Govt launches ₹20,000 crore credit guarantee scheme to boost MFIs
Mumbai, Mar 20, 2026
Scheme aims to ease liquidity constraints, boost credit flow to small borrowers, and support microfinance institutions with graded guarantee cover and lending norms
The Central government on Friday launched a Rs 20,000 crore credit guarantee scheme for microfinance institutions aimed at easing liquidity tightness in the segment and increasing credit flow. The scheme will start on March 20, 2026, and remain active until June 30, 2026, or until the cumulative guarantee coverage reaches the Rs 20,000 crore threshold, whichever is earlier.
The scheme's core objective is to provide guarantee coverage to Member Lending Institutions (MLIs) — primarily scheduled commercial banks and all-India financial institutions — for loans extended to MFIs. This funding is strictly intended for incremental lending — fresh loans to small borrowers as per RBI’s microfinance definitions — and cannot be used to repay existing debts.
The guarantee structure is designed to favour smaller players who often face the steepest hurdles in accessing bank credit.
The National Credit Guarantee Trustee Company (NCGTC) will cover the “amount in default” (principal plus interest) based on the MFI's size. For small MFIs with assets under management (AUM) of less than Rs 500 crore, it provides an 80 per cent guarantee cover. Similarly, a 75 per cent guarantee cover will be provided for medium-sized MFIs with assets between Rs 500 crore and Rs 2,000 crore, and a 70 per cent coverage will be given for large MFIs with AUM of Rs 2,000 crore or more.
MFIN, the self-regulatory organisation (SRO) for the microfinance sector, expects the scheme to catalyse bank lending by restoring lender confidence, improving credit flow, and supporting sustainable sectoral growth, particularly for small and medium MFIs, which saw a dip of around 70 per cent in bank funding between Q4 FY 2023-24 and Q3 FY 2025-26.
Despite an improvement in portfolio quality, the sector is affected by liquidity constraints. MFIN estimates that nearly 50 lakh borrowers have lost access to formal credit, underscoring the urgent need to restore funding flows.
To ensure the benefits of this government-backed safety net reach end-borrowers, strict interest rate caps and allocation mandates have been imposed. The interest rate on loans sanctioned by banks to MFIs is capped at the external benchmark lending rate (EBLR) or the one-year MCLR plus 2 per cent per annum.
Furthermore, MFIs are required to pass on these benefits by ensuring their lending rate to small borrowers is at least 1 per cent below their average lending rate from the past six months. To prevent fund concentration, Member Lending Institutions (MLIs) have also been asked to ensure that at least 5 per cent of their total loans under the scheme are sanctioned to small MFIs and 10 per cent to medium-sized MFIs.
Operational guidelines stipulate a maximum loan tenure of three years, which includes a one-year moratorium followed by two years for repayment. Lending limits are pegged to the MFI’s size, where loans are capped at 20 per cent of the institution’s AUM, subject to absolute maximums of Rs 100 crore for small, Rs 200 crore for medium, and Rs 300 crore for large MFIs. MLIs are also required to pay a guarantee fee to the NCGTC, set at 0.5 per cent of the sanctioned amount in the first year and 0.5 per cent of the outstanding amount thereafter.
The guidelines place heavy emphasis on accountability and the creation of fresh assets. MFIs must utilise the financial assistance for fresh loan assets within three months of disbursement and maintain a separate account for credit facilities extended under the scheme.
If an MFI account is classified as a non-performing asset (NPA), the MLI can submit a claim for the defaulted amount annually. However, a lock-in period applies for the first claim, which must be at least one year from the date of the guarantee issue or the last date of disbursement.
“We are sure this step will increase credit to underserved communities, and support the continued growth and resilience of the microfinance ecosystem and financial inclusion. We deeply appreciate this progressive move and look forward to its transformative impact across the sector,” said Jiji Mammen, executive director (ED) and chief executive officer (CEO), Sa-Dhan.
[The Business Standard]
