"Credit guarantee schemes are a cost-effective way to widen formal credit to micro enterprises, but they carry fiscal and moral-hazard risks." Critically examine with reference to CGFMU.

A credit guarantee moves part of a lender's default risk onto a public fund, so banks can lend without collateral. The Credit Guarantee Fund for Micro Units (CGFMU) was launched in 2016 and is run through NCGTC. It has now been extended to 31.03.2031 with a lower fee [1]. It has clearly widened credit, but its risks need active management.

Cost-effectiveness and outreach

• High leverage: a Rs.5,000 crore corpus is expected to support about Rs.12.6 lakh crore of loans over five years. That makes public money only about 0.4% of the credit it backs [1].
• Scale: PMMY loans backed by CGFMU number 60.36 crore, worth Rs.43.34 lakh crore (Sept 2026) [1].
• Inclusive design: it covers PMJDY overdrafts up to Rs.10,000 and SHG loans at a low 0.25–0.50% fee. This reaches newly banked and women-led borrowers [1].
• Credit ladder: Tarun Plus (Rs.10–20 lakh) rewards borrowers who repaid an earlier Tarun loan [2].
• Cheaper cover: the fee is cut from 1% to 0.75% p.a., which helps make small-ticket lending viable [1].

Fiscal and moral-hazard risks

• Contingent liability: guarantees do not appear in today's deficit. If defaults rise, the corpus runs out quickly at such high leverage.
• Concentration: the average PMMY loan is about Rs.72,000, against a Rs.20 lakh ceiling. One large default uses up as much cover as many small loans [1][2].
• Moral hazard: when cover is cheap, lenders have less reason to appraise borrowers carefully.
• Unproven additionality: "60.36 crore" counts loans, not first-time borrowers. Global principles ask schemes to balance outreach, additionality and sustainability [3].
• Opacity: the Cabinet release gives no figures on claims or defaults [1].

Assessment The statement largely holds. CGFMU is cheap per rupee of credit and has widened access. But its cost-effectiveness is assumed rather than shown.

Overall, CGFMU shows that a small public fund can unlock large formal credit, as long as risk is priced and monitored. Before 2031, four steps would help:

• NCGTC should publish claims data by loan category [3].
• An independent additionality study should be done, as the G20/OECD Principles on SME Financing recommend [4].
• Larger Tarun Plus loans should carry risk-based fees.
• The Budget should disclose guaranteed amounts every year.

These steps would keep a sound tool financially sustainable and advance SDG 8.3, which calls for the formalisation and growth of micro enterprises.