The ₹20,000-crore credit guarantee scheme for microfinance institutions, launched on March 20, has yet to gain significant traction more than two months after its introduction. According to reports from The Economic Times, banks have received an aggregate loan demand of ₹10,000-12,500 crore under the scheme, with applications worth over ₹12,500 crore logged in so far. The scheme is nearing its scheduled closure on June 30, with non-banking financial institutions-microfinance institutions (NBFC-MFIs) keenly waiting for banks to accelerate disbursements. As per The Economic Times, with the audit of March 2026 financials completed and all clarifications on the scheme now in place, approvals and disbursals of bank loans should accelerate now.
The scheme's rigid framework has created significant barriers to loan disbursement, as reported by The Economic Times. While the credit guarantee provides 70-80% default coverage, its strict caps on bank lending rates and strict margin rules for microfinance companies have made it a non-starter for loan disbursement. According to Arohan Financial Services managing director Manoj Nambiar, with the audit of March 2026 financials completed and all clarifications on the scheme now in place, approvals and disbursals of bank loans should accelerate now. The loan limit for large NBFC-MFIs has been revised to ₹1,000 crore from ₹300 crore earlier, reflecting the government's focus on supporting larger institutions.
The scheme's benefits are expected to be concentrated among different segments of the microfinance sector, as reported by The Economic Times. Large NBFC-MFIs are more likely to benefit from the credit guarantee programme, while smaller and medium-sized ones, which are more vulnerable in the absence of bank funding, may be left without adequate support. The loan limit for large NBFC-MFIs has been revised to ₹1,000 crore from ₹300 crore earlier, reflecting the government's focus on supporting larger institutions.
The scheme operates under specific lending rate caps that have created additional challenges for participation, according to operational guidelines reported by The Economic Times. Banks must cap the lending rate under the scheme at 2% over one-year marginal cost of fund-based lending rate or over the external benchmark rate. NBFC-MFIs and non-profit MFIs must on-lend to their customers at 1 percentage point lower than the six-month average lending rate, creating a complex pricing structure that may not align with traditional lending models.
Bank executives have maintained strict underwriting standards despite the guarantee coverage, as reported by The Economic Times. They refuse to dilute their standards to lend to financially weak companies, with a senior banker noting they cannot lend to companies below investment grade, as most smaller ones fall in this category. Credit ratings of BBB- and above are considered investment grade, and several smaller MFIs were downgraded to junk following the asset quality crisis, limiting their eligibility for scheme benefits. According to The Economic Times, bank executives won't dilute their underwriting standards to lend to financially weak companies despite the guarantee cover.
