Karnataka’s organised microfinance institutions (MFIs) are grappling with the fallout from recent suicides, as their cumulative loan books have contracted from ₹42,000 crore in March 2024 to ₹34,000 crore managed by MFIs, excluding microfinance loan books reflected in banks’ by December 2024.
Once known for lower default rates, the State is now witnessing a surge in loan delinquencies. Industry insiders point to over-borrowing, with nearly 8 per cent of borrowers having loans from five or more institutions, stretching repayment capacities to the brink. The crisis has been exacerbated by confusion over a recent ordinance passed by the Karnataka government, further fueling defaults.
The bill passed by the Karnataka government in February 2025 targets to regulate the microfinance market by penalising the unregulated MFIs and lenders for their coercive loan recovery practices by imposing a jail term of up to 10 years and a fine of up to ₹5 lakhs for violations.
However, insiders have noticed that borrowers have misunderstood the nuances in the bill, which only targets unorganized players. Karnataka’s microfinance sector comprises both organised and unorganised players, including 64 RBI-registered entities, of which 35 major players operate across five districts. While the bill specifically targets unregulated entities, it has inadvertently impacted the organised sector as well.
“We have observed a dip in the loan repayment rates after the ordinance bill. Out of our 8000 crore loan book, 2,000 crore is in Karnataka, and repayment rates here have worsened compared to other states,” said a senior official from an RBI-registered MFI on condition of anonymity. The MFI operates in 10–15 other States. He explained that some customers now believe they are not obligated to repay their loans due to the confusion between organised and unorganised lenders. Before the ordinance, recovery rates stood at 98 per cent, but they have now dropped to 90 per cent.”
Echoing this concern, Venkatesh N, MD, IIFL Samastha Finance Ltd, stated, “There has been a decline in repayment rates since December. In January and February, we noticed a collateral dip. Previously, 99 per cent of our customers paid on time, but over the past few months, this figure has dropped to around 95–96 per cent, meaning an additional 2–3 per cent of borrowers have delayed payments.”
Some regions, particularly pockets in South, West, and North Karnataka, have been more affected than others, according to industry sources.
However, there are some exceptions, with some players reporting an improvement in the repayment rates. “Repayments have improved from 85 per cent to 90 per cent,” noted Vivekanand N. Salimat, Chairman of IDF Financial Services Private Limited.
Economic stress
Beyond multiple loans, an official from the Association of Karnataka Microfinance Institutions (AKMI) pointed to additional factors contributing to defaults, including last year’s heat wave, reduced economic activity, inflation, and diminished purchasing power among local borrowers.
“These factors collectively led to financial stress, making loan repayments difficult,” the official explained.
He also noted that a small percentage of borrowers, about 10 per cent have irresponsibly taken loans from three to four different entities. “Some of these borrowers are now protesting in villages, demanding loan waivers,” he added.
Meanwhile, the Karnataka government told businessline that it has taken the necessary steps regarding the ordinance and will continue to monitor its impact.
With increasing defaults, borrowers risk damaging their credit scores, which could push them toward non-formal sources of credit in the future, concluded a spokesperson.
