Credit guarantee scheme for MFIs to lend to small borrowers launched

The Government rolled out a Rs 7,500-crore credit guarantee scheme to facilitate concessional loans to as many as 25 lakh small borrowers through micro-finance institutions (MFIs).

About the Scheme

• Under the Scheme, the government will offer guarantee to banks for extending loans to the MFIs for on-lending up to Rs 1.25 lakh to each borrower.
• Banks will be allowed to charge only up to a 200-basis point premium over the marginal cost of funds-based lending rate (MCLR).
• Eligibility: All borrowers, including defaulters up to 89 days (before the stressed accounts turn into NPAs), will be eligible for such loans.
• As for credit to the small borrowers through MFIs, guarantee up to 75% of default amount for a maximum of three years will be provided by the government through the National Credit Guarantee Trustee Company and no guarantee fee will be charged by the state-run entity.

Need of the Credit Guarantee Scheme

• Credit markets for small and medium size enterprises (SMEs) are characterized by market failures and imperfections. 
• Up to 68% of formal SMEs in emerging markets are either unserved or underserved by financial institutions, with a resulting credit gap estimated to be close to $1 trillion. 
• Public credit guarantee schemes (CGSs) are a common form of government intervention to unlock finance for small and medium enterprises (SMEs). More than half of all countries in the world have a CGS for SMEs and the number is growing.
• A credit guarantee scheme provides third-party credit risk mitigation to lenders through the absorption of a portion of the lender’s losses on the loans made to SMEs in case of default, typically in return for a fee.