Tamil Nadu has passed a strict new law, to shield borrowers from harsh recovery tactics by finance and microfinance firms. It allows jail for 3 to 5 years and a fine for harassment during loan recovery.
The Tamil Nadu government passed a new law, to protect borrowers from the harsh loan recovery methods used by some finance and microfinance companies,. As per this law, if anyone harasses a borrower while recovering a loan, they can be sent to jail for three to five years and also have to pay a fine.
The Tamil Nadu Legislative Assembly passed the bill in April, and it received the assent of Governor RN Ravi on June 13, officially making it law.
The legislation aims to protect economically disadvantaged groups such as individuals, self-help groups, and joint liability groups from the harsh recovery tactics employed by financial institutions.
It applies to all lending entities in Tamil Nadu, with the exception of banks, Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India, cooperative banks, and cooperative societies.
However, if these exempt entities also resort to coercive recovery practices, the law will apply to them as well.
In addition to this law, the governor has also approved another bill aimed at preventing the illegal disposal of medical waste. Under this new law, offenders found dumping medical waste in public areas can be detained under the Goondas Act.
Due to the delays and bureaucratic hurdles of obtaining loans from government or bank-linked institutions, many individuals turn to private companies, banks, and microfinance agencies for urgent financial needs. Unfortunately, this often leads to long-term distress.
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Even a single missed payment can provoke extreme reactions from some institutions, including staff visiting borrowers’ homes, creating public disturbances, and using threats and humiliation as pressure tactics.
In these distressing situations, numerous borrowers, overwhelmed by both emotional and financial strain, have tragically resorted to suicide. Those most affected include farmers, women in self-help groups, agricultural workers, daily-wage laborers, street vendors, dairy workers, construction laborers, and migrant workers.
Given the gravity of the situation, activists have urgently called for coercive recovery agents to be prosecuted under the Goondas Act.
To address these abuses, Tamil Nadu Deputy Chief Minister Udhayanidhi Stalin introduced a bill during the April legislative session, prescribing up to five years of imprisonment for financial institutions and agents that resort to force or threats for loan recovery.
The law explicitly prohibits recovery agents or institutions from harassing the borrower, their parents, spouse, children, or any family member.
The following actions are classified as coercive recovery tactics under Section 20:
- Causing disturbance or violence
- Threatening or intimidating
- Following the borrower or their family
- Interfering with or seizing their property
- Blocking access to their home, workplace, or business
- Using undue influence under the guise of negotiation
- Employing third-party agents
- Seizing government-issued documents or essential personal items
According to the law, threats or intimidation can result in up to three years of imprisonment, a fine of up to Rs.5 lakh, or both. For using third-party agents or seizing personal documents, the punishment can be up to five years of imprisonment, a fine of Rs.5 lakh, or both.
If a borrower or a family member dies by suicide and it is established that coercive tactics from a financial institution or its agent contributed to this, it will be treated as a criminal offense under Section 108 of the Bharatiya Nyaya Sanhita (the Indian Penal Code equivalent).
Any institution wishing to offer loans must register with the appropriate district or division authority using an online form. Registrations must be renewed every three years. Loan providers are required to clearly display interest rates, office addresses, websites, and other relevant information in printed formats such as pamphlets or advertisements.
Institutions offering loans without proper registration will face three years of imprisonment and a fine of Rs.1 lakh.