Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme

In a nation like India, teeming with entrepreneurial spirit, financial support is often the bridge between the dreams and the reality. The credit guarantee fund trust for micro and small enterprises (CGTMSE) scheme emerges as a beacon of hope for aspiring business owners, offering financial assistance and risk mitigation.

What is CGTMSE Scheme?

The Credit Guarantee Fund Trust Scheme (CGTMSE) was launched by the Government of India in 2000 to make available collateral free credit to the micro and small enterprise sector.
The scheme guarantees credit to Micro and Small enterprises.

There are basically 3 kinds of enterprises in India, categorized on the basis of their turnover and investment:

Micro: Investment in plant and machinery or equipment not more than Rs 1 crore and Annual turnover not more than Rs 5 crore.
Small: Investment in plant and machinery or equipment not more than Rs 10 crore and Annual turnover not more than Rs 50 crore.
Medium: Investment in plant and machinery or equipment not more than Rs 50 crore and Annual turnover not more than Rs 250 crore.

The scheme is applicable only to micro and small enterprises, and not medium. The reason for this which can be explained is that micro and small enterprises do not have much availaibilty to assets, on behalf of which they can claim a loan, giving it as a security. Hence for such enterprises, expanding the business or even in some cases establishing it becomes difficult. Government of India ,therefore, through this scheme it tends to give security to bank that : You provide loan to Micro and Small enterprises and on their behalf , we are taking guarantee that if they don’t pay back, we will pay you back, which is not all amount but some portion of it.

Hence, Government of India along with Small Industries Development Bank of India (SIDBI) formed a Trust called as Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The corpus contributed by the two is in the ratio of 4:1.

The Revamped version of the scheme was launched in 2023, including some changes to the earlier 2000 version.

Objective of CGMSE

The objective for the scheme can be said to support MSE who do not have any / sufficient collateral /third party guarantee.

Eligibility

The CGTMSE scheme targets only Micro and Small enterprises, encompassing various sectors and activities. To be eligible for this scheme, a business must meet the following criteria:-

The business should be classifies as a micro or small enterprise.
The proposed business activity should not fall under the negative list of the scheme.
The business owner should possess the required skills and experience in the specific sector.
The business should comply with all statutory and regulatory requirements.

Key Features of the scheme

All Fund and Non Fund based facilities given to borrowers are covered.
Maximum 5crore (earlier 2crore) loan exposure can be booked under CGTMSE. The earlier data for the same is 2crore for manufacturing and trading sector and 1crore for service sector.
However for small finance banks and urban co-op banks, its 2crore.

Revised coverage is applicable for Trading as well.

There are basically 2 types of Model:

Single: No collateral required by MSE.
Hybrid Model: Some kind of collateral is required by MSE, i.e. some asset is to be provided.
Hence, Banks have some sort of security in case of Hybrid model as compared to single model.

Guarantee % given:

MSE upto 5 lakh exposure: 85%, i.e. 15% unsecured.
Women entrepreneur, SC/ST, a person with disability/ZED certified( i.e. zero effect on environment and zero defect(good in quality)/Agni veer/Aspirational Districts:-85%
Further, they get a 10% discount on fee as well.
N-E Region , J&K (Ladakh , as well) for loan upto 50 lakh: 80%

And , provided with a 10% discount on fee as well.

All other cases, 75%.

Key Features of Bank

Guarantee start from the date of payment of Guarantee Fee.
For Term Loan: Guarantee is given till the tenure of the term loan.
For Working Capital: It is given for 5 years and can be removed for 5 years and so on payment of fee.

Annual Guarantee Fee: 0.37% -1.35%

Maximum rate of interest: 14% (18% for NBFCs-) old version.

There is no such provision for this in Revamped version.

Lock in period is 18 months, before which bank cant approach to claim the money.
Lender is responsible for all recovery efforts, meaning thereby the Bank or NBFC.
CGTMSE shall pay 75% of the guaranteed amount upfront and 25% on conclusion of the recovery proceeding.
CGTMSE shall cover only outstanding and one quarter interest, nothing else.
Claim can be lodged with CGTMSE without legal action for loan upto10 Lakh (earlier 5 lakh), for which they need to show that they have tried their best as to capability.
New coverage and structure shall be applicable for all new loans under CGTMSE on or after 1^st April 2023, and for already running loans under CGTMSE, old coverage norms shall be applicable except for traders.

