India launches ₹8,000cr credit guarantee scheme for microfinance institutions
India just approved an ₹8,000 crore credit guarantee scheme to help microfinance institutions (MFIs) get easier access to bank loans.
The plan, with a notification expected shortly, is meant to ease funding stress and keep small lenders afloat.
Scheme to enable up to ₹1.5 lakh crore in loans
This scheme mainly targets smaller MFIs struggling with bad loans and tight bank funding.
Banks are likely to be directed to cap lending rates at up to 2% above their marginal cost of funds-based lending rate (MCLR).
While the industry had hoped for a bigger ₹20,000 crore package, this move could potentially enable up to ₹1.5 lakh crore in loans.
MFI sector has been under stress
The MFI sector has hit a rough patch: the sector contracted after 2024, with recent portfolio declines and funding pressures.
A similar government scheme in 2021 helped the sector bounce back before stress resurfaced in 2024.
This new support could give small lenders (and their borrowers) a much-needed breather.