HAND-IN-HAND. Microfinance enables access to credit without collateral for small businesses
| Photo Credit:
Adeel Halim
The credit guarantee fund of microfinance institutions (CGSMFI 2.0) has come as a boon to a sector that has been reeling under liquidity shortage for more than a year. Many lenders kept away from MFIs or enhanced their underwriting norms in the past two years. Some institutions that had supported the microfinance sector even during some of the worst times in the past have stepped back at the moment, miring the sector in uncertainty. At this juncture, the announcement of the CGSMFI 2.0 scheme for guaranteeing funders’ money has come as a great relief.Similar to a fund created during the Covid-19 pandemic, the CGSMFI 2.0 has almost three times the allocation at ₹20,000 crore. It has been designed to ensure that every institution can benefit equitably. Additionally, 15 per cent has been earmarked exclusively for small and mid-segment MFIs.The scheme also prescribes a cap of 20 per cent of assets under management (AUM) for individual borrowers to ensure the money is better distributed. The maximum amount eligible for each institution is capped at ₹100 crore, ₹200 crore or ₹1,000 crore, depending on the size of the institution.The limit for the larger MFIs was increased subsequently. Similarly, the scheme has been extended up to August 31, demonstrating the government’s commitment.Thankfully, the scheme comes at a time when the microfinance sector is showing signs of revival. The past few months have seen a positive trajectory of disbursements and outstanding. There are indications that disbursements in May may have been much higher. The funding under the guarantee scheme would speed up the revival.Self-regulationThe microfinance sector — which enables easy access to credit without collateral for low-income individuals, marginalised groups, and small entrepreneurs — was hit badly during the Covid-19 pandemic. The borrowers in this sector are among the most vulnerable in such calamities. The sector catered to the post-pandemic surge in demand for credit. But the higher credit flow without a commensurate revival of the economy saw some households ending up in an overleveraged position, leading to higher indebtedness and sector-wide stress.As a corrective measure, self-regulatory organisations came up with a set of guardrails, first in July 2024 and again in April 2025. The guardrails were finalised jointly with the CEOs of MFIs and their diligent implementation has put the sector back in order.There has been an improvement in several parameters in the last few quarters. The portfolio size declined from ₹4.4 lakh crore in March 2024 to ₹3.71 lakh crore in March 2025. It had dipped below ₹3.2 lakh crore during the year, but showed growth in the last two months of the financial year to close at ₹3.34 lakh crore, below the previous year’s close.However, the numbers for May would be more encouraging, given the higher lending. When it comes to the portfolio at risk (PAR) value, the PAR 30–179 days has improved from 6.65 per cent in March 2025 to 2.31 per cent in March 2026. Similarly, the PAR 90-plus improved from 3.93 per cent to 1.49 per cent. The PAR 179-plus, which surged during this period, has stabilised in the last six months. Here again the numbers for non-banking financial companies (NBFCs) and NBFC MFIs are much better than the average.Lack of funding is the major factor impeding a quick revival. Reduced funding support has lowered the disbursement during FY2025-26 to ₹2.52 lakh crore against a high of ₹3.89 lakh crore in 2023-24.Confidence boosterThe CGSMFI 2.0 scheme is expected to bring cheer back in the industry with improved lender confidence and more funding support.The guarantee scheme is mainly a confidence-building measure. The experience with CGSMFI 1.0 showed that only a small amount was invoked from the guarantee fund — ₹10–12 crore against ₹7,500 crore utilised. But the comfort offered to lenders is huge.While a larger MFI can raise funds easily with or without the guarantee, it is the smaller or mid-sized MFI that will benefit from the scheme. The government’s offer of 70–80 per cent guarantee cover should prove a confidence booster for lenders.The microfinance sector, which has seen several ups and downs in the past, is poised for 15–20 per cent growth during the current year. The fund flow needs to keep up with this growth. The micro-lenders, on the other hand, need to keep their guards on and ensure there is no backslide to challenging times again.Let us not forget that a diverse country like India needs many different types of institutions, and MFIs are one such that cater to the bottom of the pyramid. They are a great enabler of financial inclusion.
