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.
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.
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:
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.
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.
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.
