What is the CGTMSE Scheme
Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) is a trust established by the Government of India, Ministry of Medium, Small and Micro Enterprises (MSME) and Small Industries Development Bank of India (SIDBI).
Launched in 2000, CGTMSE offers 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.
What is a Credit Guarantee Under CGTMSE
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. 2 crore.
Eligibility for CGTMSE Scheme
Let us look at the eligibility criteria for CGTMSE loan scheme for credit providers and credit borrowers.
Lending institutions who provide funding support to specific sectors are in agreement with CGTMSE. The institutions that are eligible for CGTMSE are as follows:
- All existing and new Small and Medium Enterprises
- Scheduled Commercial Banks (SCBs)
- Regional Rural Banks (RRBs)
- Small Finance Banks (SFBs)
- Non-banking Financial Companies (NBFCs)
- Small industrial Development Bank of India (SIDBI)
- National Small Industries Corporation (NSIC)
- North Eastern Development Finance Corporation Ltd. (NEDFi)
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. The CGTMSE loan limit depends on the applicant’s profile and business requirements.
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. 1 Crore.
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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 fee is payable at the rate of 1.5%. It is payable at 0.75% for North Eastern region including the state of Sikkim.
The procedure for getting a loan under CGTMSE is as follows:
Step 1. 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.
Step 2. 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.
Step 3. 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.
Step 4. 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 CGTMSE loan application form can be downloaded from its official website.
The extended list of MLIs under the CGTMSE scheme contains 141 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, United Bank of India, Punjab National Bank, etc.
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Documents required for Loan under CGTMSE
Documents Required for Loan under CGTMSE and its coverage
- CGTMSE loan application form
- Passport-sized photographs
- Business incorporation letter
- Company registration certificate
- Business Project Report
- CGTMSE Loan Coverage Letter
- Copy of loan approval from bank
What is the CGTMSE Claim Settlement Procedure
After the disbursal of the final part of loan amount, there is a lock-in period of 18 months for preferred claim. The bank or lender shall prefer claim once the defaulted account has been notified as an NPA. The commencement of recovery proceedings after account is called an NPA, this procedure is known as CGTMSE claim settlement procedure.
What is CGTMSE coverage?
CGTMSE coverage includes below mentioned criteria:
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.
Below mentioned is the detailed information on the coverage under CGTMSE:
Frequently Asked Questions (FAQs)
Q. What is CGTMSE Full form?
A. The full form of CGTMSE is Credit Guarantee Fund Trust for Micro and Small Enterprises that provides funding to financial institutions to further help SMEs and MSMEs in offering credit or loan products and services.
Q. What is the CGTMSE fee?
A. CGTMSE fee is mentioned below:
- For Credit facility up to Rs.5 lakh: Fee is 0.50% of the guarantee amount
- For Credit facility from Rs.5 lakh up to Rs. 1 crore: Fee is 0.75% of the guarantee amount
Q. What is the lock-in period in CGTMSE?
A. The lock-in period in CGTMSE is for 18 months.
Q. Which banks provide loans under CGTMSE?
A. Loans under CGTMSE are provided by banks offering funding assistance to any specific sector. These financial institutions include Regional Rural Banks, Small Finance Banks, NBFCs and by lending institutions, such as SIDBI, NSIC, NEDFi, etc.
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. Is Mudra loan covered under CGTMSE?
A. No, Mudra loan is not covered under CGTMSE.
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, and other related documents. 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 on CGTMSE loan 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.