₹20,000 Crore Credit Guarantee Scheme Falls Short as MFI Lending Remains Weak

The government’s ₹20,000 crore Credit Guarantee Scheme for Microfinance Institutions (CGSMFI-2.0) has seen limited utilisation, with banks disbursing only around ₹3,300 crore, or 17% of the sanctioned programme size, as the extended deadline approaches. The scheme was designed to revive bank funding to microfinance institutions and support lending to small borrowers.

Banks Remain Cautious on Smaller MFIs

Loan sanctions under the programme have remained slow, particularly for small and medium-sized NBFC-MFIs. Banks continue to exercise caution toward smaller microfinance lenders despite these institutions having greater difficulty accessing wholesale funding.

Of the ₹3,300 crore disbursed so far, approximately ₹1,000 crore has gone to small and medium-sized MFIs, while the remaining amount has been provided to larger institutions for on-lending. Around 60 micro-lenders have received loans under the guarantee programme, including 44 small and medium-sized MFIs.

The government initially earmarked ₹3,000 crore for small and medium-sized MFIs and ₹17,000 crore for larger institutions with more than ₹2,000 crore in assets under management. The programme’s validity has been extended until August 31, 2026, or until the ₹20,000 crore guarantee limit is reached, whichever comes first.

Why the Scheme Is Struggling to Gain Traction

A key challenge is that larger MFIs have relatively little incentive to use the government-backed facility because they can access funding from other sources on potentially better terms. At the same time, banks remain reluctant to lend to smaller MFIs because of their higher perceived credit risk.

Under the scheme, loans can generally be extended up to 20% of an MFI’s AUM, subject to category-specific limits. The National Credit Guarantee Trustee Company provides partial guarantee coverage of 70% for large MFIs, 75% for medium-sized MFIs and 80% for small MFIs in the event of default.

The low utilisation highlights a gap between the availability of government-backed credit support and actual demand from eligible lenders. Unless banks become more comfortable with smaller MFIs and larger institutions find greater value in the scheme, a substantial portion of the ₹20,000 crore facility could remain unused.