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Credit guarantee scheme for MFIs to lend to small borrowers launched

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    30th Jun, 2021

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.

What are MFIs?

  • Microfinance institutions (MFIs) are financial companies that provide small loans to people who do not have any access to banking facilities.

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. 

National Credit Guarantee Trustee Company Ltd (NCGTC)

  • It was set up by the Department of Financial Services, Ministry of Finance, Government of India.
  • It acts as a common trustee company to manage and operate various credit guarantee trust funds.
  • NCGTC was incorporated under the Indian Companies Act, 1956 on March 28, 2014 with a paid-up capital of 10 crore.

Current Trust Funds under the trusteeship management of NCGTC:

  1. Credit Guarantee Fund for Skill Development (CGFSD)
  2. Credit Guarantee Fund for Education loans (CGFEL)
  3. Credit Guarantee Fund for Factoring  (CGFF)
  4. Credit Guarantee Fund for Micro Units (CGFMU)
  5. Credit Guarantee Fund for Standup India (CGFSI)

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