Microfinance industry in Tamil Nadu: The Tamil Nadu Assembly on Tuesday adopted the Money-Lending Entities (Prevention of Coercive Actions) Act after a brisk debate that also saw 17 other measures passed before the House adjourned sine die. A late amendment—moved “on the advice of the Reserve Bank of India,” according to Deputy Chief Minister Udhayanidhi Stalin—exempts scheduled banks from the toughest clauses on coercive recovery, easing industry fears of duplicate regulation.
State ministers argued that existing statutes—the Pawn Brokers Act 1943 and Money-Lenders Act 1957—cannot curb abuses that have migrated to mobile apps and outsourced recovery agents. Stalin told the House that debt collectors’ threats and public shaming had pushed some debtors to suicide, undermining “social order and family stability.”
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The new law, therefore, bars intimidation, property interference or any violence against borrowers and allows courts to treat lender harassment leading to a death as abetment of suicide under Section 108 of the Bharatiya Nyaya Sanhita, punishable by up to five years in prison.
Market at risk
Tamil Nadu is India’s second-largest regulated microfinance hub, holding Rs 50,583 crore—about 13%—of the national Rs 3.85 lakh crore portfolio as of December 2024. Brokers estimate another Rs 20,000-30,000 crore circulates through informal or digital loan sources that lie outside RBI oversight. With such scale, even marginal shocks reverberate across national balance sheets.
The Act defines coercive action broadly enough to include persistent follow-ups, late-night calls or employing third-party agents without written consent. Analysts at IIFL Securities warn that the vagueness mirrors Karnataka’s February ordinance, which sliced regulated lenders’ collection efficiency below 90% as confused borrowers withheld instalments.
If Tamil Nadu replicates that pattern, microfinance firms already nursing a national gross NPA ratio of 13.2% on Rs 3.92 lakh crore loans could see recovery timelines stretch further.
Industry pushback
Executives at Muthoot Microfinance, ESAF Small Finance Bank and CreditAccess Grameen privately concede that coercion must end, yet fear that criminal penalties for ordinary field visits will nudge them to curtail fresh disbursements. Business-Standard quoted one lender saying the Act might “push clients back to loan sharks if credit lines dry up.” Companies are wary of open opposition, noting that the legislation is framed as a civil-rights guarantee for the poor.
Self-regulator Sa-Dhan, anticipating state-level turbulence, will from 1 June cap processing fees, limit top-up loans and bar more than three lenders from serving one household—steps meant to rebuild discipline before defaults escalate. Together with Tamil Nadu’s district-level grievance committees, these rules could create a dual filter: softer industry norms for routine cases, criminal sanction for outliers.
Lessons from precedents
Tamil Nadu hopes its bank exemption will prevent an Andhra Pradesh-style credit freeze. The 2010 Andhra ordinance covered every lender and effectively shut private microfinance for years. Karnataka’s narrower 2025 law spared RBI-regulated entities yet still triggered payment stoppages once word spread that imprisonment of up to 10 years was possible for coercion. By formally ring-fencing scheduled banks and NBFC-MFIs, Tamil Nadu bets on deterring loan sharks while keeping institutional credit alive.
For the Act to fulfil that promise, rules must clarify grey zones such as daily visit frequency, use of business correspondents and acceptable digital reminders. Without such detail, enforcement could boil down to local perception, encouraging strategic defaults and choking finance for the very households the law intends to protect. The government has pledged stakeholder consultations during rule-drafting, but time is short: repayment cycles on micro-loans average 28 days, meaning any ambiguity will surface within a month of the Act taking effect.
Tamil Nadu’s new legislation resets the terms of engagement between lenders and India’s most vulnerable borrowers. Its success will depend on whether officials can police predatory outliers without criminalising prudential collections. Get that balance right and the Act could become a national template; get it wrong and credit may retreat into the very shadows lawmakers hope to banish.