"Ordinance Has Taken Birth From The Womb Of Social Justice": Karnataka High Court Dismisses Plea Challenging Micro Loan Ordinance Which Protects Vulnerable Borrowers

The Karnataka High Court has dismissed a petition challenging the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, which aims to safeguard economically vulnerable individuals from coercive recovery practices by microfinance entities.

A Single Bench of Justice M. Nagaprasanna ruled that the ordinance does not interfere with secured transactions by regulated entities but rather provides a protective shield for borrowers of unsecured microloans with an annual income of Rs. 3 lakh or less.

"The Ordinance, conceived in response to the anguished cries of the vulnerable – farmers, women, workers, marginalized groups inter alia seeks to rescue them from usurious money lenders and micro finance entities who as public knowledge and legislative record bear testament, have wielded unconscionable recovery methods, often driving the debtors from buoyancy of hope, to the abyss of despair and death. The Ordinance does not traverse into the realm of secured transactions undertaken by the regulated entities like the petitioner, on the contrary, it carves out a protective shield specifically for those trapped in the labyrinth or unsecured micro loans extended without collateral, targeting an annual income of Rs.3 lakhs or less, which is clearly defined by the Reserve Bank of India, as quoted supra," the Single Bench observed. 

The Court emphasized that the ordinance was rooted in social justice and was neither arbitrary nor unconstitutional. "The Ordinance has taken birth from the womb of social justice, it nowhere depicts arbitrariness. The grievance of the petitioner is, on the face of it, imaginary and unacceptable," the Court held. 

The Karnataka Hire Purchase Association had filed the petition, arguing that the ordinance’s vague definitions interfered with business operations and restricted the use of collateral.

Senior Advocate Udaya Holla, representing the association, contended that the ordinance’s provisions, such as prohibiting future collateralization and requiring the release of securities, posed a threat to their business model.

However, Advocate General (AG) Shashikiran Shetty, defending the ordinance, argued that the petitioner lacked locus standi since it dealt with secured financial transactions, whereas the ordinance only applies to microfinance institutions granting unsecured loans. He further stated that the ordinance was necessary due to multiple instances of borrower suicides linked to aggressive recovery tactics.

The Court acknowledged that ordinances are subject to judicial review but clarified that this particular legislation applied only to microfinance institutions and did not affect the petitioner’s ability to conduct business under other laws. The Bench observed, "The petitioner does not come within the ambit of the ordinance. It is still permitted to run its business in terms of other legislations. There is no impediment, in the subject ordinance, for the petitioner to make a hue and cry that all securities would stand released in favour of the borrower."

Consequently, the petition was dismissed, reaffirming the validity of the ordinance aimed at protecting low-income borrowers from coercive lending practices. "In view of the preceding analysis, the unmistakable inference is, that the thread of reasonableness runs through the object of the law. With thus being the case, the Courts must always be loathe to strike down a measure of this kind, unless compelled by an egregious violation of constitutional mandates, I find none," the Bench ordered. 

Cause Title: Karnataka Hire Purchase Association v. The State of Karnataka & Ors. [WRIT PETITION No.6962 OF 2025 (GM – RES)]

Appearance:

Petitioner: Senior Advocate Uday Holla, Advocate Sanjay H. Shethiy 

Respodent: Attorney General K. Shashikiran Shettu, Advocates Anishka Vaishnav, Shamanth Naik 

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