The microfinance industry, grappling with persistent liquidity constraints and recovery challenges, is hopeful that the government’s ₹20,000 crore Credit Guarantee Scheme for Microfinance Institutions (CGSMFI 2.0) will help revive fund flows.
Under the scheme, the National Credit Guarantee Trustee Company will provide guarantee cover to banks against expected losses on loans extended to non-bank microfinance institutions (NBFC-MFIs), encouraging lenders to step up credit support.
The finance ministry estimates that nearly 36 lakh small borrowers will benefit from the initiative. NBFC-MFIs rely heavily on banks for funding, but lenders have turned increasingly cautious amid concerns over borrower overleveraging and tighter state-level regulations aimed at curbing coercive recovery practices.
Despite the introduction of sectoral guardrails, such as caps on the number of lenders per borrower and limits on overall indebtedness, and some improvement in asset quality, access to funding remains constrained. As of December 31, 2025, banks accounted for 61.7 per cent of NBFC-MFI borrowings, marginally lower than 62.5 per cent as of September 30, 2025.
The sector has also witnessed a contraction in scale. Assets under management of NBFC-MFIs declined to ₹1,32,418 crore in Q3FY26 from ₹1,50,282 crore a year earlier, while active loan accounts fell to 4.3 crore from 5.5 crore.
“This initiative will strengthen lenders’ confidence to extend credit to MFIs, which have been under stress due to recovery and liquidity issues,” said Jiji Mammen, CEO and ED of Sa-Dhan.
Alok Misra, CEO and director at MFIN, said, “The launch of CGSMFI 2.0 is timely to address the current challenges faced by the microfinance sector. The key constraint has been the availability of bank funding. This scheme will play a crucial role in unlocking liquidity, particularly for small and medium MFIs.”
MSME support
Separately, the finance ministry announced modifications to the Mutual Credit Guarantee Scheme for MSMEs, which provides 60 per cent guarantee coverage to lenders for credit facilities of up to ₹100 crore for the purchase of plant and
machinery.
The revised framework is expected to enhance credit flow to MSMEs, including exporters, and support capacity expansion through easier financing of capital expenditure, the ministry said.
