India Extends Its Mudra Loan Guarantee To 2031: What Micro-Entrepreneurs Get
India’s Union Cabinet on Nov. 11 approved a five-year extension of its Mudra loan guarantee, which now runs until March 31, 2031. The decision sets aside Rs 5,000 crore, or 50 billion rupees, to back an expected Rs 12.6 lakh crore, or 12.6 trillion rupees, in loans to the country’s smallest businesses. It also trims the fee lenders pay for that protection.
For micro-entrepreneurs, the Mudra loan guarantee means continued access to collateral-free loans of up to Rs 20 lakh, because the fund keeps absorbing part of a lender’s loss when a borrower defaults. The guarantee fee falls from 1% to 0.75% a year. Nothing in the decision changes what a borrower owes or the rate a lender may charge.
What Is The Mudra Loan Guarantee?
The Mudra loan guarantee is a government-backed fund that repays lenders part of what they lose on small business loans that go bad. Its formal name is the Credit Guarantee Fund for Micro Units. It has operated since January 2016 through the government-owned National Credit Guarantee Trustee Company.
The fund sits behind the Pradhan Mantri Mudra Yojana, a lending program launched in April 2015 for businesses too small or too informal to pledge property. Banks, microfinance institutions and other lenders make the loans. Sharing their losses is what lets them lend without collateral.
Indian figures use two units worth translating. One lakh is 100,000 and one crore is 10 million, so a Rs 20 lakh loan is 2 million rupees. By September 2026, lenders had sanctioned more than 60.36 crore loans worth Rs 43.34 lakh crore under the program, the government said. That is roughly 604 million loans.
Three kinds of credit qualify for the Mudra loan guarantee:
- Mudra loans of up to Rs 20 lakh to micro enterprises
- Overdrafts of up to Rs 10,000 on accounts opened under Jan Dhan, a government banking program
- Loans to self-help groups of between Rs 10 lakh and Rs 20 lakh
What Changed In The Credit Guarantee Fund For Micro Units
Two terms of the Mudra loan guarantee changed. The annual guarantee fee on Mudra loans drops from 1% to 0.75%. Self-help group loans keep their existing fee of 0.25% in the first year and 0.50% after that.
A second change is technical. Cover will now be tied to the amount disbursed on working capital limits and to the amount still outstanding on term loans. The government said this reflects lenders’ actual risk exposure. Until now, the first-year fee was charged on the sanctioned amount. In practice, protection will track money that is really at risk, not a figure the borrower may never draw.
The extended Mudra loan guarantee applies to loans made in fiscal years 2026-27 through 2030-31, a window the government tied to the 16th Finance Commission cycle.
The Leverage Math
A corpus of Rs 5,000 crore set against Rs 12.6 lakh crore in expected lending equals about 0.4%. Put differently, each rupee in the fund is meant to stand behind roughly 250 rupees of loans.
That ratio works only because the Mudra loan guarantee is partial and because lenders’ fees add to the pool each year. Under the rules in force before the extension, the lender absorbs the first 3% of any amount in default. The fund then pays 75% of the remainder. Total payouts are capped at 15% of the lender’s guaranteed portfolio.
The trustee’s own illustration shows the split. On Rs 100 of defaults in a Rs 1,000 portfolio, the lender bears the first Rs 3 and the fund pays Rs 72.75. That leaves the lender with Rs 27.25 of the loss. The published Cabinet decision does not mention any change to those loss-sharing terms.
Does The Guarantee Fee Cut Reach The Borrower?
Not automatically. Lenders, not borrowers, pay for the Mudra loan guarantee. The trustee’s guidance says a lender may, at its discretion, recover the fee from the borrower. Whether a lower fee becomes cheaper credit therefore depends on each bank’s pricing.
The sums are small either way. On a loan of Rs 1 lakh, a cut of 0.25 percentage points is worth about Rs 250 a year. That guidance also sets no cap on the interest rate a lender can charge on a guaranteed loan, so the rate remains the larger cost.
Consider a tailor borrowing Rs 1 lakh for two sewing machines. If her bank passed on the full fee before, her annual charge falls from about Rs 1,000 to Rs 750. Where the bank absorbed the fee instead, she sees no change, and the saving stays with the lender.
A Mudra loan guarantee does not create a right to borrow. Lenders decide whether to accept an application based on the viability of the business and the paperwork supplied. Buying protection on an approved loan is the lender’s choice too.
