Credit Guarantee Fund for Micro Units (CGFMU)

Context

The Union Cabinet approved the continuation of the Credit Guarantee Fund for Micro Units (CGFMU) up to 31 March 2031, with a ₹5,000 crore corpus to support around ₹12.6 lakh crore in loans. It also reduced the annual guarantee fee from 1% to 0.75%.

About CGFMU (Credit Guarantee Fund for Micro Units)

1. Launch: January 2016.
2. Purpose: Provides credit guarantees (default protection) to lenders against loan defaults, encouraging collateral-free lending to micro enterprises.
3. Operator: Managed by NCGTC (National Credit Guarantee Trustee Company Limited) under the Ministry of Finance.
4. Link to PMMY: Supports loans under PMMY (Pradhan Mantri Mudra Yojana), under which over 60.36 crore loans worth ₹43.34 lakh crore were sanctioned as of September 2026.

Key Features of CGFMU

1. Loan Coverage: Guarantees eligible PMMY loans up to ₹20 lakh during 2026–31.
2. Jan Dhan Overdrafts: Covers bank overdrafts up to ₹10,000 under PMJDY (Pradhan Mantri Jan Dhan Yojana).
3. Self-Help Groups (SHGs): Covers eligible SHG loans with a loan portfolio of ₹10–20 lakh.
4. Guarantee Calculation: Based on the disbursed amount for working capital loans and the outstanding balance for term loans.
5. Guarantee Fee: Reduced to 0.75% per annum for lenders; SHG loan fees stay at 0.25% in the first year and 0.50% thereafter.

About PMMY (Pradhan Mantri Mudra Yojana)

1. Launch & Purpose: Launched on 8 April 2015 to provide collateral-free loans to non-farm micro and small enterprises.

2. Loan Limit & Categories (up to ₹20 lakh):

• Shishu: Up to ₹50,000.
• Kishor: Above ₹50,000 to ₹5 lakh.
• Tarun: Above ₹5 lakh to ₹10 lakh.
• Tarun Plus: Above ₹10 lakh to ₹20 lakh (for borrowers who repaid earlier Tarun loans).

3. Lending Institutions: Provided through Banks, RRBs (Regional Rural Banks), Small Finance Banks, NBFCs (Non-Banking Financial Companies), and MFIs (Microfinance Institutions).

4. Role of MUDRA: MUDRA (Micro Units Development and Refinance Agency)—a subsidiary of SIDBI (Small Industries Development Bank of India)—provides refinance support to lending institutions rather than lending directly to borrowers.

Significance

1. Lending Support: Lowers lenders’ risk, encouraging collateral-free loans for small and first-time borrowers.
2. Cheaper Credit: Lower guarantee fees help reduce borrowing costs for micro enterprises.
3. Financial Inclusion: Extends formal credit to PMJDY (Pradhan Mantri Jan Dhan Yojana) account holders and SHGs (Self-Help Groups), especially women’s groups.
4. Employment Generation: Boosts self-employment and micro-enterprises in the unorganised sector.

Challenges

1. Credit Quality & NPAs: Lower lender risk may weaken borrower checks and increase NPAs (Non-Performing Assets) or loan defaults.
2. Claim Settlement: Delays in guarantee payouts can weaken lenders’ confidence.
3. Business Sustainability: Ensuring loans build viable businesses rather than trapping borrowers in unsustainable debt remains a key challenge.
4. Awareness Gaps: Eligible borrowers and lenders often lack awareness of the scheme’s benefits.

Way Forward

1. Risk Monitoring: Track defaults closely and strengthen borrower checks without blocking genuine borrowers.
2. Faster Claims: Ensure quick settlement of guarantee claims by NCGTC (National Credit Guarantee Trustee Company Limited).
3. Business Support: Link loans with skill training, market access, and formalisation (such as Udyam registration).
4. Lower Borrowing Costs: Ensure reduced guarantee fees actually pass on cheaper credit to micro enterprises.

FAQs

Q1. Who operates CGFMU?
Ans. National Credit Guarantee Trustee Company Limited (NCGTC), under the Ministry of Finance.

Q2. What is the guarantee fee for SHG loans?
Ans. 0.25% in the first year and 0.50% in subsequent years.

Q3. What are the PMMY loan categories?
Ans. Shishu (up to ₹50,000), Kishor (₹50,000–5 lakh), Tarun (₹5–10 lakh) and Tarun Plus (₹10–20 lakh).

Q4. How does a credit guarantee help borrowers?
Ans. It reduces lenders’ risk of loss, encouraging them to provide collateral-free loans.

Q5. What is MUDRA?
Ans. Micro Units Development and Refinance Agency, a subsidiary of SIDBI that provides refinancing support to PMMY lending institutions.