Why in news?
The government launched the second version of the Credit Guarantee Scheme for Microfinance Institutions to enhance lending to non‑bank financial companies–microfinance institutions (NBFC‑MFIs) and other MFIs. The programme seeks to expand credit to small borrowers and deepen financial inclusion.
Background
Microfinance provides small loans to low‑income households and entrepreneurs who lack access to formal banking. MFIs rely on funds from banks and financial institutions, but smaller MFIs often struggle to secure affordable credit. CGSMFI‑2.0 offers a government‑backed guarantee to reduce lenders’ risk and encourage more lending.
Salient features
- Guarantee coverage: Loans extended by banks and financial institutions to NBFC‑MFIs are covered for up to 80 % of the loss for smaller MFIs, 75 % for medium‑sized MFIs and 70 % for larger MFIs. This tiered structure reflects differing risk profiles.
- Caps on interest rates: Lending rates are capped at the external benchmark lending rate (or MCLR) plus 2 %, while on‑lending rates to borrowers must be at least one percentage point below the average rate charged over the past six months. This ensures affordable credit for end borrowers.
- Guarantee fee: MFIs pay a nominal fee of 0.5 % per annum for the guarantee cover.
- Validity: The scheme will accept loans until 30 June 2026 or until the total guaranteed loans reach ₹20,000 crore. It is expected to benefit about 36 lakh small borrowers across India.
Conclusion
CGSMFI‑2.0 underscores the government’s commitment to supporting microfinance and financial inclusion. By reducing risk for lenders and capping interest rates, the scheme will help MFIs extend more affordable loans to self‑help groups, small traders and rural entrepreneurs.
Source: Press Information Bureau
