SYLLABUS
GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. Inclusive growth and issues arising from it.
Context: The Union Cabinet has approved the continuation of the Credit Guarantee Fund for Micro Units (CGFMU) until 31 March 2031, with a corpus of ₹5,000 crore, to support the expansion of collateral-free lending under Pradhan Mantri Mudra Yojana (PMMY)
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- Cabinet Approval: The continuation will cover the period FY 2026–27 to FY 2030–31, corresponding to the Sixteenth Finance Commission cycle.
- Approved Corpus: The ₹5,000 crore corpus is expected to support PMMY lending of ₹12.6 lakh crore over the next five years.
- Reduced Guarantee Fee: The annual guarantee fee for eligible PMMY loans has been reduced from 1% to 0.75%. The fee structure for SHG loans remains unchanged.
- Latest PMMY Performance: As of September 2026, lending institutions had sanctioned more than 60.36 crore loans amounting to ₹43.34 lakh crore under PMMY since its launch.
Understanding CGFMU and PMMY
- About Credit Guarantee Fund for Micro Units (CGFMU)
- Launched in January 2016, CGFMU provides credit guarantee cover to lending institutions against default risk on eligible loans, encouraging collateral-free lending to micro enterprises.
- It is administered by the National Credit Guarantee Trustee Company (NCGTC).
- It covers specified credit facilities, including eligible PMMY loans up to ₹20 lakh, Pradhan Mantri Jan Dhan Yojana (PMJDY) overdrafts up to ₹10,000 and SHG loans between ₹10 lakh and ₹20 lakh.
- About Pradhan Mantri Mudra Yojana (PMMY)
- Launched on 8 April 2015, PMMY facilitates collateral-free institutional credit to micro enterprises for income-generating activities in manufacturing, trading, services and eligible agriculture-allied sectors.
- PMMY Loan Categories:
- Shishu: Loans up to ₹50,000.
- Kishor: Loans above ₹50,000 and up to ₹5 lakh.
- Tarun: Loans above ₹5 lakh and up to ₹10 lakh.
- Tarun Plus: Loans above ₹10 lakh and up to ₹20 lakh, available to borrowers who have successfully repaid an earlier Tarun-category loan.
Significance
- Mitigating credit risk: Reduces the risk borne by lending institutions and encourages lending to micro enterprises lacking adequate collateral.
- Promoting financial inclusion: Improves access to formal credit for small entrepreneurs, particularly those with limited credit histories.
- Supporting entrepreneurship: Facilitates the establishment and expansion of micro enterprises, supporting self-employment and livelihood generation.
- Expanding credit availability: The projected facilitation of ₹12.6 lakh crore in PMMY loans over five years is expected to strengthen institutional credit flow to the micro-enterprise sector.
Challenges
- Credit appraisal and default risk: Weak assessment of borrower creditworthiness and business viability can increase defaults and claims on the guarantee fund.
- Limited entrepreneurial capacity: Credit alone cannot ensure enterprise sustainability without adequate business skills, technology and market access.
- Information asymmetry: Limited financial records and credit histories make it difficult for lenders to assess the creditworthiness of many micro enterprises.
- Monitoring and recovery: Effective monitoring of guaranteed loans, recovery of dues and timely settlement of eligible claims are essential for the sustainability of the mechanism.
Way Forward
- Strengthen responsible lending: Ensure sound credit appraisal and assessment of enterprise viability before extending loans.
- Complement credit with capacity-building: Integrate financial literacy, entrepreneurship training, technology adoption and market linkages with credit support.
- Improve guarantee administration: Strengthen monitoring and ensure efficient processing of guarantee claims.Focus on outcomes: Assess enterprise survival, employment generation and business performance alongside loan-sanction figures.