The Tamil Nadu government’s Bill seeking to protect people from coercive recovery methods of money lenders is likely to impact credit discipline and collection efficiency of microfinance lenders. Tamil Nadu is the second-largest market for the Rs 3.85-lakh-crore microfinance industry.
“It will certainly disrupt collections in the near term,” a senior executive at a microfinance entity said, adding that while regulated entities may be kept outside its scope, the Bill does not clearly define the categories of lenders.
According to experts tracking the microfinance industry, while the Bill targets unorganised players such as digital lenders or those charging usurious rates, borrowers at the grassroots level do not distinguish between regulated and unregulated lenders. “Whenever there is a state support, it impacts borrowers’ credit discipline and the repayment behaviour. Most recently, we saw this in Karnataka.”
The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Act, 2025, which carries stringent penal provisions, including up to 10-year imprisonment and a fine of Rs 5 lakh for coercive recovery practices, was passed by the Assembly last month.
The country’s largest microfinance company, CreditAccess Grameen, has faced the impact. Karnataka accounted for 32% of CreditAccess Grameen’s Rs 24,810-crore gross loan portfolio (GLP) as of Q3FY25. The lender’s PAR 90+ — loans overdue for more than 90 days — in the state doubled to 2.4% between December 2024 and March 2025. The company’s PAR 90+ went up to 4.5% from 3.2% in Tamil Nadu, its third-largest market.
In microfinance, portfolio at risk (PAR) is a key indicator measuring the percentage of an MFI’s gross outstanding loan portfolio that is at risk of default or credit risk.
Tamil Nadu is the second-largest market for the microfinance industry’s Rs 3.85-lakh-crore GLP, with a portfolio of Rs 50,583 crore as of December 2024, behind Bihar’s Rs 58,364 crore. The Bill, tabled by deputy chief minister Udhayanidhi Stalin on Saturday, proposes a three-year jail term and penal provisions against recovery agents who employ coercive methods.
A top executive of a small finance bank (SFB) said regulated entities follow RBI-mandated code of conduct prohibiting coercive collections, use of recovery agents and restricting collections to business hours. “The government should at least have consulted with stakeholders before tabling the Bill,” the executive said, adding that the move looks more political in nature ahead of 2026 state elections.
Tamil Nadu is a major market for several MFIs and SFBs. For instance, the state is the second-largest market after Kerala for ESAF Small Finance Bank, accounting for 22% of its Rs 18,291-crore gross advances as of Q3FY25. Similarly, 47% of Equitas Small Finance’s Rs 37,344-crore advances come from the state, with microfinance loans forming 14% of its portfolio.
“If this becomes law, organised lenders like us may pull back, and poor borrowers will return to unorganised money lenders,” the SFB executive said.