MC EXCLUSIVE Credit guarantee scheme worth Rs 20,000 crore soon for NBFC-MFIs to ease liquidity crunch

microfinance

Non-bank microfinance companies (NBFC-MFIs) may get their first major relief in the form of a credit guarantee scheme, people familiar with the matter have told Moneycontrol. The scheme, expected to be around Rs 20,000 crore, is intended to solve the liquidity crunch faced by NBFC-MFIs, sources have said.

While the full detail of the rollout is awaited, the scheme may see the government back the loans extended by lenders to NBFC-MFIs, thereby ensuring credit from the banking sector.

The package may provide liquidity worth Rs 1.2-1.4 lakh crore from banks, which can help MFIs meet their funding requirement for the next 12-18 months, it is learnt.

“Negotiations have been going on since April, and the package is likely to be implemented soon,” said one official who didn’t want to be named. Likely in the form of a wholesale credit guarantee scheme, the relief will be aimed to support to lenders lending to the sector, along with a possible interest subvention package for bank credit to NBFC-MFIs.

An email sent to the finance ministry in this regard remained unanswered at the time of the publishing of the story.

“At present, just a handful of banks extend credit to NBFC-MFIs. Even these lenders are turning cautious and prefer to purchase PTCs (pass through certificates) and direct assignments rather than taking a direct loan exposure. There are many small and mid-sized NBFC-MFIs which are starring at temporary closure of business because of lack of funding,” said a CEO of a NBFC-MFI who didn’t wish to be named.

Another CEO of a large MFI said because of the change in stance adopted by the lenders, microfinance lenders have further tightened disbursements and prefer to go slow on growth. “Till the time large state-owned banks such as SBI, PNB and BoB start lending to MFIs, the situation will remain grim on growth,” the MFI CEO added.

The crisis in the MFI space heightened early this year after bank loans to the sector turned extremely selective. It is understood that most PSU banks have withdrawn their sanction limits and fresh borrowing plans for NBFC-MFIs.

Banks’ credit to NBFC-MFIs declined by 14 percent on-year in FY25, reducing its overall share to 48.3 percent.

With credit availability constrained and risk perception elevated for NBFC-MFIs, cost of funds too has remained high for NBFC-MFIs. One senior banker said that the cost of borrowing for the MFIs has been revised upwards by 150-200 bps, owing to the high risk that the sector continues to carry. “As a result, most NBFC-MFIs have increased their rate of interest for borrowers by 200-250 bps from July this year,” said another CEO of a NBFC-MFI. This is despite a 100 bps reduction in the repo rate since February this year.

The MFI space, marred by defaults and escalated credit costs, has seen a prolonged tough since September 2024. It is anticipated that credit guarantee scheme and interest subvention plan may help reduce the cost of funds NBFC-MFIs.

The outstanding gross loan portfolio of the NBFC-MFIs has declined by 17 percent on-year to Rs 3.53 lakh crore in April-June FY25, while the customer base is down by 6 percent on-year to 7.5 crore borrowers.