How far has collateral-free lending under PMMY changed entrepreneurship among groups excluded from finance? Discuss the role of guarantee backstops.

The Pradhan Mantri Mudra Yojana (PMMY) gives collateral-free loans to micro enterprises. By September 2026 it had sanctioned 60.36 crore loans worth Rs.43.34 lakh crore [1]. PMMY has clearly widened access to credit. It has not yet shown how far it has changed entrepreneurship.

Extent of change: gains

• Borrowers without assets: Collateral-free credit has created a "new generation of entrepreneurs" who could not borrow from formal banks before [1].
• Women and SHGs: SHG loans carry a low guarantee fee of 0.25%, then 0.50%. This keeps group-based and women-led credit cheap [1].
• Credit ladder: Tarun Plus (Rs.10–20 lakh) is open only to borrowers who repaid an earlier Tarun loan, so it rewards growth [2].

Extent of change: limits

• Small loans: The average loan is about Rs.72,000 [1]. Most loans support self-employment, not firms that create jobs.
• Loans, not people: A person who borrows several times is counted each time. So nobody knows how many borrowers are first-time entrepreneurs.
• Additionality untested: There is no public evidence on whether banks would have made these loans anyway. The G20/OECD Principles ask for this to be assessed regularly [4].

Role of guarantee backstops (CGFMU)

• Absorbs risk: Since 2016, CGFMU has covered lenders through NCGTC against default on PMMY loans up to Rs.20 lakh and PMJDY overdrafts up to Rs.10,000 [1].
• Leverage: A Rs.5,000 crore corpus is expected to enable Rs.12.6 lakh crore of loans up to 2031. The fee has been cut from 1% to 0.75% p.a. [1].
• Cover matched to exposure: Working-capital cover is linked to the amount disbursed. Term-loan cover is linked to the amount outstanding [1].
• Risks: Cheap cover creates moral hazard, because lenders may check borrowers less carefully. The guarantees are a contingent liability for the Centre. Larger Tarun Plus loans put more risk on each default.

Corpus (Rs.5,000 cr) → NCGTC guarantee → Bank lends without collateral → Micro entrepreneur
                              ↑________ fee 0.75% p.a. paid by lender ________|

Fig: How the guarantee backstop works

PMMY has widened access to credit more than it has proven new enterprise creation, and guarantee backstops are what make that access possible. Before 2031, NCGTC should publish default and claims data by loan category, and fees should be priced by risk. An independent additionality study should follow the World Bank–FIRST Principles [3]. Contingent liabilities should be reported in the Budget. These steps would keep CGFMU sustainable while it advances SDG 8 (inclusive growth and decent work).