Govt mulls credit guarantee to ease MFI stress

Kolkata: The finance ministry is preparing a credit guarantee scheme to support the stressed microfinance sector, two people in the know said. The sector is longing for government backing amid the ongoing asset quality stress. The scheme would encourage banks to lend to microfinance institutions (MFIs), especially the smaller ones, which are facing liquidity crunch amid limited access to bank funding. An announcement to this end is likely in the 2026 budget, people cited above said. The likely size of the guarantee programme is not known. This will be similar to the Credit Guarantee Scheme for Microfinance Institutions (CGSMFI) rolled out during the pandemic in 2021. At that time, the government had set up a ₹7,500 crore guarantee fund to encourage bank lending to micro-lenders. The scheme was in force from June 2021 to March 2022. Industry bodies Microfinance Institutions Network and Sa-Dhan have sought similar support several times over the past few quarters. Sa-Dhan executive director Jiji Mammen said banks are reluctant to lend to MFIs, especially to the smaller ones, leading to severe liquidity constraints. "Institutional funding and bank loans are the raw material for MFIs. Without this, small and medium sized entities are facing difficulty to do their regular business," Mammen told ET. "Any comfort for the financial institutions which lends to MFIs will be useful to improve the situation. A government guarantee programme, as given during Covid-time, can address this issue to a great extent." The National Credit Guarantee Trustee Company (NCGTC), a wholly-owned trustee company of the government, would provide the guaranteed cover. In the 2021 scheme, NCGTC provided a cover of up to 75% of loan, if there was a default. The department of financial services, which is believed to be in the final stages of drafting the scheme, did not respond to queries. Banks stopped funding to low rated MFIs as the stress on the ground lingered, while the repayment from overleveraged end-borrowers remained slow, leading to the liquidity crunch. The availability of lendable resources led to slower loan disbursal. On the other hand, the low-income borrowers typically slow repayment when they anticipate a rejection in new credit delivery. Lenders to the bottom of the pyramid borrower segment in general turned very selective and stopped lending to the overleveraged borrowers. This led to a contraction in the microfinance market with the gross loan portfolio having stood at ₹3.46 lakh crore at the end of September, falling steadily from the record high of ₹4.34 lakh crore seen at the end of March last year, data from Crif High Mark showed. The portfolio for NBFC-MFIs stood reduced at ₹1.34 lakh crore, registering a 17.4% decline from ₹1.62 lakh crore a year back.