Scheme's validity extended: MFI credit lifeline may gain traction

The microfinance industry body expects stronger participation in the government's credit guarantee scheme after its validity was extended to August 31, 2026

Microfinance Institutions Network (MFIN) — a self-regulatory organisation of micro lenders — said the loan guarantee scheme is expected to gain traction after the government extended the validity of the scheme until August 31.

 

Under the Credit Guarantee Scheme for Microfinance Institutions 2.0 (CGSMFI 2.0), which was announced in March, loans up to ₹20,000 crore were to be guaranteed by National Credit Guarantee Trustee Company (NCGTC). The scheme was originally scheduled to run until June 30, or until guarantees for ₹20,000 crore were issued by NCGTC — whichever was earlier. On Wednesday, the government extended the validity of the scheme until August.

 

“The scheme was announced in March, but implementation gained momentum only after the FAQs were issued in May, as April is typically a busy period for banks due to year-end activities and planning,” Alok Misra, chief executive officer and director, MFIN, told Business Standard during an interaction.

 

“We are now seeing banks and institutions actively participating, and there are sufficient applications in the pipeline. The extension provides additional time for the scheme to gain traction and should provide the needed boost to funding, particularly for small and medium MFIs. It also gives stakeholders more time to fully utilise the scheme and support the flow of credit to the sector,” he said.

 

The scheme provides guarantee cover to commercial banks and all-India financial institutions for loans extended to non-banking finance company-microfinance institutions (NBFC-MFIs) and other MFIs for on-lending to existing or new small borrowers.

 

While initially the maximum loan limit for large MFIs was ₹100 crore, it was later increased to ₹1,000 crore. Micro lenders having assets under management (AUM) of ₹2,000 crore or more are classified as large MFIs.

 

Misra said there is already a lot of interest in the scheme, with large MFIs also applying and a number of applications in the pipeline. “Large MFIs account for a major share of the portfolio, and the enhanced limit of ₹1,000 crore can be readily absorbed as it would remain well within the cap of 20 per cent of AUM,” he said.

 

He also said the enhanced limit is expected to facilitate greater participation by eligible institutions and improve access to guaranteed funding. “As liquidity support through the guarantee scheme and the normal flow of funds improve, the sector's overall funding position is expected to strengthen,” he added.

 

The dispensation for large MFIs and the extension of the validity period came following requests from industry associations. “Funding costs had emerged as a concern as lenders turned selective following the deterioration in asset quality over the past year. The expanded guarantee cover provides comfort to banks and should support liquidity at a time when institutions are focused on rebuilding growth in a calibrated manner," said another industry executive.

 

According to the latest report by CRIF High Mark, the microfinance portfolio remained stable at ₹331.2 trillion in April 2026, registering a marginal month-on-month increase of 0.1 per cent. Active loans declined by 1.2 per cent over the same period, indicating an ongoing shift towards higher ticket-size lending and portfolio consolidation, the report said.

 

“The guarantee cover certainly improves comfort levels from a credit perspective, particularly for larger and well-rated NBFC-MFIs. While banks will continue to remain selective given the asset quality challenges in the sector, the enhanced limit provides room to step up lending to stronger institutions with established track records,” said a senior public sector bank executive.

 

The CRIF report observed that while overall portfolio at risk (PAR) improved from 2.6 per cent in March 2026 to 2.5 per cent in April 2026, the one to 30 days PAR witnessed a marginal increase from 0.6 per cent to 0.8 per cent, reflecting seasonal repayment variations.