Govt Prepares Credit Guarantee for Stressed Microfinance Sector

The finance ministry is developing a new credit guarantee scheme to provide crucial support to the stressed microfinance sector. This initiative is designed to alleviate liquidity concerns and encourage financial institutions to increase lending to microfinance institutions (MFIs), especially smaller entities that have limited access to funding.

The proposed scheme follows a similar successful program implemented during the pandemic. Industry bodies have repeatedly called for such government backing to address the reluctance of banks to lend to MFIs. The ongoing asset quality stress and slow repayment from overleveraged borrowers have led to a contraction in the microfinance market.

Data indicates a significant drop in the gross loan portfolio, falling from ₹4.34 lakh crore to ₹3.46 lakh crore. The National Credit Guarantee Trustee Company is expected to manage the guarantee cover, similar to its role in the previous scheme where it covered up to 75% of defaulted loans.