Banks will only be allowed to charge a premi"/>

Rs 7,500 crore credit guarantee program enabling MFIs to lend to small borrowers

marginal cost of the funds-based lending rate (MCLR).”/>Banks will only be allowed to charge a premium of up to 200 basis points over the marginal cost of the funds-based lending rate (MCLR).

Finance Minister Nirmala Sitharaman on Monday launched a Rs 7,500 crore credit guarantee program to facilitate concessional lending at no less than 25 lakh from small borrowers through microfinance institutions (MFIs).

The decision will not only help the poor and vulnerable cope with the pandemic, but will also improve consumption at the local level. However, to create a meaningful impact, borrower coverage and assistance must be significantly expanded, analysts say.

The government will provide a guarantee to banks for granting loans to MFIs for on-lending up to Rs 1.25 lakh to each borrower. Banks will only be allowed to charge a premium of up to 200 basis points over the marginal cost of the funds-based lending rate (MCLR).

All borrowers, including defaulters up to 89 days (before stressed accounts turn into NPAs), will be eligible for such loans, Sitharaman said. But existing central bank guidelines, including household income and debt ceilings, must be followed when granting a loan to a borrower.

To support the tourism sector battered by the Covid epidemic, fully guaranteed loans of up to 10 lakh will be granted to each eligible travel agency and 1 lakh to each tourist guide. This will support over 11,000 registered tour guides and other travel and tourism stakeholders.

Sitharaman said more funds will also be given to the National Export Insurance Account Trust, which will enable it to underwrite project exports worth an additional Rs 33,000 crore. As of March 2021, the Trust had supported 211 projects of Rs 52,860 crore in 52 countries by 63 different Indian project exporters.

Likewise, the government will inject new capital into the Export Credit Guarantee Corporation (ECGC) over the next five years, which will increase export insurance coverage by Rs 88,000 crore. The various insurance products offered by ECGC support about 30% of India’s merchandise exports, or about $ 300 billion annually.

For credit to small borrowers through MFIs, a guarantee of up to 75% of the default amount for a period of up to three years will be provided by the government through the National Credit Guarantee Trustee Company and no guarantee. Guarantee commission will only be charged by the state-run entity.

Guarantee coverage will be available for loans until March 31, 2022, or until loan guarantees of Rs 7,500 crore are exhausted, whichever comes first.

Commenting on the move, Shravan Shetty, MD at Primus Partners, said: “It is designed to provide a safety net, especially for smaller borrowers. However, coverage of only 25 lakh of individuals will need to increase to generate the desired impact. “

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