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The government on Monday announced a new credit guarantee scheme that will facilitate loans to 25 lakh people through micro finance institutions (MFIs).

The announcement was made by Finance Minister Nirmala Sitharaman as part of economic relief package provided to spur investment climate in the country affected by the Covid pandemic.

As per the new scheme, guarantee will be provided to Scheduled Commercial Banks for loans to new or existing NBFC-MFIs or MFIs for on lending up to Rs 1.25 lakh to approximately 25 lakh small borrowers.

Interest Rate on Loans from banks will be capped at MCLR plus 2 per cent.

Maximum loan tenure 3 years, 80 per cent of assistance to be used by MFI for incremental lending, interest at least 2 per cent below maximum rate prescribed by RBI.

The focus of the scheme will that lending would be for new activities and not repayment of old loans. Loans to borrowers to be in line with extant RBI guidelines such as number of lenders, borrower to be member of JLG, ceiling on household income and debt.

All borrowers (including defaulters upto 89 days) will be eligible for guarantee cover for funding provided by MLIs to MFIs/NBFC-MFIs till March 31, 2022 or till guarantees for an amount of Rs 7,500 crore are issued, whichever is earlier.

Guarantee upto 75 per cent of default amount for up to 3 years through National Credit Guarantee Trustee Company (NCGTC) which will also not charge any guarantee fee.