The ₹20,000-crore microfinance credit guarantee scheme faces significant implementation challenges as banks continue to prefer larger, well-established MFIs over smaller, lower-rated institutions. According to The Economic Times, the scheme, launched on March 20 and valid until June 30 or when funds run out, was designed to reduce microfinance companies' borrowing costs and lending rates for grassroot borrowers. However, banks' natural preference for bigger companies, combined with the scheme's short lifespan, suggests the support may primarily benefit stronger players rather than its intended recipients. This banking sector hesitancy raises concerns about how much the scheme will be utilized and how effective it will be for its intended beneficiaries.
Lending rates for bottom-of-the-pyramid borrowers have hardened by 50-100 basis points in recent months despite the government rolling out the microfinance credit guarantee scheme to reduce rates. According to The Economic Times, heads of microfinance companies blame the rate increases on their own elevated borrowing costs. As reported by The Economic Times, a leading NBFC-MFI CEO stated that the current lending rate is an outcome of higher cost of borrowing, credit cost, and operating cost. The company expects rate cuts to be implemented probably in the second half of the current fiscal as incremental stress decreases. Recent data shows this trend continuing, with major firms like CreditAccess Grameen reporting average lending rates at 22.76% for the January-March quarter, up from 22.11% in the previous period.
Borrowing costs have risen significantly, with one NBFC-MFI head reporting that borrowing cost rose by about 150 basis points over the past one year until January, after which there was a 10 basis point relief. According to The Economic Times, this has forced several NBFC-MFIs to keep lending rates high, with some bigger ones starting to pass on the impact of higher borrowing costs after October last year. The lenders have highlighted this cost aspect to the Reserve Bank of India, as reported by The Economic Times. Despite these challenges, data from February 2026 shows new loans increased significantly in value (29%) and number (10%), though the total loan portfolio decreased by 18.3% year-on-year to ₹3.14 lakh crore by December 2025. The ₹20,000-crore credit guarantee scheme has not yet shown significant effect in easing these funding pressures.
CreditAccess Grameen, the country's largest NBFC-MFI, had its weighted average lending rate in the January-March quarter at 22.76% against 22.11% in the July-September quarter. As reported by The Economic Times, its lending rate range based on the risk-based pricing method stands at 18-23.75%, reflecting a 75 basis points rise at the upper band from 18-23% in October last year. Other publicly listed entities such as Fusion Finance, Muthoot Microfin, Satin Creditcare Network and Spandana Sphoorty Financial have also seen their weighted average rates move higher in the fourth quarter when compared to the second quarter. The trend is visible across the sector, with firms like CreditAccess Grameen trading at a price-to-earnings ratio of about 41.74, signaling a premium, while others like Muthoot Microfin (-9.98), Spandana Sphoorty Financial (-1.53), and Fusion Micro Finance (-10.51) report negative P/E ratios, indicating losses or unprofitability.
The microfinance industry is experiencing a period of careful consolidation as asset quality has improved with delinquency rates dropping to 2.8% by February 2026. According to The Economic Times, lenders started risk-based pricing in 2022 after the Reserve Bank deregulated the market and removed the lending rate cap. The sector continues to borrow largely from private and MNC banks at higher rates as public sector banks remain selective in lending to MFIs. Top executives in the sector expect the rate environment to improve as incremental stress decreases, with potential rate cuts anticipated in the second half of the current fiscal year. However, the ongoing difficulty in securing affordable bank funding continues to squeeze microfinance companies' profits, with firms like Muthoot Microfin, Spandana Sphoorty, and Fusion Finance reporting negative returns on equity. Analysts expect slow asset growth for microfinance companies in the 2026 fiscal year, with a potential recovery to 15-17% in the 2027 fiscal year, depending on better loan repayment health and more flexible loan eligibility rules.
