Credit guarantee refers to a situation where the loan to the applicant is backed by a party without the need for any external collateral or third party guarantee. Here, the loan sanctioned by the member lending institution is backed by the scheme which provides the guarantee cover for a large portion of the loan amount. Under CGTMSE scheme, both new and existing micro and small enterprises including service enterprises are eligible for a maximum credit cap of Rs. 200 lakh. The guaranteed coverage also extends to Non-Banking Financial Companies (NBFCs), who are lending to the medium, small and micro business sectors.
Launched in 2000, Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) is a government initiative by the Ministry of Medium, Small and Micro Enterprises (MSME) in association with the Small Industries Development Bank of India (SIDBI). Its focus is to provide credit guarantee to financial institutions that provide loans to MSMEs. CGTMSE provides a guarantee to lending institutions up to a certain limit for all lending done by them to the MSME sector. This initiative allows banks and other lending institutions to provide funds to first generation entrepreneurs without the need for collateral/security or third party guarantees.
CGTMSE is one of the more important provisions that help small Indian businesses to thrive in a competitive environment. Since the risk of providing a bank loan without any collateral is a key factor for all banks, the objectives of CGTMSE help these institutions achieve their lending goals to MSME market without any worries.
CGTMSE Scheme: Eligibility Criteria
Let us look at the eligibility criteria for CGTMSE scheme for credit providers and credit borrowers.
Lending Institutions: All scheduled commercial banks and specified Regional Rural Banks (RRBs), including NSIC, NEFDi, and SIDBI can be considered as eligible lending institutions. The institutions that enter into an agreement with CGTMSE are called Member Lending Institutions (MLIs).
Eligible Borrowers: All new and existing MSMEs are eligible for this credit guarantee under certain conditions. The conditions are:
a) The trust guarantees up to 75% of the defaulted principal amount (up to 85% of the defaulted principal amount for select category of borrowers). The cover comes with a maximum guarantee cap of Rs. 37.50 lakh for the credit facilities up to Rs. 50 lakh.
b) The term credit including interest on principal is covered for a period of one-quarter and / or outstanding capital advances including the interest, as on the date of the account becoming a Non Performing Asset (NPA) or as on the date of filing the suit (whichever is lower).
c) Other charges, such as penal interest, commitment charge, service charge or any other levy/ expenses do not qualify for the guarantee cover.
Small and micro enterprises owned and/or operated by women are eligible for a guarantee cover of 80% whereas all the credit / loans in the North East Region (NER) for credit facilities are eligible for a guarantee of Rs. 50 lakh. Retail trade, educational institutions, agriculture, training institutions, and Self-Help Groups (SHGs) are not eligible for guarantee cover under CGTMSE.
CGTMSE also provides rehabilitation assistance to the business units. If a business unit is in a bad condition due to factors that are beyond the control of the management, then CGTMSE covers the loan for rehabilitation extended by the lender within the credit cap of Rs. 100 lakh.
How to get a Loan Under the CGTMSE Scheme?
The objective of the CGTMSE is to enable the banks to look at small and micro businesses with objectivity and give more importance to the project viability and business model validation. To cover the loan under the CGTMSE scheme, the borrower has to pay an additional guarantee fee and service charge in addition to the interest charged by the bank. Current CGTMSE guarantee fee is payable at the rate of 1.5%. It is payable at 0.75% for North Eastern region including the state of Sikkim.
According to the ‘policy package for stepping up credit to small and medium enterprises’, public sector banks are expected to charge an annual service fee at the rate of 0.25% from the borrowers falling under such categories as:
- Loans granted to eligible women entrepreneurs
- Loans granted to borrowers hailing from the North Eastern region, including Sikkim and Jammu and Kashmir
The procedure for getting a loan under CGTMSE is as follows:
Formation of the Business Entity: Before even starting the procedure for loan approval under the CGTMSE, the borrower has to incorporate a private limited company, limited liability partnership, one person company, or a proprietorship according to the nature of the business and obtain necessary approvals and tax registrations for executing the project.
Business Plan: Borrowers need to conduct a market analysis and prepare a business plan containing relevant information, such as business model, promoter profile, projected financials, etc. The report is then presented to the credit facility and an application is filed for getting the loan under CGTMSE scheme. However, businesses should consider that such project reports be prepared by experienced professionals. This shall increase the chances of approval.
Sanction for Bank Loan: The request for bank loan usually contains credit term and working capital facilities. After the application and business plan are under process, banks carefully analyses the viability of business model and process the loan application and accord sanction, as per the bank’s policy.
Obtaining the Guarantee Cover: After the loan is sanctioned the bank applies to CGTMSE authority and obtains the guarantee cover. If the loan is approved by CGTMSE, the borrower will have to pay the guarantee fee and service charges.
The extended list of MLIs under the CGTMSE scheme contains 131 banks including all the major rural, urban, public sector banks, and private sector banks of India. The list contains some of the larger banks, such as State Bank of India, Union Bank of India, United Bank of India, Punjab National Bank, etc.
