Micro lenders fret over Tamil Nadu Bill to prevent coercive recovery

The microfinance players, banks and non-banking finance companies said the checks and balances proposed in the bill are likely to hinder micro lending operations

The microfinance industry, already facing multiple headwinds, is now bracing for another disruption with the Tamil Nadu government introducing a Bill to prevent coercive loan recovery practices. Microfinance players, including banks and non-banking financial companies, said that the checks and balances proposed in the Bill are likely to hinder micro-lending operations.

 

“It is not a conducive environment to work which puts so many checks and balances,” said a senior executive of a small finance bank. “As per the Bill, we cannot go for regular collection as we don’t know what can constitute harassment and can land us in jails. Plus, (since) we are replacing moneylenders, we need to charge higher rates of interest, with the amount of risk involved in the segment.” 

 

The executive added that the operating costs of the micro-lending business is higher than other segments, and interest rates are higher to make up for those costs. “But that is the set up.”

 

Some microfinance industry players with exposure in Tamil Nadu are: Muthoot Microfinance with nearly 25 per cent of assets under management (AUM), CreditAccess Grameen (nearly 20 per cent of AUM), Ujjivan Small Finance Bank (nearly 14 per cent of AUM), and Asirvad MFI (nearly 20 per cent of AUM).

 

The Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Bill, 2025, tabled on Saturday, extends protection particularly to farmers, women, and self-help groups. The Bill calls for a three-year jail term for coercive recoveries. Loan recovery agents can be penalised for harassing borrowers or their family members. Microfinance companies are also prohibited from forcibly collecting dues. Disputes between borrowers and lenders need to be resolved through district-level committees set up by the government, according to the Bill. 

 

Speaking about the Bill, Tamil Nadu Deputy Chief Minister Udhyanidhi Stalin said that Tamil Nadu is a pioneer state in protecting people from usurious interest in loans by regulating the businesses of moneylenders and pawnbrokers. He added that money-lending entities are resorting to unethical ways of recovering debt from borrowers already in financial distress. This sometimes instigates borrowers to even die by suicide, thereby ruining families and disturbing the social order, he said further.  

 

An official at a microfinance institution said, “It (microfinance) is a segment of higher interest rate as (the) risk involved is extremely high and people from low-income groups are the borrowers. As lenders, we need to go for collections regularly, otherwise, there are high chances of NPAs (non-performing assets). If we do not keep track of our borrowers, we will lose them. Hence, regular visits to their homes are necessary for our business.”

 

The Karnataka government introduced an ordinance in February to similarly regulate the microfinance sector with penal provisions such as imprisonment of up to 10 years and a fine of ₹5 lakh for violations. As a result, the microfinance sector in the state faced near-term disruptions in customer discipline, delaying recovery of loans, said analysts. This led to delinquencies in the sector. Analysts expect similar consequences for the microfinance sector in Tamil Nadu.

 

Aside from asset quality challenges, the microfinance sector has also come under regulatory glare with the Reserve Bank of India imposing restrictions on four entities for charging usurious interest rates in October last year. The restrictions were later withdrawn. The Microfinance Institutions Network has announced guardrails for players, including a cap on the number of micro-lenders per customer and the maximum total indebtedness per borrower.