Bihar Micro Finance Institutions Bill, 2026

Bihar Micro Finance Institutions Bill, 2026

The Bihar MFI Act creates a parallel regulatory framework that directly conflicts with the regulations set by the RBI for NBFC-MFIs

On Thursday, 27th February, 2026, the Bihar Assembly has passed the Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026 (“Bill”) aimed at regulating the micro-finance sector in Bihar. Its primary objectives are to protect borrowers from exploitation, prohibit coercive recovery practices, and ensure transparent lending operations.

Key provisions of the Bill are as follows:

1. Applicability and Scope

• The proposed law would apply to all individuals and entities engaged in the business of advancing micro or small loans within Bihar, including digital lending platforms, irrespective of their place of registration.
• It defines the term “Micro Loan” as a loan given to a household with an annual income of up to ₹3 lakh or such limit as the Bihar Government may fix by notification.
• Section 2(2) exempts certain entities like Scheduled Commercial Banks, Regional Rural Banks, and RBI-registered Non-Banking Financial Companies (NBFCs). However, a crucial provision in Section 2(3) makes the rules on prohibiting coercive recovery practices applicable to these exempted entities as well when they operate in Bihar.

2. Registration and Compliance

• The proposed law mandates that no entity can grant or recover loans without obtaining a Certificate of Registration from a state-appointed “Registering Authority”.
• Existing lenders are required to obtain this registration within 90 days from the commencement of the proposed law.
• The registration is valid for three years and is subject to renewal.

3. Lending Norms and Transparency

• Interest Cap: The total interest recovered on a loan cannot exceed the principal amount.
• Multiple Lending: A maximum of two microfinance institutions are permitted to lend to the same borrower.
• Disclosure: Lenders must provide a written loan agreement in Hindi, clearly stating all terms, charges, and the repayment schedule. A comprehensive pre-loan disclosure statement must be delivered to the borrower at least 72 hours before disbursement.
• Security: The proposed law prohibits demanding any security or collateral for loans below a certain threshold to be prescribed by the government. For loans above this threshold, only specified forms of security are permissible, and their value cannot exceed the loan amount by more than 25%.

4. Prohibition of Coercive Practices

• Section 7 of the proposed law provides a detailed and exhaustive list of prohibited recovery practices. These are categorized as:

o Physical coercion, violence, and intimidation.

o Psychological harassment and mental torture, including contacting borrowers outside specified hours (7:00 AM to 8:00 PM).

o Digital harassment and cyber coercion.

o Economic coercion and livelihood interference.

o Social pressure and community harassment.

5. Enforcement and Penalties

• The Registering Authority is empowered to cancel or suspend registration for violations.
• The Act introduces stringent criminal penalties. Unregistered lending is punishable with imprisonment up to three years and a fine.
• Engaging in coercive recovery practices can lead to imprisonment for up to five years and a fine.
• Crucially, if a borrower commits suicide and it is proven that coercive methods were used prior to the event, the lender is deemed to have abetted the suicide under the Bharatiya Nyaya Sanhita, 2023.
• Most offences under the Act are classified as cognizable and non-bailable.
• The proposed law contains the following relief measures for affected borrowers:

(1) The borrowers need not have to pay loans that have been advanced by unregistered lenders provided such loans that violate the specified interest rate caps / loans obtained through coercive means / loans that violate other provisions of the proposed law.

(2) The lenders have been prohibited from recovery of the loan amounts mentioned in above clause by initiating civil recovery proceedings before any civil court, tribunal, authority, or arbitrator.

(3) In cases where the borrower has already repaid amounts exceeding the limits prescribed under the proposed law then he is entitled to refund of excess amounts with interest at the rate of 12% p.a. from the Borrower Protection Fund or directly from the lender.

6. Overriding Effect

• Section 30 of the Act states that in the event of a conflict with any other law, the provisions of the Bihar MFI Act will prevail for matters concerning microfinance and loan recovery within the State of Bihar.

