What Happened
- The government has approved a Rs 20,000 crore (₹200 billion) credit guarantee scheme for microfinance institutions (MFIs), aimed at addressing acute liquidity and funding stress in the sector.
- Guarantees will cover 70% of disbursals to large MFIs, 75% to medium-sized MFIs, and 80% to smaller institutions, incentivising lending to smaller players.
- Government-owned National Credit Guarantee Trustee Company (NCGTC) will administer the guarantees.
- Lenders must cap interest rates at the external benchmark lending rate (EBLR) or 2% above the marginal cost of funds; MFIs must lend at 1% below their six-month average lending rate.
- Maximum loan tenure is three years (one-year moratorium, two years repayment); the scheme is operative until June 30, 2026.
- Minimum allocation mandates: at least 5% of loans to small MFIs and 10% to medium MFIs; per-loan caps of ₹100 crore, ₹200 crore, and ₹300 crore for small, medium, and large MFIs respectively.
Static Topic Bridges
Microfinance Institutions and Financial Inclusion
Microfinance refers to the provision of small loans (micro-credit) and other financial services to low-income individuals and households who lack access to formal banking. In India, NBFC-MFIs are the largest channel for microfinance credit, serving over 8 crore clients across 723 districts with a loan portfolio of ₹3.81 lakh crore (March 2025). MFIs primarily serve women in rural and semi-urban areas for income-generating activities, making their health critical to last-mile financial inclusion.
- RBI regulates NBFC-MFIs; the qualifying asset ratio (loans to qualifying borrowers as % of net assets) was revised from 75% to 60% in 2025, allowing MFIs greater flexibility.
- MFI loans qualify as priority sector lending (PSL) under Agriculture, MSME, Social Infrastructure, and Others categories.
- Key sector bodies: Microfinance Institutions Network (MFIN), Sa-Dhan.
- Jan Dhan Yojana and MFIs are complementary — Jan Dhan opens accounts, MFIs provide productive credit.
- Risk weights on bank loans to MFIs were reduced from 125% to 100% by RBI in 2025 to ease refinancing.
Connection to this news: The credit guarantee directly addresses the funding squeeze — banks had tightened lending to MFIs after rising defaults. By de-risking bank loans to MFIs, the scheme restores credit flow to the bottom-of-pyramid borrower.
Credit Guarantee Schemes as a Policy Tool
Credit guarantee schemes are government mechanisms that compensate lenders in case of borrower default, enabling credit to flow to segments that lenders consider too risky without collateral. In India, credit guarantee architecture has been used for MSMEs (CGTMSE), startups (SIDBI), and now MFIs (NCGTC). These schemes are fiscally efficient — a guarantee corpus of ₹20,000 crore can leverage several multiples in actual credit.
- NCGTC (National Credit Guarantee Trustee Company Ltd) is a government-owned trust company under the Department of Financial Services that manages multiple guarantee funds including CGFMU (for MFIs) and CGSSD (for street vendors).
- CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) is the flagship guarantee scheme for MSMEs — collateral-free loans up to ₹2 crore.
- Moral hazard is a known risk: lenders may under-price risk if guarantees are too generous; tiered coverage (70/75/80%) is designed to keep lenders invested.
- Differential guarantee coverage (higher for smaller MFIs) corrects the market failure where smaller institutions face disproportionately higher funding costs.
Connection to this news: The tiered guarantee structure — highest coverage for small MFIs — recognises that smaller MFIs serve the most financially excluded populations and face the starkest market failure in accessing bank credit.
Self-Help Groups and Women's Financial Empowerment
Microfinance in India is deeply intertwined with the Self-Help Group (SHG) movement, which began with NABARD's pilot programme in 1992. MFIs often operate alongside or within SHG-bank linkage structures, extending individual loans to SHG members. The SHG-Bank Linkage Programme is the world's largest microfinance programme, with over 1.2 crore SHGs linked to banks. Strengthening MFIs thus indirectly reinforces women's economic agency in rural India.
- DAY-NRLM (Deendayal Antyodaya Yojana — National Rural Livelihood Mission) mobilises rural women into SHGs and facilitates bank credit linkage; Ministry: Rural Development.
- Over 90% of MFI borrowers are women; average loan size ranges from ₹30,000–₹80,000.
- Joint Liability Groups (JLGs) are the core credit delivery model for MFIs — peer pressure replaces collateral.
- The 2010 Andhra Pradesh MFI crisis (following aggressive lending and coercive recovery) led to RBI tightening sector regulation significantly.
Connection to this news: Credit stress in MFIs directly impacts women borrowers — reduced credit means fewer income-generating opportunities. The guarantee scheme aims to prevent a repeat of the 2010-style credit contraction.
Key Facts & Data
- Scheme size: Rs 20,000 crore credit guarantee corpus
- Administering body: National Credit Guarantee Trustee Company (NCGTC), under Department of Financial Services
- Coverage: 70% (large MFIs), 75% (medium), 80% (small)
- Interest cap: EBLR or 2% above marginal cost of funds-based rate (MCLR)
- Loan tenure: Maximum 3 years (1-year moratorium + 2-year repayment)
- Validity: Until June 30, 2026
- India's MFI sector: ₹3.81 lakh crore portfolio, 8 crore+ borrowers, 723 districts covered (March 2025)
- Largest MFI regulator: Reserve Bank of India (RBI) — NBFC-MFI classification