Credit guarantee
Also called: Credit guarantee scheme · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Beyond NCERT
Meaning
A credit guarantee is a promise by a guarantor to repay the lender if the borrower fails to repay (defaults). The guarantor is often a trust backed by the government. The guarantee reduces the lender's risk, so banks become willing to lend without asking for collateral. This helps small borrowers with no assets to pledge.
Example
- CGTMSE (2000) guarantees loans to micro and small enterprises.
- CGFMU (2015) guarantees MUDRA loans and other micro loans.
- If a small shop owner with no collateral defaults on a guaranteed loan, the guarantee fund repays the covered part of the loan to the bank.
Don't confuse with
- Collateral: an asset that the borrower pledges. A credit guarantee is a third party's promise to pay, so the borrower does not need to pledge any asset.
- Credit insurance for borrowers: crop insurance protects the farmer's income. A credit guarantee protects the lender's loan.