The Government of India has introduced the Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI-2.0) to bolster funding for microfinance institutions. The scheme will provide guarantee cover to banks and financial institutions (FIs) through the National Credit Guarantee Trustee Company Limited (NCGTC) against expected losses on assistance extended to non-banking financial company-microfinance institutions (NBFC-MFIs) and microfinance institutions (MFIs) for on-lending to small borrowers. The measure is intended to restore confidence among lenders and improve access to funds for smaller institutions.

Eligible borrowers will include existing or new small borrowers within the regulatory definition of micro finance prescribed by the Reserve Bank of India (RBI). Guarantee coverage will be 80 per cent for small, 75 per cent for medium and 70 per cent for large NBFC-MFIs and MFIs, and the guarantee fee will be zero point five per cent per annum on the sanctioned amount in the first year and on the outstanding amount thereafter. Interest rates on loans by lending institutions to NBFC-MFIs and MFIs are capped at EBLR or MCLR plus two per cent and on on-lending to small borrowers lenders will cap the rate at one per cent below the average rate of lending in the past six months.

The scheme will remain valid until 30 June 2026 or until loans amounting to Rs 200 bn are guaranteed. It is estimated that the arrangement will facilitate on-lending by NBFC-MFIs and MFIs to approximately three point six mn small borrowers, increasing credit flow to the microfinance sector. The guarantee mechanism is expected to lower risk perceptions and enable smaller MFIs to secure funding that has been constrained by recent sector stress.

Microfinance has been central to financial inclusion by delivering credit to people at the bottom of the economic pyramid, and NBFC-MFIs and MFIs are key participants in that ecosystem. The scheme aims to encourage lending institutions to provide funding for on-lending activities within the regulatory definition of micro finance and to support recovery of lending momentum across the sector. The combined effect is intended to stabilise the sector and promote broader access to formal credit for low income borrowers.