Govt rolls out Rs 20,000 crore credit guarantee scheme to boost MFIs; 36 lakh borrowers to benefit

The Government of India has launched the Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI-2.0), which is aimed at improving the availability of credit to the microfinance sector and small borrowers.

This scheme provides guaranteed benefits to banks and financial institutions through the National Credit Guarantee Trustee Company Limited, which would compensate the banks and financial institutions when they experience losses from loans to Non-Banking Financial Company Microfinance Institutions and microfinance institutions that lend to small borrowers.

This scheme is likely to enhance the credit flow of up to Rs 20,000 crore to NBFC-MFIs and MFIs, and around 36 lakh borrowers are likely to be benefited.

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"The Government of India has introduced Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI-2.0). The scheme aims to provide guarantee cover to Banks/ FIs through National Credit Guarantee Trustee Company Limited (NCGTC) against expected losses on the financial assistance extended by them to Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) and MFIs for on lending to small borrowers," Ministry of Finance said in a statement.

Key features of Credit Guarantee Scheme 2.0

The scheme covers both existing and new borrowers falling under the microfinance definition prescribed by the Reserve Bank of India (RBI).

Guarantee coverage: 80 per cent for small NBFC-MFIs/MFIs, 75 per cent for medium, and 70 per cent for large entities on the amount in default.

Guarantee fee: Set at 0.50 per cent per annum on the sanctioned amount in the first year, and on the outstanding amount thereafter.

Interest rate cap: Lending rates by member lending institutions (MLIs) to NBFC-MFIs/MFIs will be capped at EBLR or MCLR plus 2 per cent per annum. For end borrowers, MFIs must cap rates at least 1 per cent below their average lending rate over the past six months.

Validity: The scheme will remain operational until June 30, 2026, or until guarantees worth Rs 20,000 crore are issued, whichever comes earlier.

Need for CGSMFI-2.0

The scheme is intended to address funding challenges in the microfinance sector, particularly as small-scale MFI institutions have experienced challenges in accessing credit due to ongoing financial stress and cautious lending by banks.

By creating a safety net for lenders, CGSMFI-2.0 is intended to restore confidence in the microfinance sector with a view to increasing access to underserved segments, thereby supporting financial inclusion.

Why does microfinance need a boost?

Microfinance plays a crucial role in providing credit to low-income households or individuals at the lower end of the economic pyramid. NBFC-MFIs and MFIs are a major part of this ecosystem. However, the recent issues faced by the sector have resulted in a slowdown in bank lending that has impacted the ability of smaller institutions to raise funds.

The government has rolled out this latest initiative to address ongoing sector challenges by encouraging banks and financial institutions to provide credit facilities to microfinance institutions, which will help maintain funding operations for small-scale borrowers.