Who Can Borrow, And How Much
Loans under the Pradhan Mantri Mudra Yojana come in four tiers named for stages of growth, and the Mudra loan guarantee covers all four.
| Tier | Loan size | Who qualifies |
|---|---|---|
| Shishu | Up to Rs 50,000 | New or existing micro units |
| Kishor | Above Rs 50,000 to Rs 5 lakh | New or existing micro units |
| Tarun | Above Rs 5 lakh to Rs 10 lakh | New or existing micro units |
| Tarun Plus | Above Rs 10 lakh to Rs 20 lakh | Only borrowers who repaid a Tarun loan |
The top tier matters for reading the headline number. A first-time borrower cannot get Rs 20 lakh. For someone new to the program, the ceiling is Rs 10 lakh, and the higher limit rewards a clean repayment record.
Borrowers have been moving up. The average loan nearly tripled in a decade, from Rs 38,000 in fiscal 2016 to Rs 1.02 lakh in fiscal 2025, the Finance Ministry said. Kishor loans grew from 5.9% of the total to 44.7% over the same period.
Some businesses fall outside the Mudra loan guarantee. Purely agricultural lending such as crop loans is excluded, though allied activities including dairy, poultry, fisheries and food processing qualify. Registration under India’s small business law is not required.
What Happens If A Mudra Borrower Defaults?
The debt does not disappear. A claim paid under the Mudra loan guarantee compensates the lender. The trustee’s rules require lenders to share whatever they recover after a claim is settled, so collection continues.
How often loans go bad depends on the yardstick. Bad loans at scheduled commercial banks stood at 9.81% of outstanding Mudra loans in March 2025, up from 5.47% in March 2018. Finance Minister Nirmala Sitharaman gave the figures in August 2025 in a written reply to the Rajya Sabha, the upper house of Parliament. Measured against all money ever disbursed, the rate was 2.19%, down from 2.71%.
Both figures are accurate. The lower one has a denominator that grows every year and includes loans long since repaid, so it will almost always look smaller. For the wider small business sector, the comparable rate on outstanding credit was 3.60%. Sitharaman attributed the gap to the absence of collateral and to borrowers who are often new to business.
What To Watch After The Mudra Loan Guarantee Extension
The extension keeps a decade-old mechanism in place and makes it slightly cheaper for lenders. For micro-entrepreneurs, the practical gains are continuity of collateral-free loans and, for repeat borrowers, a route to Rs 20 lakh.
Three things will show whether the Mudra loan guarantee does more than that. One is the trustee’s revised operating guidance, which would show whether loss-sharing terms change. Another is lender pricing, since only banks can turn a lower guarantee fee into a lower cost for borrowers. The last is the next disclosure of bad loans on outstanding credit, the measure that tracks current stress.
A fourth indicator sits in the program’s own data: the share of loans going to first-time borrowers. For a guarantee designed to bring new micro-entrepreneurs into formal credit, that share is the plainest test.
Frequently Asked Questions
What is the Mudra loan guarantee?
The Mudra loan guarantee is a government fund that repays lenders part of their losses when small business loans under India’s Mudra program go bad. Formally called the Credit Guarantee Fund for Micro Units, it has operated since January 2016 and now runs until March 31, 2031, with a corpus of Rs 5,000 crore.
Is a Mudra loan collateral-free?
Yes. Loans under the Pradhan Mantri Mudra Yojana are meant to be made without collateral, and the guarantee fund exists to make that possible by sharing lenders’ losses. The rules treat assets created with the loan itself as primary security, not collateral. Lenders still decide whether a business is viable enough to fund.
Who pays the guarantee fee on a Mudra loan?
The lender pays it. The fee is 0.75% a year under the extended scheme, down from 1%. Guidance from the fund’s trustee lets a lender recover that amount from the borrower at its discretion, so whether the borrower bears the cost depends on the bank or finance company making the loan.
What is the maximum Mudra loan amount?
The maximum is Rs 20 lakh, or 2 million rupees, under the Tarun Plus tier. That tier is open only to borrowers who previously took a Tarun loan and repaid it. For a first-time borrower, the ceiling is Rs 10 lakh. Smaller tiers are Shishu, up to Rs 50,000, and Kishor, up to Rs 5 lakh.
What happens if a Mudra borrower defaults?
The lender can claim part of its loss from the guarantee fund, but the debt is not written off for the borrower. Under the existing rules, the lender absorbs the first 3% of the default and the fund covers 75% of the rest. Lenders must share later recoveries with the fund.
How high are bad loans under the Mudra program?
It depends on the measure. At scheduled commercial banks, bad loans were 9.81% of outstanding Mudra loans in March 2025, the finance minister told Parliament. Measured against everything disbursed since launch, the figure was 2.19%. The broader small business sector stood at 3.60% of outstanding loans.
Does the fee cut make Mudra loans cheaper?
Not necessarily. The cut lowers the lender’s cost by 0.25 percentage points a year, worth about Rs 250 on a Rs 1 lakh loan. Borrowers benefit only if their lender had been passing the fee on and now reduces the charge. The scheme sets no cap on interest rates for guaranteed loans.
