Microfinance

Liquidity support by the Centre may offer symptomatic relief, but India’s microfinance sector needs a structural recast. Without reforms to address recurring cycles of over-lending and loan stress, another credit guarantee package will only postpone the next crisis in this fragile sector.

Sadaf Sayeed, chief executive officer of Muthoot Microfinance said the move could unlock lending, revive financial inclusion and support sectoral growth.

The scheme offers 70-80% guarantee cover on loans to MFIs, aiming to restore lender confidence and improve credit access for underserved borrowers.

The proposed guarantee cover is expected to be larger than the ₹7,500 crore package offered during the pandemic. To be managed by the National Credit Guarantee Trustee Company, it will underwrite lending risks for banks, covering defaults caused by factors outside the control of small borrowers.

Pressure is spreading beyond unsecured microfinance into what was once considered a relatively stable asset class, but lenders and analysts offer differing reasons for this.

Microfinance sector is witnessing a slow recovery marked by moderating bad loan ratios and better collections. However, profitability remains pressured as major lenders focus on secured loans to manage risk. The sector's path to growth is further constrained by uneven recovery.

The US's 50% tariff on Indian imports is a wake-up call for the country's MSMEs. While market diversification is necessary for long-term resilience, a covid-style relief package aimed at preventing business closures and saving jobs is urgently needed.