Discuss the role of NCGTC-run credit guarantee schemes in addressing the 'missing middle' in MSME finance in India.

India's MSME sector has a 'missing middle': there are millions of tiny firms but few mid-sized ones. Firms too big for microcredit but too asset-light for corporate loans hit a collateral barrier. NCGTC-run guarantees bridge this gap by repaying lenders part of their losses on defaults. They work well at the base of the ladder but are still thin in the middle.

Role: how the guarantees bridge the gap

• Base layer (CGFMU): It guarantees collateral-free PMMY loans. It has been extended to March 2031 with a ₹5,000 crore corpus that is expected to support ₹12.6 lakh crore of lending [1].
• Fiscal leverage: The cover is portfolio-based and capped at a share of defaults [2]. Each rupee in the corpus backs about ₹250 of credit [1], which is cheaper than lending directly.
• Graduation ladder: Tarun Plus (₹10–20 lakh) is open only to borrowers who repaid an earlier Tarun loan, and it carries CGFMU cover [3]. A repayment record works as collateral.
• Middle tier (MCGS-MSME): It gives a 60% guarantee on loans of up to ₹100 crore for buying machinery [4]. In 2026 it was widened to service-sector MSMEs [5]. This targets the expansion capital that mid-sized firms lack.
• Counter-cyclical shield: ECLGS 5.0 gives MSMEs guaranteed working capital [6], so viable firms do not slip back during shocks.

Limitations

• Bottom-heavy: More than 60.36 crore loans worth ₹43.34 lakh crore [1] average about ₹72,000 each. That is breadth, not growth capital, and loan counts do not show whether firms survive.
• Rising stress: NPAs on outstanding Mudra loans of commercial banks rose from 5.47% (2018) to 9.81% (2025) [7].
• Moral hazard: Disbursement targets combined with partial loss cover can weaken how carefully banks screen borrowers.
• Thin buffer: The corpus is about 0.4% of the guaranteed lending [1], so it stays viable only if defaults remain contained.

Way forward

• Risk-based guarantee fees, building on the fee structure of MCGS [5].
• Annual NPA disclosure by loan category and by bank.
• Make every move up the loan ladder, from Shishu onwards, depend on repayment, and track whether enterprises survive.

NCGTC's layered guarantees have widened formal credit for asset-poor entrepreneurs: CGFMU at the base, MCGS in the middle and ECLGS during crises. Pricing risk properly and rewarding repayment rather than volume can turn this inclusion into firm growth. That would advance SDG 8.3 and a formalised, job-creating MSME sector.