MICROCAPITAL BRIEF: Indian government revises COVID-19 guarantee program for bank financing of MFIs, seeking to enable microfinance loans of 2.5 million

india Finance Minister Nirmala Sitharam recently unveiled a package of measures to boost the country’s economic recovery after its second wave of COVID-19 infections. One of them is to encourage the distribution of 2.5 million retail microloans by microfinance institutions (MFIs), financed by government guaranteed wholesale bank loans. These guarantees, available until March 2022, will cover up to 75% of the losses that lenders could incur. Retail loans can be up to INR 125,000 (USD 1,670) per person. The total value of the program is INR 75 billion (USD 1 billion). MFIs can participate, whether organized as NGOs or non-bank financial companies. These institutions number around 170 and serve 48 million clients.

Guarantees had been offered previously, but only for commercial paper and non-convertible debentures, both of which required MFIs to provide a guarantee in advance. The revised rules allow term loans from banks, which do not require an initial guarantee. They also impose an unspecified cap on the interest rates banks charge MFIs and extend the maximum debt term from 18 months to three years.

One of the goals of the effort is to stimulate lending to vulnerable populations, increase liquidity in rural areas, and ease financial pressure on small and medium-sized MFIs.

By Sophie Fiala, research associate

Additional sources and resources

Business Standard article on the new Covid-19 recovery package

Business Standard article on MFI loan guarantees

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