In a move aimed at revitalising the microfinance ecosystem, the Indian government has launched the Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI-2.0), a revamped initiative designed to unlock up to ₹20,000 crore in credit flow to the sector.
The scheme, operationalised through the National Credit Guarantee Trustee Company Limited (NCGTC), will provide guarantee cover to banks and financial institutions against potential losses on loans extended to Non-Banking Financial Company–Microfinance Institutions (NBFC-MFIs) and other MFIs. The move comes at a time when cautious lending sentiment has constrained liquidity for smaller players in the segment.
Strengthening Last-Mile Credit Delivery
CGSMFI-2.0 is designed to improve credit access for underserved borrowers at the bottom of the economic pyramid. By de-risking lending for financial institutions, the government aims to encourage increased funding to MFIs, which in turn will on-lend to small borrowers.
Around 36 lakh borrowers are expected to benefit from the scheme, reinforcing the role of microfinance in advancing financial inclusion across the country.
Key Features of the Scheme
The scheme will have a guarantee coverage of 80% for small NBFC-MFIs/MFIs, 75% for medium entities and 70% for large institutions. The other highlight is its affordable cost structure, with guarantee fee set at 0.50% per annum and interest rates capped at EBLR/MCLR + 2% for loans to MFIs.
The scheme has borrower-friendly lending norms, on-lending rates capped at 1% below the average lending rate of the past six months. It will be valid until June 30, 2026, or until guarantees worth ₹20,000 crore are issued.
Addressing Sectoral Challenges
The microfinance sector has been grappling with liquidity constraints amid rising financial stress, leading to a slowdown in bank lending to MFIs, particularly impacting smaller institutions. By offering a structured credit guarantee, CGSMFI-2.0 seeks to restore lender confidence and stabilise credit pipelines.
The scheme aligns with regulatory frameworks prescribed by the Reserve Bank of India, ensuring that eligible borrowers fall within the defined microfinance criteria.
Driving Financial Inclusion
Microfinance remains a critical pillar of India’s financial inclusion agenda, enabling access to credit for low-income households and small entrepreneurs. With CGSMFI-2.0, the government is reinforcing its commitment to inclusive growth by ensuring that credit continues to reach the most vulnerable segments of society.
As the scheme rolls out, its success will hinge on effective participation from lenders and timely disbursement, potentially offering a much-needed boost to grassroots economic activity.