrable audit trail of periodic “due diligence”.
• Income Assessment: Should be ensured that at the time of extending digital loans to borrowers in Bihar, as a part of the “economic profile assessment”, the (household) income details are clearly captured to determine which borrowers (based on household income criteria + secured/unsecured nature of loan) come under MFI category, and which do not – and an audit trail for the same should be maintained. This is to ensure that routine digital loans offered in Bihar do not inadvertently trigger compliance (and subsequently, penalties) under the Bill.
• Calls and messages: Should be ensured that calls and messages are spaced out in a manner that they are not construed to be causing “mental distress” or “disrupting daily life”. Hence, ideally, the intervals of recovery calls may be consented to by the borrower and agreed upon at the time of the loan application.
• Policy & Code of Conduct: The code of conduct and Policy for engagement of recovery agents would need to be made more granular and include the aspects under Section 7 of the Bill.
• Consent notices: Contacting a borrower on a holiday or Sunday for recovery is not permitted without express written consent. Such consent may be taken at the time of the loan application itself.

^[1] Available at: https://assets.equifax.com/marketing/india/assets/mfi-pulse-vol-xxv-nov-2025.pdf (last accessed in March 2026)

^[2] Available at: https://www.careratings.com/uploads/newsfiles/1760347854_NBFC-%20Microfinance%20Industry%20-%20CareEdge%20Report.pdf (last accessed in March 2026)

^[3] Available at: https://censusofindia.net/bihar/10&rut=9cd546346239622690d85a78e295b2bec8e13c0333ed6e0ae15893e26e734304 (last accessed in March 2026).

Other Resources:

• ‘Mahattva Series: Episode 2 | Microfinance: State of the Industry and Way Forward’ – For an insightful session, with participation from the heads of two of India’s most prominent MFIs, and moderated by Mr. Kothari: https://www.youtube.com/live/C0vTpo9wjVw?si=poHF8Pct-IadHcmD
• ‘Microfinance and NBFC-MFIs in Economic Survey 2026’ – A snapshot of some of the structural concerns, recent problem areas, and challenges, of microfinance lending, identified by the Economic Survey: https://vinodkothari.com/2026/01/microfinance-and-nbfc-mfis-in-economic-survey-2026