The Government of India has approved a limited-period ₹20,000-crore credit guarantee scheme to support microfinance institutions (MFIs), offering relief to a sector grappling with funding challenges and rising non-performing assets (NPAs).
The scheme, titled Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI-2.0), will be implemented through the National Credit Guarantee Trustee Company (NCGTC). It will cover loans extended by member lending institutions (MLIs), including banks and financial entities, to MFIs and non-banking finance company-MFIs (NBFC-MFIs) until the end of June.
Why the Scheme Matters
Microfinance institutions play a crucial role in providing credit to low-income households and small borrowers, often referred to as the “bottom of the pyramid.” However, the sector has been under stress due to a spike in NPAs, making lenders cautious about extending fresh credit.
The new guarantee scheme is expected to unlock liquidity and restore confidence among lenders, enabling MFIs to continue their lending operations.
Key Features of CGSMFI-2.0
Under the scheme:
- Loan Coverage: Loans provided by MLIs to MFIs/NBFC-MFIs for onward lending to small borrowers will be covered under the guarantee.
- Interest Rate Cap: Lending rates are capped at either the External Benchmark Lending Rate (EBLR) or the 1-year marginal cost of funds-based lending rate plus 2%.
- Affordable Lending Mandate: MFIs must lend to borrowers at rates at least 1% lower than their average lending rate over the past six months.
- Loan Tenure: Maximum tenure is set at three years, including a one-year moratorium followed by a two-year repayment period.
Funding Limits Based on MFI Size
The scheme sets caps on the amount that MLIs can lend to MFIs:
- Up to 20% of the MFI’s assets under management (AUM)
- Maximum limits:
- ₹100 crore for small MFIs
- ₹200 crore for medium MFIs
- ₹300 crore for large MFIs
Additionally, MLIs must ensure:
- At least 5% of loans go to small MFIs (AUM below ₹500 crore)
- 10% to mid-sized MFIs (AUM between ₹500 crore and ₹2,000 crore)
Industry Welcomes Move
The Microfinance Institutions Network (MFIN), a self-regulatory body for the sector, welcomed the scheme, calling it a timely intervention.
MFIN CEO Alok Misra stated that while credit quality in the sector has improved, access to bank funding remained a key constraint—something the new scheme is expected to address.
Outlook for the Sector
With improved liquidity support and structured lending norms, the CGSMFI-2.0 scheme is likely to stabilise the microfinance ecosystem, ensure continued credit flow to underserved segments, and strengthen financial inclusion across the country.