Up to 2 banks/customer! Microfinance hotspot tightens noose on lenders—Rs 60,000 crore market in spotlight

Did you know that Bihar is the biggest market for microfinance lenders in the country? In a significant update for this banking segment, the state's lawmakers have cleared draft legislation aimed at regulating microfinance institutions while enforcing stricter curbs on recovery practices.

Formally known as the Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026, the draft law lays down provisions requiring lenders to obtain prior permission from the state government's finance department before disbursing loans to applicants in the state.

Why the Bihar Micro Finance Institutions Bill, 2026?

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The state government aims to regulate microfinance institutions while curbing unethical recovery practices and ensuring transparent lending operations with reasonable interest rates.

Under the proposed law, micro lenders will be required by law to undergo state-level registrations even if they have already obtained RBI licence.

State approval a must before doling out loans

The law mandates that microfinance institutions secure state-level approval before disbursing loans in the state.

Each individual application will require prior approval. This is set to give the state full control over microfinance activities in the state.

No. of lenders capped at two per borrower

A crucial provision in the draft law restricts the number of microfinance institutions extending credit to an individual at two at a time.

Essentially, what this means is that a borrower will not be allowed to secure a third credit line while servicing two active microfinance loans in the state.

State-level registration

It will be compulsory for microfinance lenders to undergo state-level registrations, even if they hold prior RBI licenses.

This step will be crucial for microfinance institutions operating in the state.

No illegal recovery proceedings

A key provision in the draft law restricts institutions from taking recovery-related action on a defaulter without prior state-level registration.

In other words, microfinance institutions engaging in any activity aimed at recovering money from defaulters without approved registration will attract criminal proceedings.

The move is set to discourage MFIs from engaging in coercive, abusive or unlawful methods to recover loans from defaulters without prior registration.

A special court will be established to hear such cases.

Bihar, the biggest market for MFIs

With an estimated Rs 60,000 crore in assets under management (AUM), Bihar serves as the biggest market for microfinance institutions in the country.

The state accounts for nearly 15 per cent of the total microfinance AUM in the country. To put that into perspective, out of every Rs 100 outstanding as microfinance loans in the country, about Rs 15 is owed by borrowers in Bihar.

Under the draft law, the Director of Institutional Finance will be designated as the nodal officer. Microfinance institutions will be required to register with the director after securing a regulatory licence, The registration process will be completed within 90 days of document verification.

Here are answers to frequently asked questions (FAQs) on the Bihar Micro Finance Institutions Bill 2026:

What is the draft law?

Formally known as the Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026, the draft law aims to regulate microfinance institutions (MFIs) and curb unethical recovery practices while ensuring transparent lending operations in the state.

What is the status of this Bill?

It has been passed by the Bihar Legislative Assembly.

What's the purpose of enacting this law?

The state government aims to:

• Prevent coercive and illegal loan recovery practices
• Ensure fair and transparent lending
• Regulate MFI operations

Will microfinance institutions need prior state approval before giving loans?

Yes. The draft law requires these lenders to obtain prior approval from the state finance department before disbursing loans in the state.

Is RBI licence alone enough to operate in the state?

No. Even if an institution holds an RBI licence, it must obtain mandatory state-level registration to operate in Bihar.

Why is this law significant for the microfinance space?

Bihar is the largest market for microfinance institutions in India, with around Rs 60,000 crore in AUM.

How long will the registration process take?

MFIs must register with the Director of Institutional Finance, who will act as the nodal officer in this regard.

The registration process will be completed within 90 days after document verification.

How many MFIs can lend to each borrower in the state?

A borrower cannot take loans from more than two microfinance institutions at once.

Will there be any special mechanism to handle complaints?

Yes.