Credit Guarantee Support for Microfinance Institutions (MFIs)
The Centre has announced a ₹20,000-crore credit guarantee support for MFIs to boost funding from mainstream banks, focusing on economically vulnerable borrower segments.
Purpose and Importance
- This initiative aims to strengthen lenders' confidence, addressing recovery-related issues and liquidity concerns.
- It specifically supports small and medium non-banking financial companies (NBFC-MFIs) facing operational challenges due to lack of bank funding.
Operational Guidelines
- The guarantee programme is effective immediately, covering loans sanctioned by banks until June 30.
- Banks must cap lending rates at 2% over the one-year MCLR or external benchmark rate.
- NBFC-MFIs need to lend at 1% below their average past six-month lending rates.
Expected Impact
- The scheme is anticipated to restore lender confidence, improve credit flow, and support sustainable sector growth while maintaining customer protection.
Microfinance Market Context
- The microfinance market size contracted to ₹3.21 lakh crore by December, down 28% from its peak in March 2024.
- Lenders slowed loan disbursement to bottom-of-the-pyramid borrowers due to overleveraging concerns.
Loan Tenure and Distribution
- The maximum tenure of loans carrying a credit guarantee is set at three years, including a one-year moratorium.
- Banks must ensure at least 5% of loans go to small NBFC-MFIs with portfolios under ₹500 crore and 10% to medium NBFC-MFIs with portfolios between ₹500 crore and ₹2000 crore.
