NEW DELHI: The finance ministry is weighing a plan to provide credit guarantee cover to funds that NBFCs raise from banks and ramp up their microfinance operations, according to two people familiar with the development.
The proposed one-time credit guarantee scheme will help non-banking financial company-microfinance institutions (NBFC-MFIs) access funds from banks easily and tide over a liquidity crunch in maintaining their lending to low-income households that lack access to traditional banking.
The guarantee cover under consideration will be larger than the ₹7,500 crore cover that was offered during the pandemic. The new scheme is likely to be managed by the state-run National Credit Guarantee Trustee Company, which will cover and underwrite the lending risk to NBFC-MFIs arising due to factors outside the control of small borrowers.
This will help NBFC-MFIs to draw funds on easier terms from financial institutions. The development assumes importance for India’s ₹3.34 trillion microfinance loan portfolio, which has been shrinking steadily.
“The proposed credit guarantee scheme that has been under discussion in the government for some time now is being weighed for launch when budget proposals for 2026-27 are announced next month,” one of the two people said, requesting anonymity.
“The one-time guarantee cover under examination is far larger than the ₹7,500 crore cover that was offered during the covid period, but the quantum is still to be finalised,” the second person said, asking not to be identified.
The government formulated the Credit Guarantee Scheme for MFIs in 2021 to provide 75% guarantee on funding extended by member-lending institutions to NBFC-MFIs and MFIs for onward lending to small borrowers. That scheme was valid till 31 March 2022 or till guarantees for an amount of ₹7,500 crore were issued.
The government takes a final call on several budget proposals closer to the presentation date of 1 February.
Financial inclusion
MFIs help in formalizing credit to low-income households and aid in the financial inclusion of people who otherwise bank on informal, unregulated and often usurious credit sources. Credit guarantees lower the financing risk for banks and financial institutions and allows them to take larger exposure to MFIs.
The guarantor needs to pay only in case of a default by the borrower. The move is significant given that banks limit funding to MFIs due to the inherent risks these institutions face while lending to small borrowers with limited means. The risk also puts a higher cost on MFI borrowings from banks while also limiting fund flows to the sector.
Queries emailed to the finance ministry spokesperson on Friday remained unanswered at the time of publishing.
Minister of state for finance Pankaj Chaudhary told Parliament in August that the share of microfinance loans that are one to six months overdue rose to 6.2% in March 2025 from 4.3% in September 2024. The trend was similar for banks, with overdue microfinance loans increasing to about 6.5% from less than 5% over the same period.
Small Industries Development Bank of India attributed the rise in microfinance delinquencies to an increase in indebtedness among borrowers or overleveraging and natural calamities, the minister said then.
The microfinance sector’s gross loan portfolio shrank to ₹3.34 trillion on 30 November 2025 from ₹3.75 trillion on 31 March 2025 and from ₹4.3 trillion on 31 March 2024, according to data from Microfinance Industry Network (MFIN), the self-regulator for NBFC-MFIs that account for about 40% of outstanding MFI loans.
“This is a fall of almost ₹1 trillion over the last 20 months,” said Alok Misra, chief executive officer and director of MFIN, citing credit bureau figures.
Debt funding
The Reserve Bank of India has mandated that the monthly loan obligations of borrowers cannot exceed half of their monthly income, in order to prevent over indebtedness.
“NBFC-MFIs are non-deposit taking NBFCs and depend on wholesale lending from banks for the further on-lending to microfinance borrowers,” Misra said.
The debt funding received by these entities has fallen 54% to ₹13,840 crore in the fourth quarter of FY25 from ₹30,018 crore in the fourth quarter of FY24. In the September quarter of FY26, the funding received was ₹18,993 crore, which is still very low, added Misra.
“This reduction in liquidity availability has led to a fall in disbursements to microfinance borrowers and therefore the decline in the gross loan portfolio. Most microfinance loans are income-generating loans and borrowers use these loans as working capital to manage and expand their micro-enterprises. Disruptions in flow of credit impacts their livelihoods,” added Misra.