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Govt Unveils ₹20,000 Crore Credit Guarantee Scheme to Revitalize Microfinance Sector Amid Liquidity Crunch

  • by- Grihik
  • Mar 24, 2026
The central government has launched a ₹20,000 crore Credit Guarantee Scheme for Microfinance Institutions (CGSMFI-2.0) to address funding constraints amid rising NPAs. Operational until June-end, the scheme offers partial guarantees to banks lending to MFIs, with caps on interest rates, loan tenure, and exposure limits. It mandates allocation of funds to small and mid-sized institutions to ensure equitable distribution. Industry body MFIN has welcomed the initiative, stating it will restore liquidity and support credit flow to underserved borrowers.
Govt Unveils ₹20,000 Crore Credit Guarantee Scheme to Revitalize Microfinance Sector Amid Liquidity Crunch

New Delhi, March 24, 2026 – In a decisive move to address growing funding constraints within the microfinance sector, the central government has approved a ₹20,000 crore credit guarantee scheme aimed at restoring liquidity and bolstering credit flow to small borrowers. The initiative, designated as the Credit Guarantee Scheme for Microfinance Institutions (CGSMFI-2.0), comes at a critical juncture when the sector is grappling with rising non-performing assets (NPAs) and cautious lending behavior from traditional financial institutions.

Scheme Framework and Operational Timeline

According to a circular issued by the National Credit Guarantee Trustee Company (NCGTC), the scheme will operate for a limited duration, covering loans sanctioned until the end of June. The framework is designed to encourage member lending institutions (MLIs)—including banks and other financial entities—to extend credit to microfinance institutions (MFIs) and non-banking finance company-MFIs (NBFC-MFIs). These institutions will subsequently on-lend the funds to underserved small borrowers.

The guarantee mechanism is structured to mitigate risk perception among lenders, thereby unlocking much-needed liquidity for the microfinance ecosystem, which has faced significant headwinds due to deteriorating asset quality in recent quarters.

Interest Rate Caps and Lending Norms

To ensure affordability and responsible lending, the scheme introduces clear pricing guidelines. Loans extended by MLIs to MFIs must be priced either at the External Benchmark Lending Rate (EBLR) or the one-year marginal cost of funds-based lending rate (MCLR), with a maximum permissible spread of 2 per cent.

Furthermore, the scheme mandates that MFIs pass on the benefit to end-borrowers. Institutions receiving funds under the facility must lend to their clients at a rate that is at least 1 per cent lower than their average lending rate recorded over the preceding six months.

The loan tenure has been capped at three years, structured with a one-year moratorium followed by a two-year repayment period, providing operational flexibility to borrowing institutions.

Equitable Distribution and Exposure Limits

A key feature of the scheme is its focus on ensuring that smaller and mid-sized players are not sidelined. To promote equitable fund distribution, MLIs are required to allocate:

  • Minimum 5 per cent of total sanctioned funds to small MFIs with assets under management (AUM) below ₹500 crore.

  • Minimum 10 per cent to mid-sized institutions with AUM between ₹500 crore and ₹2,000 crore.

Additionally, exposure limits have been set to prevent over-concentration. Loans to any single MFI are capped at 20 per cent of the institution’s AUM. In absolute terms, the maximum loan amounts are:

  • ₹100 crore for small MFIs

  • ₹200 crore for mid-sized MFIs

  • ₹300 crore for large MFIs

Industry Response and Sector Context

The microfinance sector has faced mounting pressure due to a rise in non-performing assets, which has prompted banks and traditional lenders to tighten credit disbursement. Industry observers note that while credit quality metrics have shown early signs of improvement and lending practices have stabilized, access to institutional funding has remained a persistent challenge.

The Microfinance Institutions Network (MFIN), the sector’s self-regulatory body, welcomed the government’s intervention. Industry representatives described the scheme as a timely and well-calibrated measure that will help bridge the funding gap, particularly for smaller institutions that rely heavily on bank borrowings.

By providing a partial credit guarantee, the scheme is expected to reduce the risk burden on lenders, enabling them to resume credit flow to MFIs. This, in turn, will support continued financial inclusion and ensure that low-income and underserved households retain access to essential credit.

Strategic Intent

The introduction of CGSMFI-2.0 reflects the government’s broader commitment to strengthening the microfinance ecosystem as a vital channel for last-mile credit delivery. The scheme balances liquidity support with regulatory discipline through carefully calibrated interest rate caps, exposure limits, and mandatory allocation requirements.

With the scheme now operational, stakeholders anticipate improved funding availability for MFIs over the coming months, which is expected to stabilize the sector and sustain credit growth for small borrowers across the country.