Bad Memories of Another Day for Lenders as Bihar Moves to Regulate Microloans

The state’s legislative assembly adopted the Bihar Micro Finance Institutions (Regulations of Money Lending and Prevention of Coercive Actions) Bill, 2026, on Thursday, creating a sense of deja vu. The bill has a provision which prohibits borrowing from more than two lenders, while the microfinance industry currently allows a three-lender association for a single borrower.

Bihar, being the biggest microfinance market, may see a dip in repayment, people tracking the market said. The state accounts for 15% of the microfinance industry, while 13% of its borrowers have more than three lender associations, industry data showed.

The lenders are facing a risk of a sharp rise in delinquencies as they had seen in Karnataka, where portfolios at risk with over 30 days past due tripled to 12.5% within two quarters of Karnataka‘s microfinance bill, IIFL Capital Services said in a note. Borrowers with low per capita income and literacy may be more vulnerable, it said.

“Event risk like this makes us structurally cautious on lenders with high microfinance exposure apart from structurally lower growth/profitability vs previous cycle during ‘normal’ times,” IIFL Capital’s research analyst Viral Shah said.

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Private banks and non-banking financial companies-microfinance institutions (NBFC-MFIs) have grown their respective cumulative microfinance portfolios in January from December, after a phase of contraction, according to monthly data from credit bureau Equifax.
Now, the leaders of the sector will have to energise the field force all over again in Bihar to raise borrower engagement so that any fresh delay in repayment can be prevented. It was typically seen that borrowers tended to delay repayment when governments tried to regulate any sector. It was seen when states like Karnataka and Tamil Nadu enacted laws to regulate microfinance.However, the negative impact was more pronounced in Karnataka than in Tamil Nadu.

“We expect Bihar to be headed the Tamil Nadu way,” a chief executive of a large NBFC-MFI said.

The microfinance self-regulators plan to carry out targeted awareness and outreach initiatives across Bihar to prevent erosion of asset quality.

The Microfinance Industry Network (MFIN) highlighted that the bill is directed at unregulated entities. However, the provisions in the bill relating to borrower protection and fair recovery practices apply to all lending entities.

“MFIN would like to caution microfinance borrowers not to fall prey to rumours, be regular in repayment to maintain a good credit record and contact their lender for information,” it said.

“It is noteworthy that RBI-regulated institutions, as on date, provide collateral-free and doorstep credit services to nearly one crore low-income clients with credit outstanding of ₹48,569 crore in Bihar, thereby playing an integral part in building an inclusive and prosperous Bihar,” MFIN said.