How to apply for CGTMSE scheme?

The process of applying for a loan under the CGTMSE scheme is relatively straightforward.

Identify a leading institution: The very first step is to identify a leading financial institution, such as a bank or NBFC, to apply for a loan.
Complete Necessary Documentation: Next, complete all the necessary documentation required by the lending institution. This usually includes financial statements, business institutions, and any other documents specific to the lending institution’s requirements.
Application submission: Submit your loan application, along with the necessary documentation, to the selected financial institution. Also ensure that all eligibility criteria are met as outlined by the lending institution and the CGTMSE scheme.
Evaluation and approval: Further financial institution evaluates the loan application, access the feasibility of the business plan, and verify the eligibility for the CGTMSE scheme. If approved, the loan application moves forward then.
Applying for Guarantee: Upon the approval, the financial institution need to apply for a guarantee cover from the CGTMSE from the CGTMSE for the sanctioned loan amount, which mitigates also the institution’s risk, increasing the likelihood of approval.
Loan amount disbursement: Once all necessary requirements are met, and the guarantee is in place, the financial institution disburses the amount to the business.
Repayment: Repay the loan as per the agreed-upon terms and conditions.

Path covered by the scheme, achieving its objectives

The credit guarantee scheme has over the years, emerged as a successful tool in facilitating MSEs access to formal credit sources. CGTMSE has been able to instill some confidence and encourage the member lending institutions to enhance further the credit flow to the MSEs, being backed by the comfort of guarantee cover. As the scheme is focused on MSE sector, the backbone of Indian economy, the positivities hence are immense in terms of contribution to GDP and employment generation. CGTMSE has always been responsive and proactive to ensure sustainable growth of the trust meeting the needs of the MSME sector.

The impact of enhancements to the credit guarantee products with changing needs of the sector is evident from the upswing in the credit guarantee flow shown by CGTMSE in the above graph.

The data above seems to be quite satisfying, however if we look and analyse the guaranteed fees charged under this scheme, it is high for some prospective as well as existing MSEs. And, the Indian MSEs are hesitant to bear any extra fees in addition to high rate of interest already charged by the financial institutions.

Moreover, the inability of MSEs for promoters contribution of margin money also results in non sanction of credit

Conclusion

Thus, the scheme has served very well as a benefiting asset but needs some changes to function better. Ensuring banking accessibility in remote and underserved areas is crucial. Banks in India play a vital role in addressing various challenges encountered by MSMEs. Rather than solely being credit providers, banks should perceive themselves as growth partners for these enterprises. This involves offering hands-on support to first-generation entrepreneurs and startups as they navigate the initial phases of their businesses. To achieve this, banks ought to provide comprehensive financial consultancy and management services to MSE borrowers, guiding and nurturing them.

To address functional gaps and market challenges, banks could establish specialized departments for industrial and management consultancy. While startup MSMEs might face a higher risk of failure, supporting their financing remains imperative for fostering inclusive growth. The Credit Guarantee Scheme emerges as a key player in this scenario. While it’s not the only factor facilitating MSME credit, it’s undeniable that the lack of collateral often leads to the rejection of viable projects by banks.

Promoting the Credit Guarantee Scheme among bankers and entrepreneurs is essential, considering it not only benefits the enterprises but also ensures a level of safety for financial institutions when granting loans.

Author: This article has been writtern by Aishna Sikri.

References

CGTMSE SCHEME ,available at: https://www.drishtiias.com/daily-updates/daily-news-analysis/cgtmse-scheme (last visited on 30th November;2023)
CGTMSE ups guarantee coverage for MSEs, available at: https://www.thehindubusinessline.com/money-and-banking/cgtmse-ups-guarantee-coverage-for-mses/article66732722.ece( last visited on 30^th November 30, 2023)
what is cgtmse scheme?,available at:https://www.psbloansin59minutes.com/knowledge-hub/what-is-cgtmse-scheme (last visited on 31st November;2023)
Chandra Sekhar Mund, “Problems of MSME Finance in India and Role of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)” Volume 11, Issue 4 Ser. III , PP 01-06(IOSR Journal of Economics and Finance,2020).
CGTMSE SCHEME: ALL YOU NEED TO KNOW, available at: https://www.bajajfinserv.in/cgtmse-scheme( last visited on 31^st November;2023).