Microfinance companies, in turn, will have to lend at a rate which will be 100 basis points lower than their six months’ average pricing, they said. A basis point is a hundredth of a basis point.
The scheme, likely to be announced soon, is aimed at encouraging banks to lend to microfinance institutions (MFIs), especially the smaller ones, which have been struggling to get funding for on-lending due to the asset quality stress.
Banks slowed lending to small and medium sized microfinance institutions in the past two years following an increase in delinquency as overleveraged borrowers failed to service their debts. Bank lending under the credit guarantee scheme will transfer the credit risk to the guarantor.
The issue of implementation of the scheme was briefly discussed at last Thursday’s meeting held at the Department of Financial Services with non-bank lenders, although the topic was not mentioned as part of the agenda.
According to people in the know, the scheme was ready before the budget but the announcement has been delayed owing to some technicalities.
Microfinance industry bodies Microfinance Industry Network and Sa-Dhan have sought a ‘20,000 crore credit guarantee fund for their members. The National Credit Guarantee Trustee Company (NCGTC), a wholly owned trustee company of the government, will provide the guarantee cover.
In 2021, the government had launched a Credit Guarantee Scheme for Microfinance Institutions (CGSMFI) during the Covid-19 pandemic. At that time, the government had created a ‘7,500 crore guarantee fund to encourage banks to lend to micro-lenders. That scheme remained in operation between June 2021 and March 2022.
Under the scheme, the NCGTC provided a cover up to 75% of loan, in case of a default.
The need for a credit guarantee cover assumed greater urgency after some MFIs defaulted on bank loans due to cash-flow mismatches. Banks stopped funding to low rated MFIs as they faced severe asset quality stress, raising the possibility of higher default.
India’s microfinance market contracted to ‘3.14 lakh crore at December-end 2025 from its peak level of ‘4.43 lakh crore as of March 31, 2024.