Why in news?
The Union Cabinet has approved the continuation of the Credit Guarantee Fund for Micro Units (CGFMU) until 31 March 2031. The 11 November 2026 announcement also approved a ₹5,000-crore corpus and reduced the standard annual guarantee fee from 1% to 0.75%. The fund protects eligible lenders against specified default risk on micro-enterprise credit. It supports the Pradhan Mantri MUDRA Yojana, which provides institutional loans to small businesses. Continuing the guarantee arrangement is intended to help lenders finance these businesses while managing the risk that some borrowers may fail to repay.
Where the guarantee fits in a business loan
A small enterprise may need finance to buy equipment, purchase stock or meet operating expenses. A lending institution examines the business and decides whether to provide a loan. Under the loan agreement, the borrower receives credit and repays the lender according to the agreed terms.
A credit guarantee provides a separate layer of protection for the lender. If an eligible loan defaults, the guarantee arrangement can meet an admissible claim under its rules. Default means that the borrower has failed to meet the required repayment obligations. The guarantee deals with that lending risk.
The Government of India established CGFMU, and the National Credit Guarantee Trustee Company Limited manages it as trustee. Participating banks and other eligible lending institutions seek guarantee cover for qualifying loans. This connects the fund to the institution that actually extends credit to the enterprise.
Supporting credit without collateral
Collateral is an asset pledged as security for a loan. A small business owner may have a viable activity but limited assets to offer as collateral. The guarantee gives the lender support against eligible default risk while the lending programme enables collateral-free credit.
The lender still examines the business's viability and the documents needed for its decision. This appraisal concerns whether the proposed activity can use the finance productively and service the loan. The guarantee and the credit decision therefore perform complementary functions.
The facilities covered
The Cabinet announcement identifies three types of eligible credit: MUDRA loans to micro enterprises up to ₹20 lakh; overdrafts up to ₹10,000 in Pradhan Mantri Jan Dhan Yojana accounts; and self-help-group loans in the ₹10-lakh to ₹20-lakh range. An overdraft allows an account holder to draw credit up to an approved limit.
MUDRA's Tarun Plus category covers loans above ₹10 lakh and up to ₹20 lakh for entrepreneurs who successfully repaid an earlier Tarun loan. This eligibility condition explains which borrowers can access that upper loan band. MUDRA supports manufacturing, services, trade and eligible agriculture-allied activities such as dairy and poultry.
Working capital and term loans
Working capital supports the business's operating cycle, including expenses such as stock and other day-to-day requirements. A term loan is repaid over an agreed period and can finance an investment such as machinery. The same enterprise can have both operating and longer-term financing needs.
Under the announced continuation, guarantee coverage is linked to the disbursed amount for working-capital limits and the outstanding amount for term-loan accounts. Disbursed means the amount actually released. Outstanding means the amount still owed. These bases connect the coverage to the lender's exposure.
What the fee change means
The standard guarantee fee falls from 1% to 0.75% per year. This is a reduction of 0.25 percentage point in the rate. The guarantee fee is the charge for the cover. The borrower's loan also has its own lending terms, including interest and repayment arrangements.
The announcement retains the separate self-help-group fee structure: 0.25% for the first year and 0.50% in subsequent years. Keeping the two fee schedules distinct helps explain how the continuation applies to different covered credit facilities.
The five-year financing objective
The continuation spans the financial years 2026–27 to 2030–31. The Cabinet approved a ₹5,000-crore corpus, meaning the fund's financial backing. The government expects the extension to facilitate ₹12.6 lakh crore of MUDRA lending over five years.
The two figures refer to different parts of the arrangement. The corpus backs the guarantee fund, while the projected lending is credit extended by participating institutions. Guarantee support helps those institutions manage eligible default claims across the lending they undertake.
Conclusion
CGFMU supports micro-enterprise finance by connecting lending institutions with a mechanism for sharing eligible default risk. Its continuation combines a longer operating period, a lower standard guarantee fee and coverage linked to the credit exposure involved.
Sources
- Union Cabinet, 11 November 2026: continuation, corpus, coverage and fees
- NCGTC, February 2025 FAQ: fund, lender roles, appraisal and eligibility background
- Department of Financial Services: MUDRA purposes and Tarun Plus eligibility
- Finance Ministry, October 2024: Tarun Plus and the ₹20-lakh upper band