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).

More on the News

• 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.