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Advantages of CGTMSE for the Business
MSEs are an integral part of the Indian economy and contribute approximately 10% to the country’s GDP. They give employment to more than 7 crore people even though they face many hurdles in procuring finances and business loans. Despite their large presence across various market segments, lending institutions stay apprehensive about the high rate of NPAs in small and micro businesses. Even though it is a valid risk, the liability that these factors entail creates problems for both the businesses and the banks. For instance, SMEs do not find the loan approval procedure simple or business-friendly. Banks prefer not to lend unless they have checked and rechecked all documents and got a guarantee.
To counter such situations, CGTMSE has come forward to play a crucial role. It has shared the risk factor and has helped bring relief to both borrowers and lending institutions.
CGTMSE offers significant advantages for new and existing MSMEs. The major advantage of CGTMSE is that one can acquire cover for the credit facility, even if he/she have minimum or no experience in setting up a business. Although the credit cover remains optional under this scheme, the MSME Ministry has given due importance to the scheme and monitored its progress on a regular basis.
Effectiveness of CGTMSE
CGTMSE is rapidly changing the credit landscape of MSME sector. In recent years, lending institutions have approved a large number of proposals against big amounts and most of them have given satisfactory results in terms of developing the business and repaying the loan within the specific time limit. Also, because of it being a government initiative, CGTMSE is trying its best to create awareness among MSEs and lending institutions to help them take advantage of the available credit facilities.
Preconditions and Downside of CGTMSE Regarding Loan Approvals
Almost every financial institution is comfortable in providing loans against collaterals. This is because of the fear of NPA and ambiguity of financial decisions made by first-time entrepreneurs. This is why a major precondition of CGTMSE states that the company should not have a loan secured by collateral or a third party or both. Also, it is better for entrepreneurs to have a clean financial history along with a healthy financial status. Additionally, entrepreneurs need to prepare a project report that clearly indicates the viability of their project. This should also be easily understandable for lending institutions.
However, CGTMSE is not the only effort of the Indian government to promote MSME entrepreneurship in the country. There are several other schemes under implementation as well which have shown satisfactory results under their specific circumstances. Here is a quick look at some of these schemes so that one can use them also if he/she are a MSME business owner:
Credit Link Capital Subsidy Scheme for Technology Upgrade - Ministry of Small Scale Industries (SSI) runs this scheme for upgrading the existing technology, along with the plant and machinery to help businesses survive and flourish in international markets. The scheme is directed towards facilitating an upfront capital subsidy of 15% which is limited to a maximum Rs. 15 lakh for the credit availed by the SSIs. All the sole proprietorship, partnership firms, and cooperative, private, and limited companies are eligible for this scheme. Since the advent of this scheme, more than 28,000 units have availed a subsidy of approximately Rs. 1,619 crore.
Small Industries Development Bank of India (SIDBI) began its small businesses funding programs in 1990 and is now considered among one of the most dependable government financial institutions. Loans sanctioned by SIDBI have played an important role in developing the SSI sector in India. Some schemes provided by SIDBI are:
- Direct Assistance Scheme
- Indirect Assistance Scheme
- Promotional and Development Activities
- National Equity Fund
- Technology Development and Modernization Fund Scheme
- Single Window Scheme
- Mahila Udyam Nidhi (MUN) Scheme
- Scheme and Equipment Finance Scheme
- Integrated Development of Leather Sector Scheme (IDLSS)
- Food Processing Industry Technology Upgradation Fund Scheme (FPTUFS) – Scheme for Food Processing Industries
NSIC - National Small Industries Corporation (NSIC) came into effect in 1999 with the objective of encouraging Small Scale Industries (SSIs) in the country. The core function of NSIC is to import machines on hire-purchase terms. The scheme also focuses on supplying both indigenous and imported raw materials, along with exporting the products of SSIs. In addition to this, the scheme creates awareness about the latest advancements and developments occurring in the field of Small-Scale Industries.
NABARD - The existence of National Bank for Agriculture and Rural Development (NABARD) is based on the promotion of agriculture-based rural SSIs. It offers financial assistance to most rural SSIs, such as cottage and village industry. Being an apex development bank, the institution also looks at policy matters that concern the overall operations and development of rural credit in India. The bank provides extensive credit facilities and loans for areas, such as rural infrastructure, irrigation, roads and bridges, health centers, education facilities, water conservation schemes, etc. in addition to the primary focus areas of agriculture and cottage industries.
Market Development Assistance Scheme for MSMEs: This scheme provides funding to SSIs, especially manufacturing SMEs, to gain an edge in international markets. It promotes Indian organisations to participate in international trade fairs and exhibitions under the MSME India stall. It also offers funding for sector-specific market studies by industry associations, export promotion councils, and FIEO.
Technology and Quality Upgrade Support to MSMEs: This scheme focuses on reducing the product cost by employing energy efficient technologies and manufacturing processes to help create a sustainable environment. The scheme focuses on making the MSMEs globally competitive by improving their product quality. The Government of India provides up to 75% of the total expenditure as support to the manufacturing MSMEs for buying energy efficient technologies for production.
