The Government of India has introduced key modifications to the Mutual Credit Guarantee Scheme for MSMEs and launched a new Credit Guarantee Scheme for Microfinance Institutions 2.0, in a significant policy push aimed at strengthening credit flow, boosting manufacturing and exports, and deepening financial inclusion across the country.
The revised Mutual Credit Guarantee Scheme for MSMEs, originally launched in January 2025, has been recalibrated to enhance accessibility, reduce compliance burden, and extend targeted support to both manufacturing and service sector enterprises. Under the scheme, National Credit Guarantee Trustee Company Limited provides 60 percent guarantee coverage to Member Lending Institutions for loans up to ₹100 crore extended to eligible MSMEs for the purchase of plant, machinery, or equipment.
Based on stakeholder feedback, the government has introduced several structural changes to improve scheme uptake and operational efficiency. The upfront contribution of 5 percent, previously a cost burden, has now been made refundable in a phased manner at 1 percent annually from the fourth year onwards, subject to satisfactory loan performance. This move is expected to ease liquidity pressure on enterprises during the initial years of borrowing.
In a major expansion, service sector MSMEs have now been brought within the ambit of the scheme, broadening its coverage beyond manufacturing units. Additionally, the minimum project cost requirement linked to machinery and equipment has been rationalised to 60 percent of the total project cost, down from 75 percent earlier, thereby making it more flexible and accessible for a wider set of enterprises. The guarantee tenure has also been fixed at 10 years, providing clarity and long-term assurance to lenders and borrowers alike.
A distinct set of provisions has been introduced for export-oriented MSMEs, recognising their critical role in driving foreign exchange earnings and global competitiveness. Eligible exporter units must demonstrate profitability and maintain at least 25 percent export share in turnover over the previous three financial years, along with compliance in export realisation norms. For such units, loans up to ₹20 crore will be covered with an enhanced guarantee of 75 percent on defaulted amounts. The upfront contribution for exporters has been reduced to 2 percent of the loan amount, capped at ₹40 lakh, with refund provisions in later years. The guarantee fee has been waived in the first year and set at 0.50 percent annually thereafter, offering a significant cost advantage.
The government expects these modifications to substantially improve credit availability for MSMEs, which contribute nearly 30 percent to India’s GDP, over 45 percent to exports, and provide employment to more than 35 crore people. Strengthening this sector is considered central to achieving the long-term vision of Viksit Bharat 2047, particularly by enabling capacity expansion, technology upgradation, and global market integration.
In parallel, the government has launched the Credit Guarantee Scheme for Microfinance Institutions 2.0 to address liquidity constraints in the microfinance sector and revive credit flow to small borrowers at the grassroots level. The scheme is designed to provide guarantee support through National Credit Guarantee Trustee Company Limited to banks and financial institutions against potential losses on loans extended to Non Banking Financial Company Microfinance Institutions and other microfinance institutions.
The scheme introduces differentiated guarantee coverage based on the size of lending institutions, with 80 percent coverage for small, 75 percent for medium, and 70 percent for large microfinance entities. The guarantee fee has been fixed at 0.50 percent per annum on the sanctioned amount in the first year and on the outstanding amount thereafter.
To ensure affordability and protect end borrowers, interest rates on loans extended by lending institutions to microfinance entities have been capped at External Benchmark Lending Rate or Marginal Cost of Funds based Lending Rate plus 2 percent annually. Furthermore, microfinance institutions are required to lend onward to small borrowers at rates at least 1 percent lower than their average lending rates over the previous six months, ensuring that benefits are transmitted to the last mile.
The scheme is valid until June 30, 2026 or until guarantees worth ₹20,000 crore are issued, whichever is earlier. It is estimated to facilitate credit flow of up to ₹20,000 crore to the sector and enable lending to approximately 36 lakh small borrowers.
The initiative comes against the backdrop of stress in the microfinance sector, where reduced bank lending has constrained liquidity, particularly for smaller institutions. By de-risking lending through guarantee support, the government aims to restore confidence among financial institutions and ensure uninterrupted credit delivery to economically vulnerable segments.
Together, the modified MSME credit guarantee framework and the new microfinance scheme represent a coordinated policy effort to strengthen India’s credit ecosystem across both formal enterprises and grassroots borrowers. The measures are expected to drive investment, enhance production capabilities, promote exports, and reinforce inclusive growth by expanding access to finance at multiple levels of the economy.
