Govt introduces credit guarantee scheme for microfinance institutions

The government has introduced a Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI-2.0).

The scheme aims to provide guarantee cover to Banks/ Financial Institutions through the National Credit Guarantee Trustee Company Limited (NCGTC) against expected losses on the financial assistance extended by them to Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) and MFIs for on lending to small borrowers.

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Salient features of the scheme include:

–Eligible borrowers: Existing or new small borrowers within the regulatory definition of micro finance as prescribed by RBI from time to time;

–Guarantee coverage: 80% of amount in default for small, 75% for medium and 70% for large NBFC-MFIs/ MFIs;

–Guarantee Fee: 0.50% p.a., on sanctioned amount (1st year) & outstanding amount (thereafter); and

–Interest Rate: Capped at EBLR or MCLR + 2% p.a., on loans by MLIs to NBFC-MFIs or MFIs. While on-lending to small borrowers, these lenders shall cap the interest rate at 1% below the average rate of lending in the past 6 months.

The scheme will facilitate increased credit flow to the MFI sector. It is estimated that the scheme will facilitate on-lending by NBFC-MFIs/ MFIs to approximately 36 lakh small borrowers.

Microfinance plays a key role in Financial Inclusion by delivering credit to people at the bottom of the economic pyramid. NBFC-MFIs and MFIs are the key participants in the microfinance lending business.

In view of ongoing financial stress in the microfinance sector, there has been a slowdown in lending by banks to MFIs due to which smaller MFIs are struggling to get loans.

The scheme aims to encourage lending institutions to provide funding to NBFC-MFIs or MFIs for lending to small borrowers within the regulatory definition of micro finance as prescribed by the Reserve Bank of India.