Microlenders seek govt guarantee to tide over liquidity crunch
The Microfinance Institutions Network (MFIN) has sought a ₹ 15,000–20,000 crore guarantee scheme and wrote to the government on 15 July, Alok Misra, director and chief executive of the industry body, told reporters on Tuesday.
Misra said the proposed scheme is not a typical borrower-level guarantee. 'It (an earlier guarantee scheme) was ₹ 7,500 crore; the entire money came back, and nobody broke the guarantee. It restarted a virtuous cycle and had no fiscal implications,' he said.
He said that discussions with the bankers are underway, and a solution to the current liquidity challenges could emerge within the next one to two months.
Bank lending to microfinance lenders has slowed down, and the credit guarantee scheme, if approved, would give banks more confidence, according to Misra. This, he said, would allow banks to lend to microfinance institutions (MFIs) at lower interest rates, which the MFIs would then be able to pass on to their customers.
The industry comprises non-banking financial company-microfinance institutions (NBFC-MFIs) and other non-bank lenders, small finance banks and lenders who advance microloans. As of 30 June, NBFC-MFIs—typically referred to as MFIs—had a 39% share in total outstanding microfinance loans, followed by banks at 33%, among others.
'Despite a fall in disbursements, recovery is inching up. CIC (Credit Information Company) data shows 80% of customers have borrowings of less than ₹ 120,000, and 95% of customers have loans from less than three lenders,' said Misra.
He said that the sector's average cost of funds is currently around 11.5-12%, though good institutions borrow at lower rates. Operating expenses, even with the lower wage levels, average 6.5%, while credit costs are in the range of 3-4%. 'If we add these, the total cost comes to about 22%. So, if I lend even at 24%, the margin left is just 2%,' said Misra.
For the April to June quarter, the weighted average yield or the average lending rate of the portfolio reported by NBFC-MFIs is 23.66%.
Outstanding microloans declined 16.74% year-on-year to ₹ 3.53 trillion as of June 2025, according to the credit bureau cited by MFIN.
Last year, then Reserve Bank of India (RBI) governor Shaktikanta Das had said the regulator came across instances of microlenders and non-bank financiers charging 'usurious' interest rates on small-value loans, reminding them to judiciously use their pricing power.
In October 2024, the RBI tightened its oversight of loan pricing in the microfinance sector, halting new lending by over four NBFC-MFIs over excessive interest spreads and policy breaches. These strictures were later reversed between December and January.
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