India modifies Mutual Credit Guarantee Scheme for MSME manufacturers and exporters
Change
India modified its Mutual Credit Guarantee Scheme to limit guarantee duration to ten years, cap guaranteed loans at ₹20 crore with 75% default coverage, and require a 5% upfront borrower contribution payable in tranches after the fourth year.
Why it matters
The change removes an open-ended guarantee backstop and replaces it with a finite, time-bound cover, making long-term equipment financing expose lenders and borrowers to uncovered risk once the guarantee window ends. Borrowers will be required to carry higher initial cash outflows and pay a recurring guarantee fee after the first year, constraining financing structures for multi-year projects.
Implications
- • Member Lending Institutions' credit and risk teams must cap equipment-credit facilities at ₹20 crore to access guarantee coverage and update underwriting models to reflect reduced coverage duration and 75% default coverage.
- • Member Lending Institutions' product and pricing teams must include a 0.50% annual guarantee fee in loan pricing from year two onward, recognising the first year as fee-free.
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Source
Topics
Policy & Regulation Regulatory Actions Compliance Manufacturing Banking Regulation Financial Services