Context: Recently, the National Bank for Agriculture and Rural Development (NABARD) has introduced Partial Credit Guarantee Programme for Non-Banking Financial Company (NBFC) - Micro Finance Institutions (MFIs).

• The programme aims to ensure unhindered flow of credit in rural areas hit by the Covid-19 pandemic.

About the Programme

• Under the programme, NABARD will provide partial guarantee on pooled loans extended to small and mid-sized MFIs.
• This has come in the backdrop of most MFIs being excluded from the moratorium benefits from banks, creating a dip in collections, resulting in widening asset-liability mismatch, credit downgrades and spike in cost of fresh funding.
• NABARD will facilitate Rs. 2,500 crore funding in the initial phase and will further increase the funding.
• The program is expected to cover over 1 million households across 28 states and 650 districts.

Implementation

• NABARD has signed agreements with Vivriti Capital and Ujjivan Small Finance Bank to roll out the initiative.
• Vivriti Capital is a non-banking financial corporation.

Benefits

• The partially guaranteed loan facility will catalyse much-needed financing to millions of households, agricultural and business markets to sustain in the post Covid-19 environment.
• MFIs operate in rural hinterlands and serve farmers, traders, rural businesses and households.

Pooled Loan Issuance (PLI)

• Under a PLI structure, a bank or an NBFC (Principal Lender), provides loans to identified Microfinance Institutions/other NBFCs/corporates (Borrowers).
• Each of these loans are made as per terms agreed upon between the Principal Lender and the Borrowers in keeping with the Principal Lenders underwriting and credit evaluation practices.
• The loans offered are pooled together and credit enhanced by way of a common partial guarantee offered by identified guarantors to the structure.
• The PLI structure provides the lending bank adequate comfort through the guarantor's partial credit protection, it also reduces cost of capital as the rating of the loans get increased and helps lenders meet priority sector goals.

About Non-Banking Financial Company-Micro Finance Institution'

• The Non-Banking Financial Company: Micro Finance Institution (NBFC-MFI) is a non-deposit taking financial company that has minimum 85% of its assets in the nature of qualifying assets. 
• The Qualifying Assets are those assets which have a substantial period of time to be ready for its intended use or sale.

As per RBI, for a non-banking financial company to be recognized as a microfinance institution must satisfy the following conditions

• Loan to be disbursed to the borrower with a rural household annual income shall not exceed Rs 1,00,000 and in the case of the urban and semi-urban household income not exceeding Rs 1,60,000.
• The amount of a loan shall not exceed Rs 50,000 in the first cycle and Rs 1,00,000 in the subsequent cycles.
• The tenure of the loan for the amount exceeding Rs 15,000 (with prepayment without penalty) must not be less than 24 months.
• The total indebtedness of the borrower shall not exceed Rs 1,00,000.
• The loan shall be disbursed without any collaterals.
• An aggregate of total loans given for income generation shall not be less than 50% of the total loans given by the MFI.
• The loan is repayable either weekly, fortnightly or monthly, depending on the choice of the borrower.
• Thus, by fulfilling all the above conditions any non-banking finance company can perform the operations of a micro-finance institution.