Bihar MFI Bill seen having limited impact on RBI-regulated lenders

Shares of microfinance focused lenders saw sharp drop on Friday

The recently passed Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026, is unlikely to have any material impact on lenders regulated by the Reserve Bank of India (RBI), with industry executives asserting that such entities will not be required to register at the state level.

 

Microfinance Institutions Network (MFIN), the self-regulatory organisation (SRO) for microfinance lenders, said the legislation is not applicable to RBI-regulated entities and that licensed entities will not need to seek registration under the state law.

 

“…RBI-regulated institutions already operate under one of the most stringent borrower-protection frameworks in the financial sector, supported by detailed RBI responsible business conduct guidelines, MFIN’s industry Code of Conduct and MFIN guardrails, which together mandate fair conduct, transparent lending practices and responsible, non-coercive recovery mechanisms,” the industry body said in a statement.

 

Bihar accounts for the largest share of the microfinance industry’s exposure at around 15 per cent, followed by Karnataka and Tamil Nadu. Industry executives maintain that collection efficiency in the state has remained strong.

 

The Bill states that its provisions will apply to a wide range of entities engaged in advancing micro or small loans within Bihar, “irrespective of their place of incorporation, registration or domicile.” These include individuals, partnership firms, limited liability partnerships (LLPs), companies, societies, trusts, digital lending platforms, mobile applications and other entities operating within the state’s territorial limits.

 

Shares of several microfinance-focused lenders fell sharply on Friday following the passage of the Bill. Fusion Finance declined 7.8 per cent to close at ₹187.8 on the BSE, CreditAccess Grameen fell 5.5 per cent to ₹1,264.8, and Utkarsh Small Finance Bank dropped 6.5 per cent to ₹13.8 per share. Ujjivan Small Finance Bank slipped 5.6 per cent to ₹58.1, while L&T Finance declined 5.2 per cent to ₹284.4.

 

“If you refer to Clause 2, the legislation clearly states that the operational rules are not applicable to regulated entities. What applies to them is the prohibition of coercive practices, which is already in place. For regulated entities, it only says they have to curb coercive practices, which they are already doing. There is zero impact from this,” said Sanjay Garyali, chief executive officer, Fusion Finance.

 

The Bihar legislation is seen as being on similar lines to measures introduced by the Karnataka and Tamil Nadu governments in 2025 to curb coercive recovery practices and usurious lending rates. While RBI-regulated entities are exempt from registration and certain operational provisions, they remain subject to clauses relating to the prohibition of coercive recovery methods and borrower-protection measures.

 

“In fact, Bihar has behaved very well through elections and other challenges, including floods. It is one of the most disciplined markets for us and for the entire microfinance space. Bihar is among the top three states in collection efficiency, which continues to be upwards of 99.5 per cent on the entire book. Not just for us, but for all major players in the state, collection efficiencies have become very strong in the last three to four months. Post-elections and even during the election period, Bihar has emerged as a very disciplined state,” Garyali added.

 

“We are closely studying the implications of the Bihar Micro Finance Institutions Bill, 2026, and are happy to note that RBI-regulated entities are exempt, except for provisions relating to collection and recovery practices,” said Manoj Kumar Nambiar, managing director, Arohan Financial Services.

 

After a slowdown in funding due to tighter lending norms and guardrails imposed by SROs, as well as a funding squeeze from banks, the microfinance industry saw a recovery in the October-December quarter of FY26 (Q3FY26). Lenders reported an uptick in fresh disbursements and a reduction in slippages during the quarter.