Credit guarantee scheme for MFIs still stuck in low gear

KOLKATA: The Rs 20,000-crore for , aimed at boosting liquidity, especially for small lenders to the bottom of the pyramid customer segment, is yet to see traction more than two months after it was launched.

Non-banking financial institutions-microfinance institutions (NBFC-MFIs) are keenly waiting for banks to shift gears in the next three weeks as the scheme is nearing its scheduled closure on June 30. The scheme was launched on March 20.

Banks have received an aggregate loan demand of Rs 10,000-12,500 crore under the scheme, according to people familiar with the matter. While the credit guarantee provides 70-80% default coverage, its rigid caps on bank lending rates and strict margin rules for microfinance companies have made it a non-starter so far in terms of loan disbursement, they said.

“Applications worth over Rs 12,500 crore have been logged in so far. With the audit of March 2026 financials done and all the clarifications on the scheme now in place, the approvals and disbursals of bank loans should happen now,” managing director Manoj Nambiar told ET.

Large NBFC-MFIs are more likely to benefit from the credit guarantee programme, while the smaller and medium-sized ones, which are more vulnerable in the absence of bank funding, may be left fending for themselves, said people tracking the sector.

The loan limit for large NBFC-MFIs was revised to Rs 1,000 crore from Rs 300 crore earlier.

Bank executives said that they won’t dilute their underwriting standards to lend to financially weak companies despite the guarantee cover. “We can’t lend to companies below investment grade while the smaller ones mostly fall in this category,” said a senior banker, who did not wish to be identified.

Credit ratings of BBB- and above are considered investment grade. Several smaller MFIs were downgraded to junk following the asset quality crisis.

According to the operational guidelines, banks will have to cap the lending rate under the scheme at 2% over one-year marginal cost of fund-based lending rate or over the external benchmark rate. NBFC-MFIs or the non-profit MFIs, in turn, will have to on-lend to their customers at 1 percentage point lower than the six-month average lending rate.