Why in news?
On 20 March 2026 India’s finance ministry launched the Credit Guarantee Scheme for Microfinance Institutions‑2.0 (CGSMFI‑2.0). The ₹20,000 crore scheme provides government‑backed guarantees on loans extended by banks and financial institutions to non‑banking microfinance institutions (NBFC‑MFIs) and microfinance institutions (MFIs) so that these lenders can continue supplying affordable credit to low‑income borrowers. The scheme runs until 30 June 2026 or until guarantees on ₹20,000 crore of loans are issued.
Background
Microfinance institutions provide small loans to households that lack access to formal banking. In recent years the sector has faced high interest rates, rising borrower indebtedness and scrutiny over recovery practices. Lending by banks to MFIs slowed, especially for smaller institutions, making it difficult for them to serve borrowers. During the COVID‑19 pandemic the government offered a 75 billion rupee credit guarantee scheme. CGSMFI‑2.0 builds on that experience to revive confidence in the sector.
Salient features of CGSMFI‑2.0
- Guarantee coverage: The National Credit Guarantee Trustee Company (NCGTC) will cover 80 % of defaulted amounts for small MFIs, 75 % for medium MFIs and 70 % for large MFIs.
- Interest rate caps: Lenders must cap their interest rates at either the external benchmark lending rate (EBLR) or the marginal cost of funds‑based lending rate (MCLR) plus 2 % annually. When on‑lending to borrowers, MFIs must charge interest at least 1 percentage point below their average lending rate over the previous six months.
- Guarantee fee: A low fee of 0.50 % per annum is payable on the sanctioned amount in the first year and on the outstanding amount in later years.
- Loan sizes and tenure: Loans to small MFIs are capped at ₹1 billion, to medium MFIs at ₹2 billion and to large MFIs at ₹3 billion, with a maximum tenure of three years (one‑year moratorium and two years of repayment).
- Inclusivity requirements: At least 5 % of the guaranteed loans must be for small MFIs and 10 % for medium MFIs. Disbursals cannot exceed 20 % of a lender’s outstanding loan book. The scheme is expected to facilitate lending to about 3.6 million small borrowers.
Significance
By sharing credit risk, CGSMFI‑2.0 encourages banks and other financial institutions to extend loans to MFIs that might otherwise struggle to raise funds. In turn these MFIs can provide microloans to households and small enterprises at affordable rates, supporting financial inclusion and livelihoods. The tiered guarantee coverage incentivises lending to smaller institutions that serve remote regions.
Conclusion
The Credit Guarantee Scheme for Microfinance Institutions‑2.0 seeks to revive a sector under stress by reducing risk for lenders and lowering borrowing costs for poor households. Its success will depend on effective monitoring and continued reforms to address borrower protection and sustainable lending practices.