The Government of India has introduced the Credit Guarantee Scheme for Microfinance Institutions 2.0 (CGSMFI 2.0) to strengthen credit access in the microfinance sector.
The newly launched scheme aims to provide guarantee cover to banks and financial institutions through the National Credit Guarantee Trustee Company Limited (NCGTC), enabling enhanced lending support to Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) and MFIs for onward lending to small borrowers.
Under CGSMFI 2.0, the government intends to facilitate increased credit flow of up to ₹20,000 crore to NBFC-MFIs and MFIs.
The scheme is expected to benefit approximately 36 lakh microfinance borrowers, particularly those at the bottom of the economic pyramid. By mitigating lender risk, the new scheme is designed to revive lending momentum and support financial inclusion.
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Key Features of CGSMFI 2.0
The CGSMFI 2.0 scheme outlines several structural provisions to ensure effective credit delivery and risk coverage:
- Eligible Borrowers: Existing or new small borrowers falling within the regulatory definition of microfinance as prescribed by the Reserve Bank of India (RBI) from time to time are eligible under CGSMFI 2.
- Guarantee Coverage:
- 80% of amount in default for small NBFC-MFIs/MFIs
- 75% for medium NBFC-MFIs/MFIs
- 70% for large NBFC-MFIs/MFIs
These provisions aim to reduce default risk exposure for lending institutions.
- Guarantee Fee: A fee of 0.50% per annum will be charged on the sanctioned amount in the first year and on the outstanding amount thereafter under CGSMFI 2.0.
- Interest Rate Cap:
- Loans extended by Member Lending Institutions (MLIs) to NBFC-MFIs or MFIs under CGSMFI 2.0 will be capped at EBLR or MCLR + 2% per annum.
- For on-lending to small borrowers, lenders must cap the interest rate at 1% below the average lending rate of the previous six months.
- Scheme Validity: The CGSMFI 2 scheme will remain valid until June 30, 2026, or until guarantees worth ₹20,000 crore are issued, whichever is earlier.
Expected Impact
The introduction of CGSMFI 2 is expected to significantly boost credit availability in the microfinance ecosystem.
By providing a government-backed guarantee mechanism, CGSMFI 2 encourages banks and financial institutions to extend funding to NBFC-MFIs and MFIs.
It is estimated that, NBFC-MFIs and MFIs will be able to extend loans to nearly 36 lakh small borrowers. The scheme is positioned to play a critical role in expanding financial inclusion and supporting underserved communities.
Background of CGSMFI 2.0
Microfinance remains a crucial pillar of financial inclusion in India, delivering credit access to individuals at the base of the economic pyramid. NBFC-MFIs and MFIs are key stakeholders in this ecosystem.
However, ongoing financial stress in the sector has led to a slowdown in bank lending to microfinance institutions.
Smaller MFIs, in particular, have faced challenges in securing adequate funding. In this context, CGSMFI 2.0 has been introduced to address these constraints by encouraging lending institutions to extend financial assistance with reduced risk exposure.
By aligning with regulatory norms defined by the Reserve Bank of India, the scheme aims to ensure a stable and scalable credit flow to small borrowers through NBFC-MFIs and MFIs.
