The credit-guarantee scheme for microfinance companies has failed to gain traction. Banks have sanctioned around Rs 8,500 crore under the scheme, well short of the Rs 20,000 crore, according to sources.
“Smaller MFIs struggled to raise funds, securing only about Rs 300 crore, while small and medium-sized lenders together received Rs 1,800 crore. Larger institutions, however, either did not take sanctions, as the scheme offered them little advantage,” said an industry official.
Despite the 80% default guarantee, banks remained cautious about lending to low-rated and smaller institutions, citing concerns over their creditworthiness.
Launched in March, the Credit Guarantee Scheme for Microfinance Institutions (CGSMFI) 2.0 provides guarantee cover through the National Credit Guarantee Trustee Company against expected losses on loans extended by banks and financial institutions to NBFC-MFIs and MFIs for on-lending. Initially valid until June 30, the scheme was extended last month until August 31.
With lending and borrowing caps in place, plus a 0.5% guarantee fee adding to costs, bigger MFIs found it more economical to borrow directly from the market rather than use this route, the official added.
The scheme caps sanctioned loans at Rs 100 crore for small MFIs, Rs 200 crore for medium-sized MFIs and Rs 1000 crore for large MFIs, while the interest rate was capped at marginal cost of funds-based lending rate (MCLR) plus 2%.
“Large MFIs found the credit-guarantee scheme unattractive because the guarantee fee was passed on to them and the borrowing rate cap was squeezing their margins, so it doesn’t make sense,” said a chief executive officer of MFI.
He added that they borrowed just Rs 200 crore under the scheme, as market borrowings were available at significantly lower costs. “I believe that the portion meant for larger players would have seen stronger uptake if it had fewer frills.”
The microfinance sector has been under prolonged pressure due to borrower overleveraging and state-level regulations restricting coercive recovery practices, which led to a sharp deterioration in asset quality. However, the sector is now showing signs of recovery, supported by regulatory guardrails.
“Any lender with even more than 10% exposure to the MFI segment has suffered over the past two years. That strain likely explains why they remain cautious and are adopting a wait-and-watch approach,” said a senior executive at a small finance bank.