Banks seek microloan guarantee extension
Warn of elevated risks if guarantee cover is not restored
The scheme, designed to support collateral-free loans to micro enterprises, ended on March 31, 2026, creating uncertainty around risk pricing, capital provisioning and the outlook for unsecured lending to bottom-of-the-pyramid borrowers.
IDFC First Bank and small finance banks such as AU, Jana and Suryoday were among the biggest users of the scheme to reduce credit risk. They have set aside the guarantee fee for the current fiscal year, expecting the government to reopen the window soon, people aware of the matter said.
Banks have expressed concerns that if fresh loans turn non-performing before the scheme is extended, they will have to make additional provisions to cover credit risks, the people cited above said. Without the guarantee cover, credit costs for unsecured loans remain elevated, analysts said.
IDFC First Bank reported a marginal increase in its microfinance portfolio during the quarter ended September 30 to ₹6,825 crore, with 97% of the book covered under the CGFMU scheme, chief financial officer Sudhanshu Jain said in a post-earnings analyst call.
AU Small Finance Bank said 99% of its microfinance portfolio was covered under the CGFMU guarantee scheme.
"All the new disbursements, we will continue putting under the guarantee programme," Jana Small Finance Bank managing director Ajay Kanwal told analysts. "The CGFMU programme is right now not open for fresh guarantees to be added to it. The scheme is going through an approval process. We expect that to get reopened soon. We have taken the 1% that is required to be put in the programme, and we've already accrued for it," he said.
The CGFMU scheme helped lenders improve asset quality, particularly in the unsecured lending segment.
"We have witnessed a further improvement in asset quality during the quarter, with gross non-performing assets declining to 2.9% as of September 2026, compared with 6.5% in June 2026 and 5.9% in September 2025, after giving effect to the claims received from CGFMU," Suryoday Small Finance Bank MD R Baskar Babu said.
Jana said 36% of its total portfolio was covered under government-backed guarantee schemes for micro units and micro, small and medium enterprises. The coverage could rise to 70-75% once the CGFMU window reopens. About 77% of its unsecured gross loan book was covered under guarantee programmes at the end of March. Ujjivan Small Finance Bank had around 9% of its microfinance portfolio covered under the CGFMU scheme at the end of September.
The government launched the CGFMU scheme in 2016 to encourage lenders to provide collateral-free microloans of up to ₹20 lakh and overdraft facilities of up to ₹10,000 under the Pradhan Mantri MUDRA Yojana. The scheme also covers collateral-free loans of more than ₹10 lakh and up to ₹20 lakh extended to self-help groups.