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CS Professional · Banking and Insurance - Laws and Practice · Various Government Schemes

Under the Credit Guarantee Fund for Micro Units (CGFMU) linked to MUDRA loans, a bank's Shishu loan of Rs 40,000 to a trader becomes a non-performing asset. Which description of the role of this guarantee is most accurate?

The guarantee protects the lending institution. The credit guarantee fund for micro units covers part of the loss if a collateral-free MUDRA loan defaults, which encourages banks to lend. It does not waive the borrower's repayment duty or convert the loan into a grant.

  1. AIt guarantees the borrower's profits and removes any need for repayment
  2. BIt converts the loan into a grant payable by the Government to the borrower
  3. CIt provides credit guarantee cover to the lending institution against default, reducing its risk in lending to micro units without collateralCorrect
  4. DIt makes MUDRA the sole lender liable to recall the loan from the borrower

Explanation

CGFMU gives lenders a guarantee cover against default on collateral-free loans to micro units, which encourages lending. It does not waive the borrower's repayment obligation or turn the loan into a grant. The borrower stays liable.

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