Mumbai, Feb. 26 -- Parts of rural Karnataka have started showing initial signs of distress for microlenders, following the notification of the new ordinance that aims to protect borrowers from harassment by microfinance institutions (MFIs).

According to field reports, the collection efficiency of microfinance-focused non-bank financial companies (NBFC-MFIs) has fallen below 90% in northern districts of Karnataka, said two bankers on the condition of anonymity.

"There is confusion and chaos at the ground level. In some districts, borrowers are misbehaving or are being told not to repay," said the first banker cited earlier. "Districts like Gulbarga and Belgaum are worst affected."

Banks and NBFC-MFIs like CreditAccess Grameen, IIFL Sama...