Bihar Microfinance Bill 2026: What the law mandates and what changes for MFIs

The Bihar Assembly on Thursday passed a bill seeking to tighten oversight of microfinance institutions (MFIs) and curb coercive recovery practices in the state, the country’s largest microfinance market.

Why has Bihar brought this law?

The legislation comes amid concerns over over-indebtedness, multiple lending to the same borrower and allegations of harsh recovery practices in parts of the state.

According to industry body Sa-Dhan, an RBI-appointed self-regulator for the microfinance sector, Bihar has over 22 million microfinance loan accounts with outstanding loans totalling ₹57,712 crore as of March 2025. . Sa‑Dhan, in its ‘Bharat Microfinance Report’ suggested that Bihar alone accounted for nearly 15 % of the industry portfolio.

Districts such as East Champaran, Muzaffarpur and Samastipur have reported high levels of microfinance-related indebtedness.

"Loans are taken to repay earlier debts or manage household needs, only to be replaced by new ones,” the report said.

Replying to the discussion on the bill, Finance Minister Bijendra Prasad Yadav said the legislation seeks to regulate microfinance institutions and small loan providers while curbing unethical recovery practices.

What does the Bill mandate?

The Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026 mandates prior state approval before loan disbursals and compulsory registration for all such lenders operating in the state.

The bill requires microfinance companies to obtain prior permission from the state’s finance department before disbursing loans.

Even entities licensed by the Reserve Bank of India (RBI) will have to register at the state level.

Starting operations in Bihar without registration will be treated as a criminal offence under the proposed law.

The legislation applies to individuals, partnership firms, companies, societies and trusts engaged in providing micro-loans or small loans in the state.

To prevent over-leveraging of borrowers, the bill stipulates that not more than two MFIs can lend to the same borrower.

It would ensure transparent lending operations and reasonable interest rates, Yadav said.

The bill also provides for the setting up of special courts in every district to hear cases involving individuals allegedly driven to suicide due to usury. These courts will be presided over by a first-class judicial magistrate.

The Director of Institutional Finance has been designated as the nodal officer under the proposed law.

Microfinance firms will be required to register with the director after securing an RBI licence, and the registration process will be completed within 90 days following verification of documents.

How significant is Bihar for MFIs?

An NDTV report said several prominent lenders have significant exposure to Bihar as a percentage of their overall MFI portfolio. These include Utkarsh Small Finance Bank at 45%, IIFL Samasta at 21%, L&T Finance at 17%, Fusion Microfinance at 16.7%, Asirvad Microfinance at 13%, Ujjivan Small Finance Bank at 11.1%, Satin Creditcare at 9%, AU Small Finance Bank at 5% and CreditAccess at 4.6%.

Citi said the bill explicitly exempts the lending operations of banks and non-banking financial companies (NBFCs) and sees no direct repercussions for listed entities, reported NDTV. However, it cautioned that multiple lending restrictions or adverse shifts in repayment behaviour could have indirect ramifications.

Morgan Stanley said the MFI industry has been witnessing a recovery in asset quality and a gradual pick-up in disbursements in recent quarters. While the development could create an overhang on investor sentiment, it may not materially alter fundamentals.

It added that though asset quality is likely to continue improving, loan growth may not return to earlier high levels.

Shares of small finance banks were under pressure on Friday.

Utkarsh Small Finance Bank fell as much as 6.2 % in intraday trade, while Equitas Small Finance Bank declined about 1.3%. Ujjivan Small Finance Bank slipped more than 4.5% and AU Small Finance Bank dropped 1.34%.