CGTMSE Risk Shield for MFI Lending 

-Vinod Kothari and Chirag Agarwal | finserv@vinodkothari.com

The National Credit Guarantee Trust Company (NCGTC), under the Department of Financial Services, has floated a scheme which will guarantee lending upto ₹20000 crores by banks and financial institutions (Member Lending Institutions or MLIs), for taking incremental loan exposure to MFIs. The Scheme intends to nudge bank lending to MFIs, as the former has shunned away in view of the perceived risk of the sector in the recent past. The NCGTC takes 70% – 80% risk of default of the bank loans to the MFIs, provided the lending is done accordingly with the conditions of the Scheme.

Among the conditions, the MFI must lend at least at 1% lower than the average lending rate over the last 6 months, and the MLI must lend at no more than 2% over the benchmark rate (MCLR or EBLR as applicable). 

In our view, the Scheme has following outcome expectations:

• Given the credit risk transfer to the extent of 70% – 80% (depending on the 3 sizes of MFIs), the credit risk aversion as also the credit risk premium, should significantly come down.
• In view of the credit risk transfer, the risk weight for capital adequacy also comes to zero for the guaranteed portion, resulting into significant capital relief for the MLI
• Since the Scheme can be utilised only for incremental lending, and that too, at a cheaper rate, there may be downward pressure on lending rates, resulting in a demand-side push. The latter is quite important, as reduced lending volumes in the MFI sector are quite often the cause of higher defaults as well.
• Overall, the environment of sectoral aversion would change.

Essential Features of the Scheme

Who are MLIs?

• Schedule Commercials Banks
• AIFIs

What type of loans are covered under the Scheme?

• Funding provided by the MLIs to MFIs for on-lending to microfinance borrowers

What is the interest cap under the Scheme?

• Loans sanctioned by MLIs to NBFC-MFIs/MFIs is capped at EBLR or 1 Year MCLR + 2% per annum
• Loans by NBFC- MFIs/MFIs to microfinance borrowers is capped at 1% below the average rate of their lending in past 6 months.

What is the cap on tenure of loans under the Scheme?

• Maximum tenure of the loan provided by MLI to MFIs shall be 3 years (1-year moratorium plus 2 years for loan repayment).

Conditions for MLIs to get benefits under the Scheme:

• At least 5% of the total loan amount under the Scheme shall be sanctioned to small-sized MFIs, & 10% to medium-sized MFIs.
• The maximum amount of loan which can be sanctioned by MLIs to MFIs shall be capped at 20% of the Assets Under Management (AUM) of respective MFI subject to maximum of ₹100 crore to small size, ₹200 crore to medium size and ₹300 crore to large size MFIs
• MFIs shall be classified as small, medium and large based on their AUM as follows:
  • Small MFIs – Less than 500 crores
  • Medium MFIs – Rs.500 crores to less than Rs. 2000 crores
  • Large MFIs -Rs. 2000 crores or more

Maximum coverage under the guarantee:

• 70% to Large MFIs, 75% to Medium MFIs & 80% to Small MFIs of the amount in default for a maximum period of 3 years

Guarantee Fee:

• MLIs shall pay to NCGTC Guarantee Fee at 0.5% of the sanction amount (first year) and outstanding amount (thereafter).

Claim Process:

• MLI shall submit a claim on an annual basis (once every year) in respect of the amount in default.