With microfinance institutions (MFIs) facing higher risk provisions and writeoffs, the government on Friday launched for them a ₹20,000 crore credit-guarantee scheme, aimed at easing liquidity tightness and increasing credit flow.
The scheme will take effect on March 20 and remain active until June 30 or when cumulative-guarantee coverage reaches ₹20,000 crore, whichever is earlier.
The scheme’s core objective is to provide guarantee coverage to member lending institutions (MLIs), primarily scheduled commercial banks and all-India financial institutions, for loans given to MFIs.
“We are sure this step will increase credit to underserved communities, and support the continued growth and resilience of the microfinance ecosystem and financial inclusion. We appreciate this progressive move and look forward to its transformative impact across the sector,” said Jiji Mammen, executive director and chief executive officer, Sa-Dhan, a self-regulatory organisation (SRO) for the sector.
This funding is strictly intended for incremental lending, which is fresh loans to small borrowers in accordance with the Reserve Bank of India’s (RBI’s) definitions of microfinance, and cannot be used to repay existing debts.
The guarantee structure is designed to favour smaller players, which often face the toughest hurdles in accessing bank credit.
The National Credit Guarantee Trustee Company (NCGTC) will cover the “Amount in Default” (principal plus interest) based on the MFI’s size. For small MFIs, with assets under management (AUM) of less than ₹500 crore, it provides 80 per cent guarantee cover.
Similarly, guarantee cover of 75 per cent will be provided for medium-sized MFIs with assets between ₹500 crore and ₹2,000 crore. And 70 per cent coverage will be given for large MFIs with AUM of ₹2,000 crore or more.
The Microfinance Industry Network (MFIN), the other of the two SROs, expects the scheme to catalyse bank lending by restoring lender confidence, improving credit flow, and supporting sustainable sectoral growth, particularly for small and medium MFIs, which saw a dip of about 70 per cent in bank funding between the fourth quarter (Q4) of 2023-24 and Q3 2025-26.
Despite an improvement in portfolio quality, the sector is affected by liquidity constraints. The MFIN estimates that nearly five million borrowers have lost access to formal credit.
To ensure the benefits of this government-backed safety net reach end-borrowers, strict caps in interest rates and allocation mandates have been imposed.
The interest rate on loans sanctioned by banks to MFIs has been capped at the external benchmark lending rate (EBLR) or the one-year marginal cost of lending rate plus 2 per cent per annum.
MFIs are required to pass on these benefits by ensuring their lending rate to small borrowers is at least 1 per cent below their average lending rate over the past six months.
To prevent fund concentration, MLIs have been asked to ensure that at least 5 per cent of their loans under the scheme are sanctioned to small MFIs and 10 per cent to medium-sized ones.
Operational guidelines set a maximum loan tenure of three years, including a one-year moratorium on interest, followed by two years for repayment.
Lending limits have been pegged to the MFI’s size. By this, loans are capped at 20 per cent of the institution’s AUM, subject to a maximum of ₹100 crore for small MFIs, ₹200 crore for medium ones, and ₹300 crore for those that are large.
MLIs are required to pay the NCGTC a guarantee fee set at 0.5 per cent of the sanctioned amount in the first year and 0.5 per cent of the outstanding amount thereafter.
The guidelines lay emphasis on accountability and creating fresh assets. MFIs must utilise the financial assistance for fresh loan assets within three months of disbursement and maintain a separate account for credit facilities extended under the scheme.
If an MFI account is classified as a non-performing asset (NPA), the MLI can submit a claim for the defaulted amount annually.
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