In addition, there shall be close supervision of the disbursement function.

Prohibition of security requirements for Micro loans Prohibition of security requirements for Micro loans.—

1. (1) No lender shall demand, obtain, or retain any form of security, collateral, guarantee, or third-party assurance for loans not exceeding such amount as may be prescribed by the State Government under this Act, and such loans shall be advanced solely on the basis of borrower's creditworthiness, repayment capacity, income assessment, and such other criteria as may be prescribed.
2. (2) The Government of Bihar shall within 90 days of the commencement of this Act, prescribe by rules, the threshold amounts up to which no security or collateral may be required, taking into consideration the economic conditions of borrowers, regional variations in income levels, inflation rates, and the need to promote financial inclusion while ensuring reasonable protection to lenders.
3. (3) Any security, collateral, or guarantee obtained by any lender for loans covered under sub-section
4. (1) prior to the commencement of this Act shall be deemed void and unenforceable, and shall be returned to the borrower or guarantor within thirty days of such commencement without any cost or condition.
5. (4) For loans exceeding the prescribed threshold amounts but remaining within the overall loan limits specified in this Act, lenders may obtain security only in the following permissible forms:
   • (a) pledge of gold ornaments with proper valuation and storage safeguards;
   • (b) lien on bank deposits or government securities;
   • (c) mortgage of immovable property other than the borrower's primary residence or agricultural land being personally cultivated;
   • (d) guarantee from financially sound third parties with their explicit written consent and full disclosure of liability; provided that the value of such security does not exceed the loan amount by more than twenty-five percent and the security arrangement does not impose undue hardship on the borrower or guarantor.
6. (5) No lender shall retain, confiscate, or demand as security any document that is essential for the borrower’s daily life or livelihood, including original documents of residential property used for actual residence, agricultural land being personally cultivated, ration cards, Aadhaar cards, voter identity cards, driving licenses, educational certificates, caste certificates, income certificates, pension documents, or any other government-issued entitlement documents.
7. (6) Where permissible security is taken, the lender shall execute a proper security agreement clearly specifying the security provided, conditions for release, and borrower’s rights, and shall return such security immediately upon full repayment of the loan.
8. (7) The Government of Bihar may, from time to time, review and revise the prescribed threshold amounts under sub-section
9. (2) based on economic conditions, borrower feedback, and the functioning of the microfinance sector, provided that any revision reducing the threshold limits shall not apply to existing borrowers and loans sanctioned before such revision.