Government Extends Credit Guarantee Scheme for Microfinance Institutions, Raises Loan Limit to ₹1,000 Crore

The Government of India has extended the validity of the Credit Guarantee Scheme for Microfinance Institutions-2.0, giving a fresh push to credit flow in the microfinance sector. The scheme will now remain valid up to August 31, 2026, or until guarantees worth ₹20,000 crore are issued, whichever happens earlier. The government has also increased the maximum loan amount allowed for large NBFC-MFIs and MFIs from ₹300 crore to ₹1,000 crore, within the overall ceiling of 20 percent of their Assets under Management.

This decision is aimed at improving the use of the scheme and helping more funds reach microfinance institutions. These institutions play a major role in serving small borrowers, especially those who depend on low-ticket loans for income generation, small business activity, rural enterprise, self-employment and household-level economic support. By increasing the loan cap for larger institutions, the government is allowing stronger MFIs to access higher funding and expand lending to eligible borrowers.

CGSMFI-2.0 was introduced by the Central Government on March 20, 2026. The scheme provides guarantee cover to banks and financial institutions through the National Credit Guarantee Trustee Company Limited against expected losses on financial assistance extended to NBFC-MFIs and MFIs. These institutions then lend the funds onward to small borrowers. As of the latest update, loans worth ₹770 crore have already been sanctioned under the scheme.

The structure of the scheme is designed to reduce lending risk for banks and financial institutions. When lenders receive guarantee support, they gain greater confidence to provide funds to microfinance institutions. This helps improve liquidity in the sector and supports the last-mile credit chain. For small borrowers, the benefit can come through wider access to formal credit, especially in areas where traditional banking reach remains limited.

The scheme covers both existing and new small borrowers who fall within the regulatory definition of microfinance prescribed by the Reserve Bank of India. Guarantee coverage has been fixed according to the size of the MFI. Small NBFC-MFIs and MFIs receive 80 percent coverage of the amount in default, medium institutions receive 75 percent, and large institutions receive 70 percent.

The guarantee fee has been kept at 0.50 percent per annum. This fee applies on the sanctioned amount in the first year and on the outstanding amount in the following years. The interest rate on loans given by member lending institutions to NBFC-MFIs and MFIs is capped at EBLR or MCLR plus 2 percent per annum. While lending onward to small borrowers, these MFIs and NBFC-MFIs must keep the interest rate at 1 percent below their average lending rate over the previous six months.

This interest-rate condition is important because the scheme is meant to support credit access without allowing excessive borrowing costs to reach the final borrower. It creates a link between institutional funding support and borrower protection. The government’s approach combines risk-sharing for lenders with pricing discipline for microfinance institutions.

The decision also carries wider economic value. Microfinance supports small traders, women entrepreneurs, rural households, self-help group-linked activity and local service providers. In many regions, a small loan can help a household buy equipment, expand a shop, support livestock, manage working capital or start a small enterprise. Better funding for MFIs can therefore translate into stronger grassroots economic activity.

By extending the scheme and raising the loan cap, the government is signalling that microfinance remains an important part of inclusive growth. The target of facilitating credit flow of up to ₹20,000 crore to NBFC-MFIs gives the programme a sizeable scale. If implemented effectively, it can strengthen formal lending channels, support responsible microfinance and help small borrowers access funds through regulated institutions.

In simple terms, CGSMFI-2.0 acts as a safety net for lenders and a credit bridge for microfinance institutions. The latest extension gives the sector more time to use the facility, while the higher loan cap gives larger MFIs more room to expand lending. For India’s small borrowers, this can mean greater access to formal credit, better support for livelihood activity and stronger participation in the country’s growing financial ecosystem.