Provision/Area of Regulation	The Bihar MFI Act, 2026	RBI NBFC MFI Directions, 2025 / Other RBI Directions	Analysis of Contradiction/Overlap
Regulatory Framework	Establishes a state-level “Registering Authority” and mandates separate registration for all entities lending in Bihar.	NBFC-MFIs are regulated exclusively by the RBI. Registration with the RBI is the sole requirement to operate as an NBFC-MFI.	The Bihar Act imposes a dual regulatory structure on NBFC-MFIs, which are already under the exclusive regulatory purview of the RBI. This undermines the principle of a single, unified regulator for NBFCs.
Jurisdictional Scope	Applies its coercive recovery provisions even to entities exempted from general registration, such as RBI-registered NBFCs and banks.	RBI has issued its own comprehensive guidelines on fair practices and responsible business conduct for the entities it regulates.	Jurisdictional Overreach. The Bihar Act extends its authority to entities that are exclusively regulated by the RBI, thereby encroaching upon the central bank’s regulatory domain.
Interest Rate Regulation	Imposes a hard cap: Total interest recovered cannot exceed the principal amount.	RBI does not prescribe an interest rate cap. It requires lenders to have a Board-approved pricing policy and ensures rates are transparent and not usurious, as part of a principles-based regulatory approach.	Direct Contradiction. The Bihar Act’s hard cap is a significant departure from the RBI’s current framework, which moved away from caps to allow for more flexible, risk-based pricing under Board supervision.
Multiple Lending Norms	Restricts lending to a single borrower from a maximum of two MFIs.	RBI framework does not limit the number of lenders. It focuses on preventing over-indebtedness by capping a household’s total loan repayment obligations as a percentage of its income.	Contradiction in Approach. The Bihar Act uses a rigid, prescriptive rule (max 2 lenders), whereas the RBI employs a flexible, borrower-centric parameter (repayment capacity) that is considered a more effective measure against over-borrowing.
Security/Collateral	Prohibits demanding security for loans below a prescribed threshold and strictly defines permissible collateral for loans above it.	Microfinance loans are defined as being collateral-free. RBI framework does not contain such prescriptive prohibitions on security for the entire loan book of an NBFC-MFI, relying instead on the product definition.	Contradiction. The Bihar Act is highly prescriptive regarding security, creating specific rules that are not present in the RBI’s framework, which is less rigid and relies on the nature of the microfinance product.
Enforcement and Penalties	Criminalizes violations with severe penalties, including imprisonment. Key offences are cognizable and non-bailable, involving police action.	RBI’s enforcement powers are primarily regulatory and civil, including imposing monetary penalties, cancelling registration, and issuing binding directions.	Significant Divergence. The Bihar MFI Act introduces a parallel and much harsher criminal enforcement mechanism for actions that the RBI treats as regulatory breaches.
Overriding Effect	Section 30 explicitly states that the Act’s provisions shall prevail over any other law in case of a conflict within Bihar.	As per the Constitution of India, a central law (like the RBI Act) generally prevails over a state law on a matter in the Concurrent List in case of repugnancy.	Constitutional Conflict. The “overriding effect” clause in the Bihar MFI Act creates a direct constitutional challenge to the primacy of the RBI’s regulatory framework for NBFCs, which is established under a central Act of Parliament. This has been enunciated by the Hon’ble Supreme Court and the High Courts in several cases.

Contradictions with RBI Directions

The Bihar MFI Act creates a parallel regulatory framework that directly conflicts with the regulations set by the RBI for NBFC-MFIs. The RBI’s authority stems from the RBI Act, 1934, a central legislation. The key areas of contradiction are detailed below.

In summary, the Bihar MFI Act, 2026, introduces a separate and conflicting regulatory regime for microfinance institutions in the state. Its provisions on registration, interest rates, lending norms, and enforcement are in direct contradiction with the framework established by the Reserve Bank of India, creating significant legal and operational challenges for NBFC-MFIs operating in Bihar. It is also important to note that the local authorities would make these provisions applicable to even the business correspondents of banks, and they would be made liable to penal action. In the past also several states have enacted laws to regulate micro finance sector which was made applicable to entities regulated by RBI. Though the said laws were held as not constitutionally valid, but it has affected the said regulated entities and the stakeholders associated with them financially and operationally. It is necessary for the Central Government to enact a central law on Micro-finance to provide a statutory framework which restrict state governments to enact laws on this matter.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.