Despite credit-guarantee scheme, banks may stay cautious on lending to MFIs

Banks are likely to remain cautious in lending to MFIs despite the credit guarantee scheme, with underwriting standards and risk assessment frameworks unchanged

Banks are likely to remain cautious in lending to microfinance institutions (MFIs), including those that are non-banking financial companies (NBFCs), even after a ₹20,000 crore credit-guarantee scheme for the sector announced by the National Credit Guarantee Trustee Company last week.

 

Bankers said lending decisions would continue to depend on factors such as credit ratings, with a preference for higher-rated entities, along with asset quality, profitability, and capital adequacy.

 

The aim of the credit-guarantee scheme is to improve liquidity access for microfinance players, which play a key role in last-mile credit delivery.

 

Banks are one of the key sources of funding for MFIs, but they have turned careful following stress in the sector.

 

The scheme provides differentiated guarantee coverage, with 80 per cent of the default amount covered for small MFIs, 75 per cent for medium entities, and 70 per cent for large NBFC-MFIs and other MFIs.

 

A guarantee fee of 0.50 per cent a year is charged, and it is calculated on the sanctioned amount in the first year and on the outstanding amount then on.

 

The scheme is valid till June this year or the time when the corpus is exhausted.

 

The interest rate on loans extended by member lending institutions (MLIs) to NBFC-MFIs or MFIs is capped at the external benchmark lending rate (EBLR) or marginal cost of funds-based lending rate (MCLR) plus 2 per cent per annum. Additionally, when these lenders on-lend to small borrowers, they are required to keep interest rates at least 1 per cent lower than their average lending rate over the previous six months.

 

“While the MFI sector is seeing a gradual stabilisation of asset quality trends and improving business momentum, the smaller NBFC MFIs/MFIs are still struggling on the liquidity/liability front,” Equirus Securities said in a report, which further stated while the well capitalised/stronger promoter-backed MFIs were expected to gain market share, smaller/mid-sized NBFC-MFIs were to benefit from this new scheme.

 

Bankers indicated that exposure to MFIs would remain tightly calibrated, with internal risk frameworks continuing to guide incremental disbursements.

 

They said that although the sector was seeing early signs of improvement in collection efficiency, slippages in certain geographies remained elevated.

 

“The guarantee provides an added layer of comfort, but it cannot replace strict underwriting and credit-appraisal standards. We will continue to lend, based on the strength of balance sheets, governance standards, and repayment behaviour,” a senior executive at a public-sector bank said. “Ratings of MFIs will continue to play a key role in determining lending decisions,” he added.

 

Banks are likely to favour larger, well-rated MFIs with a strong promoter backing, while limiting exposure to smaller entities.

 

An official at another large public-sector bank said broad policy guidelines would be put in place to decide the extent of lending to NBFC-MFIs.

 

“Lending rates can be up to 2 per cent above the base rate or MCLR. As a bank, this will restrict us to lending to strong and better-rated NBFC-MFIs,” he said.

 

Bankers also said that while the credit-guarantee scheme could provide some comfort, a meaningful expansion in lending to MFIs would depend on sustained improvement in asset quality, collection efficiency, and overall credit discipline in the sector.