Govt tweaks MFI credit guarantee rules to boost scheme utilisation

The government has eased norms under the microfinance credit guarantee scheme to boost fund flow to smaller lenders as utilisation of the ₹20,000-crore corpus remains low

In a bid to increase utilisation of the credit guarantee scheme for microfinance institutions (MFIs), the National Credit Guarantee Trustee Company Ltd (NCGTC) has decided to club a minimum percentage of loans that needs to be extended to small and medium size MFIs.

 

According to the new norms, banks need to lend at least 15 per cent of their total corpus of ₹20,000 crore to small- and mid-size MFIs, as compared with 5 per cent and 10 per cent earlier.

 

The maximum amount of loan which can be sanctioned by banks is capped at 20 per cent of Assets under Management (AUM) of NBFC-MFIs and MFIs, subject to maximum of ₹100 crore to small-size, ₹200 crore to medium-size and ₹1,000 crore to large-size micro lenders.

 

The Credit Guarantee Scheme for Microfinance Institutions 2.0 (CGSMFI 2.0) was announced in March to provide guarantee cover to commercial banks and all-India financial institutions for loans extended to non-banking financial company microfinance institutions (NBFC-MFIs) and other MFIs, for on-lending to existing or new small borrowers.

 

Under the scheme, loans of up to ₹20,000 crore were to be guaranteed by NCGTC, which is wholly owned by the Government of India and the common trustee company for multiple credit guarantee funds.

 

Funds drawn from the credit guarantee scheme remain low, industry players said. The scheme which came into effect on 20 March this year, will close on 31 August.

 

“With the scheme scheduled to close on 31 August 2026, there is an urgent need to accelerate its implementation. Against the total guarantee cover of ₹20,000 crore, it is learnt sanctions (are) low so far, indicating significant scope for improving utilisation before the scheme closes,” said Alok Misra, CEO, MFIN, a self-regulatory organisation of micro lenders.

 

Industry players said the relatively low utilisation is due to operational constraints rather than a lack of demand for credit.

 

One problem is that the ₹200-crore cap for mid-size MFIs is seen as very low: Under a much smaller similar scheme in 2022, a few medium-size MFIs received funding of ₹500 crore.

 

“The funding squeeze for small MFIs for the last two years has led to a shrinkage of their on-balance sheet portfolio. As the scheme has a condition that no single entity can get more than 20 per cent of their AUM, for small MFIs it is becoming a paltry amount. For such small MFIs, the cap can be raised to 40 per cent of AUM,” said an industry source.

 

Industry players said that for large MFIs, the cap needs to be raised from ₹1,000 crore to ₹1,500 crore. The cap for large MFIs which was initially at ₹300 crore was raised to ₹1,000 crore in May.

 

In addition, credit rating requirements are difficult for many small MFIs to satisfy despite having sound portfolio quality. Commercial banks, despite the sovereign guarantee, have been insisting on investment grade rating for small micro lenders.

 

MFIs with less than ₹500 crore AUM are classed as small, while those with Rs.500 crore to less than Rs. 2,000 crore AUM are in the medium category. Large MFIs are those with more than ₹2,000 crore of AUM. 

Industry demands 

• ₹200 crore funding cap for mid-sized MFIs seen as too low by the industry
• Demands an increase in the lending limit for small MFIs from 20% of AUM to 40%
• Urges govt to raise funding cap for large MFIs from ₹1,000 crore to ₹1,500 crore
•  Banks insist on investment-grade ratings for small MFIs despite sovereign guarantee