Banks that used the government-backed microloan guarantee scheme to reduce credit risk are pushing for the facility to be extended, underscoring how important the programme has become to lenders serving India's smallest borrowers. According to people aware of the discussions, IDFC First Bank and several small finance banks, including AU Small Finance Bank, Jana Small Finance Bank and Suryoday Small Finance Bank, were among the biggest users of the scheme and are now budgeting for the guarantee fee in the current fiscal year, expecting the government to reopen the window soon.
Risk Buffer Sought
The request reflects a broader concern in the banking system: unsecured and micro-ticket lending remains vulnerable to repayment slippages, especially when borrowers are low-income households, informal workers or first-time credit users. For lenders, the guarantee scheme has served as a valuable backstop, allowing them to expand access to small loans while limiting the capital strain and downside risk associated with thin-margin lending.
People familiar with the matter said banks have been factoring the guarantee cost into their current-year plans even though the scheme is not yet formally available for fresh allocations. That budgeting decision suggests lenders are preparing for a likely reopening rather than treating the programme as a one-off support measure. It also indicates that the scheme has become embedded in lending strategy, not merely used as a temporary policy cushion.
The push comes at a time when lenders are balancing growth ambitions with caution. Small finance banks, in particular, have built business models around serving borrowers outside the traditional banking mainstream. Their portfolios often include microloans and other small-ticket products that can generate strong volumes but also carry elevated credit risk if economic conditions weaken or household cash flows become uneven.
Why Lenders Want It
For banks, the appeal of a guarantee scheme is straightforward: it lowers the expected loss on a segment where underwriting is difficult and collections can be volatile. That can make lenders more willing to extend credit to borrowers who might otherwise remain excluded from formal finance. It can also support loan growth without forcing banks to absorb the full risk of defaults on their own balance sheets.
IDFC First Bank's participation is notable because it highlights that the scheme has not only been used by niche microfinance-focused institutions but also by larger private-sector lenders seeking to deepen their reach in granular retail lending. For smaller lenders such as AU, Jana and Suryoday, the programme has been especially relevant because it supports their core franchise of serving low-income and underbanked customers.
The expectation that the government may reopen the scheme suggests lenders believe policy support remains necessary even as the broader credit cycle matures. That view may also reflect the persistent challenge of scaling microcredit responsibly in a market where borrower quality can vary sharply and where even modest shocks can quickly affect repayment behaviour.
Policy And Credit Signals
The development is also a signal to policymakers. If banks are actively seeking an extension and are already provisioning for the guarantee fee, it points to continued demand for risk-sharing tools in priority-sector lending. Such schemes can help sustain credit flow to underserved segments, but they also require careful calibration to avoid encouraging excessive risk-taking or dependence on public support.
For the banking sector, the issue goes beyond one programme. It speaks to the larger question of how India should finance small borrowers at scale while keeping asset quality intact. The answer increasingly appears to involve a mix of digital underwriting, tighter collection systems and selective government-backed risk mitigation.
If the window is reopened, lenders are likely to move quickly to deploy it, given the existing appetite for microloans and the operational infrastructure already built around the scheme. For now, the fact that banks have set aside the fee in advance suggests they are betting that the policy will return — and that microloan growth will continue to depend, at least in part, on official credit support.