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Karnataka Micro Loan, and Small Loan Ordinance, 2025 

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An attempt to regulate the unorganised microfinance market 

– Team Finserv –  Aditya Iyer | Manager  (finserv@vinodkothari.com) 

Background 

As has been evident from numerous reports, the microfinance sector in India is facing mounting pressure. Rising borrower distress and overindebtedness have led to criticism of microlenders for their aggressive loan sanctions without adequate checks on the borrower’s ability to pay and harsh recovery practices.   Concerns broadly pertain to: Vulnerability of borrowers, cross-selling and opacity of terms, unjustified/usurious rates of interest, multiple loan facilities and coercive methods of recovery etc.

While RBI registered entities are subjected to various regulations such as sector-specific RBI directions on microfinance, MFIN guardrails, NBFC Directions etc. there is not much to regulate the unorganised sector. In an attempt to address these concerns, and curb the challenges faced by local borrowers, the Karnataka Government promulgated ‘The Karnataka Micro Loan And Small Loan (Prevention Of Coercive Actions) Ordinance, 2025’, hereafter referred to as “Ordinance”.  Other states too have attempted to regulate microfinance lending in the past. For instance, the aftermath of the 2010 Andhra Pradesh microfinance crisis, resulted in the Andhra Pradesh Microfinance Institutions (Regulations of Money Lending) Act (2011). Similarly, Assam has also promulgated the Assam Microfinance Institutions (Regulations of Money Lending) Act (2021). The Karnataka ordinance emerges particularly in light of the spate of reported borrower suicides in the region, and reports of usurious recovery practices by lenders. 

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The sale of season: Holding period requirements for assignments and securitisation

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– Team Finserv | finserv@vinodkothari.com

Any sale or assignment or transfer, including securitisation, of loans is subject to a minimum seasoning with the originator. Under the extant regulatory provisions, such requirement is referred to as ‘Minimum Holding Period’ (MHP), which means the minimum period for which the originator should have held the loan exposures before the same is transferred to the transferee or Special Purpose Entity (SPE), as the case may be. This serves several purposes: that the loan was not originated for sale, the originator has had some equity in the loans, and that there is a benefit of hindsight of performance.

MHP requirements have always been a part of the regulations in India. However, on December 5, 2022, the Reserve Bank of India (RBI) made certain amendments to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021[1] (‘TLE Directions’) as well as the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021[2] (‘SSA Directions’). Among the other changes, there was a change in the MHP provisions; this change may have a significant impact on future transactions. 

This write-up intends to clarify the position with respect to the computation of MHP for different types of loans under TLE Directions as well as SSA Directions.

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