Rs 7,500-crore credit guarantee scheme for MFIs to lend to small borrowers

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June 29, 2021 4:50 AM

The decision will not just help the poor and the vulnerable cope with the pandemic but also improve consumption at the grassroot level. However, for creating a meaningful impact, the coverage of borrowers and the assistance need to be significantly expanded, analysts reckon.

Banks will be allowed to charge only up to a 200-basis point premium over the marginal cost of funds-based lending rate (MCLR).Banks will be allowed to charge only up to a 200-basis point premium over the marginal cost of funds-based lending rate (MCLR).

Finance minister Nirmala Sitharaman on Monday rolled out a Rs 7,500-crore credit guarantee scheme to facilitate concessional loans to as many as 25 lakh small borrowers through micro-finance institutions (MFIs).

The decision will not just help the poor and the vulnerable cope with the pandemic but also improve consumption at the grassroot level. However, for creating a meaningful impact, the coverage of borrowers and the assistance need to be significantly expanded, analysts reckon.

The government will offer guarantee to banks for extending loans to the MFIs for on-lending up to Rs 1.25 lakh to each borrower. Banks will be allowed to charge only up to a 200-basis point premium over the marginal cost of funds-based lending rate (MCLR).

All borrowers, including defaulters up to 89 days (before the stressed accounts turn into NPAs), will be eligible for such loans, Sitharaman said. But extant central bank guidelines, including on the ceiling on household income and debt, have to be complied with while lending to a borrower.

To prop up the tourism sector battered by the Covid outbreak, fully-guaranteed loans of up to `10 lakh will be extended to each eligible travel agency and Rs 1 lakh to each tourist guide. This will support over 11,000 registered tourist guides and other travel and tourism stakeholders.

Sitharaman said more funds will also be granted to the National Export Insurance Account Trust, which will allow it to underwrite project exports worth an additional Rs 33,000 crore. As of March 2021, the Trust has supported 211 projects of Rs 52,860 crore in 52 countries by 63 different Indian project exporters.

Similarly, the government will infuse fresh capital into Export Credit Guarantee Corporation (ECGC) over the next five years, which will boost export insurance cover by Rs 88,000 crore. The various insurance products offered by ECGC support around 30% of India’s merchandise exports of around $300 billion a year.

As for credit to the small borrowers through MFIs, guarantee up to 75% of default amount for a maximum of three years will be provided by the government through the National Credit Guarantee Trustee Company and no guarantee fee will be charged by the state-run entity.

The guarantee cover will be available for lending up to March 31, 2022, or until the guarantees for Rs 7,500-crore loans are used up, whichever is earlier.

Commenting on the move, Shravan Shetty, MD at Primus Partners, said: “It is designed to provide a safety net, especially to small borrowers. However, the coverage at only 25 lakh individuals will need to increase to generate the desired impact.”

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