Overview: The Credit Guarantee Scheme for Microfinance Institutions-2.0 (CGSMFI 2.0), introduced on March 20, 2026, to strengthen institutional funding for microfinance lenders, has seen limited utilisation. According to Financial Express, banks had sanctioned around ₹8,500 crore against the scheme’s ₹20,000 crore credit-flow target. Small MFIs secured about ₹300 crore, while small and medium-sized lenders together received around ₹1,800 crore. The reported uptake highlights concerns around borrowing costs, funding limits and lender caution towards smaller and lower-rated MFIs.
A government-backed credit guarantee was designed to make institutional funding easier for microfinance lenders. Yet, Credit Guaranteed Scheme for Microfinance Institutions 2.0 closed on August 31, 2026, with banks having sanctioned only around ₹8,500 crore against the scheme’s ₹20,000 crore credit-flow target.
The gap between the scheme’s intended scale and reported sanctions raises a practical question for Microfinance Institutions (MFIs): why did a government-backed guarantee not translate into wider utilisation?
Borrowing costs, funding limits and lender caution appear to have influenced how attractive the facility was for different borrowers. For MFIs considering institutional funding, the experience also highlights the importance of assessing the funding structure, eligibility requirements and related compliance obligations before choosing a financing route.
Why Did MFIs Not Use the Scheme Fully?
CGSMFI 2.0 was designed to provide guarantee support through the National Credit Guarantee Trustee Company (NCGTC) to eligible lending institutions providing financial assistance to NBFC-MFIs and MFIs for onward lending to small borrowers.
The scheme included several important conditions:
- 0.5% annual guarantee fee, charged on the sanctioned amount in the first year and on the outstanding amount thereafter.
- Funding linked to 20% of the borrower’s Assets Under Management (AUM), subject to category-wise ceilings.
- Maximum assistance of ₹100 crore for small, ₹200 crore for medium and ₹1,000 crore for large NBFC-MFIs/MFIs.
- Interest on funding from eligible lending institutions to NBFC-MFIs/MFIs capped at one-year MCLR or EBLR plus 2% per annum.
The large-MFI ceiling was increased from ₹300 crore to ₹1,000 crore in June 2026 as part of changes intended to improve utilisation of the scheme.
Even with the guarantee support, Financial Express reported that larger MFIs saw limited benefit from the scheme because of the guarantee fee, interest-rate conditions and the availability of other funding options.
The scheme was valid until August 31, 2026, or until guarantees covering ₹20,000 crore were issued, whichever was earlier.
Why Did Banks Remain Cautious?
The scheme offered guarantee coverage against defaults, but the coverage varied according to the size of the MFI.
The guarantee covered 80% of the amount in default for small MFIs, 75% for medium MFIs and 70% for large MFIs. Banks and other eligible lending institutions nevertheless continued to assess the financial strength and creditworthiness of individual borrowers.
The report also points to broader stress in the microfinance sector, including concerns over borrower overleveraging and asset quality, as factors contributing to lender caution.
This distinction matters. A credit guarantee can reduce a lender’s potential loss, but it does not remove the need for credit assessment or eliminate the commercial considerations involved in lending.
What Does the Low Uptake Mean for MFIs?
The experience of CGSMFI 2.0 shows that a government-backed guarantee does not, by itself, determine whether a financing facility will be commercially attractive.
For an MFI or NBFC-MFI, the decision involves more than the availability of guarantee support. The borrower needs to consider the interest cost, guarantee fee, funding ceiling, AUM-based limit, eligibility conditions, documentation and alternative sources of institutional finance.
For lenders, the guarantee provides a degree of risk sharing, but borrower quality and sector-specific risks remain relevant to the lending decision.
For financial businesses planning to raise institutional funds, this makes the underlying corporate and regulatory structure equally important. The entity’s constitution, applicable registrations, regulatory permissions, financial documentation and ongoing statutory compliance can all affect how a proposed funding arrangement is evaluated.
Setindiabiz Support
For MFIs, NBFCs and other financial businesses, raising funds is closely linked with the entity’s legal structure, regulatory status, documentation and ongoing compliance obligations.
Setindiabiz supports businesses with company incorporation, Microfinance Company/NBFC-related registration support, GST, taxation, FEMA and corporate compliance requirements relevant to their operations.
Businesses planning to establish an MFI/NBFC, evaluate institutional funding or review their existing compliance structure seek Setindiabiz support to assess the proposed structure, documentation and applicable regulatory requirements before proceeding.
FAQs
What is CGSMFI 2.0?
CGSMFI 2.0 is a government-backed credit guarantee scheme introduced on March 20, 2026. It provides guarantee support through NCGTC to eligible lending institutions financing NBFC-MFIs and MFIs for onward lending to small borrowers.
What were the funding limits under CGSMFI 2.0?
Assistance was linked to 20% of the borrower’s AUM, subject to category-wise ceilings of ₹100 crore for small, ₹200 crore for medium and ₹1,000 crore for large NBFC-MFIs/MFIs.
Is CGSMFI 2.0 available in September 2026?
No. The scheme was valid until August 31, 2026, or until guarantees covering ₹20,000 crore were issued, whichever was earlier.
Why was utilisation of CGSMFI 2.0 limited?
Factors included the 0.5% guarantee fee, interest-rate conditions, funding limits and the availability of alternative funding. Banks also remained cautious about smaller and lower-rated MFIs amid broader sector concerns.
CGSMFI 2.0 was designed to facilitate up to ₹20,000 crore of credit flow to NBFC-MFIs and MFIs, but the reported ₹8,500 crore in sanctions shows that the scheme was not utilised to its full intended scale.
For MFIs and other financial businesses, the experience highlights an important funding lesson: a government-backed guarantee does not automatically make a financing route suitable.
Interest costs, guarantee fees, borrowing limits, eligibility conditions, lender risk assessment and alternative financing options all need to be considered alongside the entity’s regulatory and compliance requirements.
In This Article
Author Bio
Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.
