The Union Finance Ministry is actively considering a significant one-time credit guarantee scheme for non-banking financial company-microfinance institutions (NBFC-MFIs), with a potential announcement in the upcoming Budget for 2026-27. This move aims to address a severe liquidity crunch and reverse the contraction in India's microfinance sector, which serves as a critical lifeline for low-income households.
A Lifeline Larger Than the Pandemic Package
According to sources familiar with the deliberations, the proposed credit guarantee cover is expected to be substantially larger than the ₹7,500 crore package offered during the COVID-19 pandemic. While the final quantum is yet to be decided, the scheme is designed to underwrite lending risks for banks, specifically covering defaults caused by factors outside the control of small borrowers, such as natural calamities.
The state-run National Credit Guarantee Trustee Company (NCGTC) is likely to manage the new initiative. By providing this guarantee, the government intends to make banks more comfortable in lending to NBFC-MFIs, thereby ensuring a smoother flow of funds to the last mile. This is crucial as NBFC-MFIs, which are non-deposit taking entities, rely heavily on wholesale funding from banks for their onward lending operations.
Addressing a Sector Under Stress
The development comes at a critical juncture for India's microfinance industry. Data from the Microfinance Industry Network (MFIN) reveals a stark decline: the sector's gross loan portfolio shrank to ₹3.34 trillion on 30 November 2025, down from ₹3.75 trillion on 31 March 2025 and a significant drop from ₹4.3 trillion on 31 March 2024.
Alok Misra, CEO and Director of MFIN, highlighted that this represents a fall of nearly ₹1 trillion over 20 months. He attributed this decline directly to a reduction in liquidity. "Debt funding received by these entities has fallen 54% to ₹13,840 crore in Q4 FY25 from ₹30,018 crore in Q4 FY24," Misra stated, adding that the ₹18,993 crore received in the September quarter of FY26 remains very low.
This liquidity squeeze has led to reduced disbursements, impacting the livelihoods of borrowers who use these loans as working capital for their micro-enterprises.
Rising Delinquencies and Regulatory Context
The push for a guarantee scheme is also informed by rising stress in the portfolio. Minister of State for Finance Pankaj Chaudhary informed Parliament in August that the share of microfinance loans overdue by one to six months rose to 6.2% in March 2025 from 4.3% in September 2024. A similar trend was observed in banks' microfinance books.
The Small Industries Development Bank of India (SIDBI) cited increased indebtedness among borrowers and natural calamities as key reasons for the rise in delinquencies. To prevent over-leveraging, the Reserve Bank of India (RBI) has mandated that a borrower's monthly loan obligations should not exceed 50% of their monthly income.
The earlier Credit Guarantee Scheme for MFIs, launched in 2021, provided a 75% guarantee on bank funding to MFIs and was valid until March 2022 or until guarantees for ₹7,500 crore were issued. The new scheme under discussion is envisioned to be a more potent intervention.
By lowering the financing risk for banks, the guarantee aims to reduce the cost of borrowing for NBFC-MFIs and increase fund flows to a sector vital for financial inclusion, helping move low-income households away from informal and often usurious credit sources. A final decision on the proposal is expected closer to the Budget presentation on 1 February 2026.
