- The CGSMFI 2.0 scheme aims to stabilise the microfinance sector with a Rs 20,000 crore credit guarantee window
- Large listed MFIs face a Rs 300 crore borrowing cap under the scheme, limiting direct financial impact
- Big MFIs already have diverse funding sources, so the scheme won't fundamentally change their prospects
The government's Credit Guarantee Scheme for Micro Finance Institutions, or CGSMFI 2.0, is being held as a 'sector-positive' stabiliser. However, for the stock market's biggest players in the sector, the direct financial uplift may be more of a footnote rather than bringing about any fundamental shift, according to Citi Research.
In its latest note, Citi has stated that the CGSMFI 2.0 has been designed to boost rather than serve as an earnings engine for listed heavyweights. While the Rs 20,000 crore credit guarantee window is likely to reopen frozen bank lines across the MFI industry, the rules of the game are strictly capped for the giants of the sector.
Indeed, for large listed entities, particularly ones managing over Rs 6,000 crore in assets, the CGSMFI 2.0 scheme imposes a per-entity borrowing ceiling of just Rs 300 crore.
This is a nominal cap, equating to less than 5% of the total assets managed by these big MFI firms. Because large players already maintain a diverse funding channel, such as bank lines, external commercial borrowings and direct assignments, the new scheme is unlikely to fundamentally alter their prospects.
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Citi notes that investors should view the move as an 'improved funding sentiment' play. The real value of the scheme, especially for listed entities, lies in the pricing discipline it could enforce across markets, potentially stabilising a sector that has been rocked by high delinquency and risk.
The push for CGSMFI 2.0 comes on the back of a liquidity squeeze that had disproportionately hit smaller lenders. With industry-wise defaults on loans overdue by more than 30 days persisting at a whopping 7%, banks had largely retreated from the sector. The scheme aims to break this cycle by offering a 70-80% sovereign guarantee on defaults. This new safety net reduces the capital consumption for banks, thus making it safer for them to lend to MFI institutions.
That being said, the capital is being steered away from listed players, as noted by Citi. Mandatory allocations ensure that capital flows towards small and medium entities where the liquidity gap is most binding. While the 14 largest relevant MFIs could still generate roughly Rs 8,000 crore in total borrowings under the scheme, the move is a defensive stability play, rather than anything else.
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