Mini Tools Room and Training Centre Scheme: The Government of India also provides additional support to state governments for setting up mini tool rooms and training centers. The support is provided in the form of one-time grant-in-aid. The aid can fund up to 90% of the machinery cost for new mini tool room but cannot exceed the limit of Rs. 9 crore. For upgrading an existing mini tool room, the aid provides up to 75% of the cost of the machinery. This percentage is capped at a limit of Rs. 7.5 crore. The objective of creating such tool rooms and training centres is that they can help in creating a workforce of skilled workers, supervisors, engineers, and designers. The scheme is viable for small enterprises looking to build industrial training centres to educate the future generation of workers and industry specialists.
Mudra Loan - MUDRA or Micro Units Development and Refinance Agency is an organisation established by the Government of India to develop and refinance micro units. The aim of the organisation is to provide funds to the unfunded. The loans are provided under three categories — Shishu, Kishor, and Tarun. The limit of the Mudra loan ranges from Rs. 50,000 to Rs. 10 lakh. The organisation also provides finance for upgrading or expanding the unit under a limit of Rs. 50,000 to Rs. 5 lakh.
Frequently Asked Questions (FAQs)
Q. Which institutions are the eligible to lend under this scheme?
A. All scheduled MLIs, including PSUs, private and foreign banks in addition to selected regional and rural banks and any other bank directed by the Government of India can avail the guarantee cover under the scheme. However, Regional Rural Banks (RRBs) have different eligibility criteria. Regional rural banks that are classified by NABARD under the sustainable viable category and currently viable category with positive net worth are eligible for a guarantee cover under this scheme.
Q. When can the eligible lending institutions apply for guarantee cover in respect of eligible credit facilities under the scheme?
A. Eligible lending institutions have to enter into a one-time agreement with CGTMSE for becoming MLIs of the trust. MLIs then can apply for a guarantee cover in respect of the eligible credit facility sanctioned to an eligible borrower. The MLIs can apply for a guarantee cover in respect of the credit proposals sanctioned in the quarter of April-June, July-September, October-December and January-March before the quarter ends.
Q. Can CGTMSE reappraise the sanctioned proposals for guarantee cover approved by the MLIs?
A. Every MLI is expected to support only viable projects. The CGTMSE has full trust in the diligence process of MLIs and does not revaluate any sanctioned proposal. If any proposal satisfies the basic norms under the scheme then the cover will be extended to them.
Q. Are small road transporters and water transporters eligible for cover under the scheme?
A. Yes, they are. Small road and water transport loans that are approved by MLIs are eligible for cover under this scheme. All small business owners in this industry who are seeking a loan can ask the banks how to add the CGTMSE cover to their loan applications.
Q. Is it compulsory for the borrower to obtain IT-PAN to become an eligible borrower?
A. Yes, borrower is required to obtain IT-PAN before availing facility from the MLI. Also, under section 139A(5) and section 272C of the Income Tax Act, 1961, it is mandatory to show the PAN on all tax documents, including returns, challans, appeals, etc. However, it is not compulsory to indicate the IT-PAN in all applications irrespective of the amount of loan required.
Q. Is it necessary for the borrower to obtain all the credit facilities from a single MLI?
A. Credit facilities can be extended through more than one MLI jointly and / or separately to any eligible borrower with a maximum cap of Rs. 100 lakh per borrower.
Q. Is co-financing with a commercial bank covered under the scheme?
A. Joint financing by a financing institution and a commercial bank can be covered under the scheme. For instance, an MSE unit can borrow through a term loan from a state financial institution and take working capital funding from a commercial bank.
Q. Can term loan or working capital alone be extended by an eligible lender and still be covered under the guarantee scheme?
A. Any eligible lender can extend either term loan or working capital facility alone and still be eligible for the guarantee cover under the scheme.
Q. Is there any ceiling for the interest rate to be levied on the credit facility advanced to the borrower if the same is to be covered under the CGS?
A. In such cases, the lending institution has to follow RBI guidelines related to the levied interest on micro and small enterprises. However, the interest rate cannot exceed more than 4% over and above the base rate of the lender. This interest is exclusive to the payable fee to the trust, which is separate from the bank or financial institution’s lending rate.
Q. What if the annual guarantee rate changes after the commencement of guarantee?
A. Annual guarantee fee cannot be charged with retrospective effect. The guarantee fee is one-time charge and changes in the guarantee fee, if any, will only affect future proposals.
Q. Can annual guarantee fee be paid even after the lodgment of claim?
A. Annual guarantee fee can be paid even after the lodging of the claim but it has to be settled before the first installment of 75% of the guaranteed amount. However, one cannot lodge any claim before the expiry of initial lock-in period and after the expiry of tenure of guarantee cover.
Q. What are the Member Lending Institutions (MLIs) I can approach?
A. You can approach any MLI for your MSME loan and to get the CGTMSE guarantee.