Government Launches Rs 20,000 Crore Credit Guarantee Scheme to Boost Microfinance Sector
In a significant move to address funding constraints in the microfinance sector, the government has approved a limited-period credit guarantee scheme worth Rs 20,000 crore. This initiative, known as the Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI-2.0), aims to facilitate easier access to funds for microfinance institutions (MFIs) and non-banking finance company-MFIs (NBFC-MFIs). According to a circular issued by the National Credit Guarantee Trustee Company (NCGTC), the scheme will cover loans disbursed by member lending institutions (MLIs), including banks and other lenders, until the end of June.
Addressing Challenges in the Microfinance Landscape
Microfinance institutions, which primarily serve borrowers at the lower end of the economic pyramid, have been grappling with difficult conditions due to a rise in non-performing assets (NPAs). This has made lenders more cautious about extending fresh exposure, thereby tightening the flow of credit to these crucial financial entities. The new scheme is designed to mitigate these challenges by providing a safety net for lenders, encouraging them to increase funding to MFIs.
Key Features and Conditions of the Scheme
The CGSMFI-2.0 scheme includes several important stipulations to ensure responsible lending and affordability for end-borrowers. MLIs will extend funding to MFIs or NBFC-MFIs based on their internal assessments, with the loans intended for onward lending to eligible small borrowers. To qualify for benefits under the scheme, the interest rate on loans sanctioned by MLIs to NBFC-MFIs or MFIs is capped at the External Benchmark Lending Rate (EBLR) or the one-year marginal cost of funds-based lending rate plus two percent. Additionally, MFIs must lend to small borrowers at a cost that is at least one percent below the average lending rate charged during the previous six months.
Further conditions include a maximum loan tenure of three years, comprising a one-year moratorium followed by a two-year repayment period. The scheme also mandates allocation targets: at least five percent of the total loan amount must be sanctioned to small MFIs with assets under management (AUM) of less than Rs 500 crore, while ten percent should go to mid-sized institutions with AUM between Rs 500 crore and Rs 2,000 crore.
Loan Caps and Industry Response
The circular specifies caps on loan amounts, with MLIs limited to sanctioning up to 20 percent of the AUM of respective NBFC-MFIs or MFIs. This translates to maximum limits of Rs 100 crore for small-sized institutions, Rs 200 crore for medium-sized ones, and Rs 300 crore for large-sized entities. The Microfinance Institutions Network (MFIN), the industry's self-regulatory body, has welcomed the scheme, describing it as a timely intervention that could improve liquidity conditions. Alok Misra, chief executive and director of MFIN, highlighted that the sector has shown strong improvement in credit quality and responsible lending practices, with bank funding availability being a key constraint.
This government-backed initiative is expected to provide much-needed relief to the microfinance sector, enhancing financial inclusion and supporting economic growth at the grassroots level.
