Credit guarantee funds are a fiscally efficient way to deepen formal credit to micro enterprises, but they carry moral hazard risks. Critically examine with reference to CGFMU and PMMY.

A credit guarantee moves part of a lender's default risk to a fund, so banks can lend without collateral. The Credit Guarantee Fund for Micro Units (CGFMU) is run by NCGTC and backs collateral-free PMMY loans. In November 2026 the Cabinet extended it to March 2031 [1]. The fiscal logic of the fund is sound, but the way it shapes lender behaviour still needs work.

Fiscal efficiency and credit deepening

• High leverage: a ₹5,000 crore corpus is expected to support ₹12.6 lakh crore of loans, about 252 times its size. This is far cheaper than direct state lending [1].
• Reach: lenders have sanctioned over 60.36 crore loans worth ₹43.34 lakh crore since launch. Many went to borrowers with no assets or credit history [1].
• Graduation: Tarun Plus loans (₹10–20 lakh) are covered by CGFMU and are open only to borrowers who repaid an earlier Tarun loan. A good repayment record works as collateral [2].
• Cost-sharing: lenders pay an annual guarantee fee, so the fund is partly self-financing [3].

Moral hazard and other risks

• Weaker screening: NPAs on outstanding Mudra loans of commercial banks rose from 5.47% (2018) to 9.81% (2025). The figure for MSMEs overall was about 3.6% [4].
• Targets plus guarantee: disbursement targets push banks to lend more, and the guarantee reduces their loss when they appraise borrowers poorly.
• Thin buffer: the corpus is only about 0.4% of the loans it supports. A 10% default rate would mean losses of roughly 25 times the corpus, so payouts must stay capped [1][4].
• Opaque outcomes: the average loan is only about ₹72,000. The data counts loans, not firms that survived, so the missing middle of mid-sized firms persists [1].
• Weak oversight: CGFMU rests on a Finance Ministry notification, not a law passed by Parliament [5].

Way forward

• Risk-based fees: link each lender's fee to its NPA record [3].
• Annual disclosure: publish Mudra NPAs by bank and by loan category. These figures now come out mainly through replies in Parliament [4].
• Repayment-linked targets: judge banks on repayment, not just lending volume. Use Tarun Plus-style graduation for upgrades from Shishu to Kishor loans too [2].
• Track enterprise survival: MUDRA and SIDBI should follow up on whether funded businesses are still running.

CGFMU gives micro entrepreneurs without assets a fiscally efficient route to formal credit. Rising NPAs, however, show that a guarantee alone does not price risk. Risk-based fees, open data and repayment-linked targets can make Mudra credit both inclusive and sustainable. This would advance SDG 8 and the Article 38 goal of reducing inequality.