Government Introduces Credit Guarantee Framework to Boost MFI Lending

On March 20, 2026, the Government of India introduced the Credit Guarantee Scheme for Microfinance Institutions – 2.0 (CGSMFI-2.0). The scheme is meant to address the slowdown in bank funding to microfinance institutions (MFIs), especially smaller entities, by mitigating credit risk through guarantees provided by the National Credit Guarantee Trustee Company Limited (NCGTC) against expected losses. It is designed to support liquidity, enhance credit flow to small borrowers, and enable MFIs to extend loans within the RBI’s microfinance framework. The scheme also seeks to encourage lending by scheduled commercial banks and other eligible financial institutions to the microfinance sector.

Key features of the scheme:

• It covers all loans sanctioned by Member Lending Institutions (MLIs) to NBFC MFIs/MFIs up to June 30, 2026, or until guarantees aggregating ₹20,000 crore are issued, whichever is earlier.
• It applies to both existing and new small borrowers falling within the RBI’s regulatory definition of microfinance.
• A graded guarantee structure is provided, with coverage of 80% for small, 75% for medium and 70% for large MFIs, calculated on the amount in default.
• A guarantee fee of 0.5% per annum is payable on the sanctioned amount in the first year and on the outstanding amount thereafter.
• Interest rates on loans from MLIs to MFIs are capped at EBLR or MCLR + 2% per annum.
• MFIs are required to ensure that onward lending rates are at least 1% lower than their average lending rate over the preceding six months.

To avail of the guarantee under the scheme, eligible institutions must register with NCGTC as MLIs by submitting a formal undertaking on stamp paper of the prescribed value, executed by an authorised signatory in accordance with applicable stamp laws.

The operational guidelines prescribe a structured lending framework. Loans under the scheme have a maximum tenure of three years, including a one-year moratorium, and disbursement must be completed within three months of sanction. After approval, MLIs can get guarantee cover automatically from NCGTC, making it easier to access but putting more responsibility on lenders to follow the rules.

Exposure limits are linked to the MFI’s assets under management (AUM), subject to caps of ₹100 crore, ₹200 crore, and ₹300 crore for small, medium, and large MFIs, respectively. MLIs are also required to ensure minimum allocation thresholds, i.e., at least 5% of total sanctioned amounts to small MFIs and 10% to medium MFIs, to promote balanced credit distribution.

A key feature of the scheme is its emphasis on end-use monitoring and compliance.

The scheme applies only to incremental lending, ensuring that funds are used for fresh credit exposure rather than refinancing existing loans. This includes maintaining separate accounts for such lending, ensuring that loan assets are created within three months of disbursement, obtaining periodic credit bureau reports, and securing statutory auditor certifications to confirm compliance with scheme conditions.

A structured claim process has been established under the scheme. In the event of default and classification as a non-performing asset, MLIs may submit guarantee claims annually, subject to a lock-in period of one year. Importantly, the guarantee does not absolve lenders of recovery obligations; MLIs are required to continue pursuing recoveries and safeguard the interests of NCGTC. The framework therefore reflects a partial credit risk-sharing model rather than a complete transfer of risk.

The scheme is expected to facilitate a credit flow of up to ₹20,000 crore and benefit approximately 36 lakh borrowers.