India has extended a government-backed guarantee scheme for loans to small businesses until 31 March 2031 and reduced its standard annual guarantee fee. The Union Cabinet approved a five-year continuation of the Credit Guarantee Fund for Micro Units, with a corpus of ₹5,000 crore.
The government expects the extension to facilitate ₹12.6 lakh crore in loans under the Pradhan Mantri Mudra Yojana over the next five years. That figure is a projection of lending, not money already issued. It is also much larger than the approved corpus: ₹12.6 lakh crore is ₹12.6 trillion, while ₹5,000 crore is ₹50 billion.
The guarantee scheme is intended to reduce the risk to lending institutions if eligible borrowers default. It operates through the National Credit Guarantee Trustee Company. The guarantee is provided to lenders; it is not a direct payment of the projected loan total to businesses.
The government describes Mudra lending as collateral-free. That is distinct from the guarantee to the lender: the fund addresses default risk, while the borrower still takes on a loan.
What the cabinet changed
The standard annual guarantee fee will fall from 1% to 0.75%. The reduction is a quarter of a percentage point, or one quarter of the previous fee. It is a change to the guarantee fee rather than an announced cut to the interest rate on every borrower’s loan.
The fee for loans to self-help groups is unchanged. It remains 0.25% for the first year and 0.50% in subsequent years. The government said the continued scheme would apply to Mudra loans extended during the financial years from 2026–27 to 2030–31.
The fund covers eligible Mudra loans of up to ₹20 lakh to microenterprises. It also provides guarantees for bank overdrafts of up to ₹10,000 on accounts under the Pradhan Mantri Jan Dhan Yojana, and for loans to self-help groups where the portfolio is between ₹10 lakh and ₹20 lakh.
For working-capital limits, guarantee coverage is linked to the amount disbursed. For term loans, it is linked to the amount outstanding. The cabinet said this approach reflects the actual risk exposure of lending institutions. The announcement did not specify a universal guarantee percentage for every loan.
How the loan programme fits in
The Mudra programme began in April 2015, and the guarantee fund followed in January 2016. The lending programme supports income-generating small and micro enterprises, including activities in manufacturing, trading and services. Loans can be extended through banks and other financial institutions.
Mudra loans are arranged in categories according to their size. Shishu covers loans up to ₹50,000; Kishore covers those above ₹50,000 and up to ₹5 lakh; and Tarun covers loans above ₹5 lakh and up to ₹10 lakh. Tarun Plus covers loans above ₹10 lakh and up to ₹20 lakh for entrepreneurs who have successfully repaid a previous Tarun loan.
The upper limit of ₹20 lakh was introduced in 2024, before this week’s cabinet decision. It should not be mistaken for a newly announced increase in the loan ceiling. The current decision concerns the continuation and terms of the guarantee fund that supports eligible lending.
According to the government, lending institutions had sanctioned more than 60.36 crore Mudra loans, totalling ₹43.34 lakh crore, from the programme’s launch to September 2026. That is more than 603.6 million loans and ₹43.34 trillion in sanctioned credit. The count is of loans, not necessarily of different borrowers, and sanctioned amounts should not be treated as the same thing as amounts disbursed.
The latest five-year figure is separate from that historical tally. It describes lending the government expects the extended guarantee to facilitate, rather than a confirmed amount of credit already advanced under the continuation. Whether that expectation is met will depend on lending over the period ahead.
