MICROCAPITAL BRIEF: Government of India Revises COVID-19 Guarantee Program for Bank Funding of MFIs, Seeking to Enable 2.5m Microfinance Loans

India’s Finance Minister, Nirmala Sitharam, recently unveiled a set of measures intended to boost the nation’s economic recovery following its second wave of COVID-19 infections. One of these is to encourage the distribution of 2.5 million retail microloans by microfinance institutions (MFIs), funded by wholesale bank loans guaranteed by the government. These guarantees, which are available until March 2022, will back up to 75 percent of losses lenders may incur. The retail loans may range in size up to INR 125,000 (USD 1,670) per person. The total value of the program is INR 75 billion (USD 1 billion). MFIs are eligible to participate whether they are organized as NGOs or non-banking finance companies. These institutions number approximately 170 and serve 48 million customers.

The guarantees had been offered previously, but only for commercial paper and non-convertible debentures, both of which required MFIs to offer collateral upfront. The revised rules allow for term loans from banks, which do not require collateral upfront. They also place an unspecified cap on the interest rates banks charge the MFIs and extend the maximum period of the debt from 18 months to three years.

Among the goals of the effort are to boost lending to vulnerable populations, increase liquidity in rural areas, and ease the financial strain on smaller and mid-sized MFIs.

By Sophie Fiala, Research Associate

Sources and Additional Resources

Business Standard article on new Covid-19 recovery package
https://www.business-standard.com/article/economy-policy/india-expands-credit-relief-unveils-new-covid-recovery-aid-121062800988_1.html

Business Standard article on MFI loan guarantee
https://www.business-standard.com/article/economy-policy/guarantees-for-mfi-loans-to-kickstart-lending-in-rural-areas-say-experts-121062801372_1.html

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