The lapse of the microloan backstop threatens to disrupt credit flows to lower-income segments, as institutions face sudden exposure to heightened default risks. Lenders credit the initiative with lowering gross non-performing assets and bolstering asset quality across their unsecured operations since its 2016 introduction. To prepare for an eventual renewal, several institutions like Jana Small Finance Bank have already earmarked the necessary guarantee fees for the current fiscal year. Continued delays, however, could force financial institutions to alter their lending behavior to avoid elevated credit risk provisions.
Key points
Lenders risk enduring elevated credit costs and additional capital provisioning requireme…: Lenders risk enduring elevated credit costs and additional capital provisioning requirements if fresh microloans default while the backstop remains expired.
Heavy institutional reliance on the program makes top users, such as small finance banks,…: Heavy institutional reliance on the program makes top users, such as small finance banks, vulnerable to asset quality fluctuations.
Financial institutions have already set aside required guarantee fees in anticipation tha…: Financial institutions have already set aside required guarantee fees in anticipation that the government will reopen the framework.
Sources checked by our analysis pipeline: 1
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.
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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.
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