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

By | March 10, 2019

Credit Guarantee Scheme –

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

Introduction to Credit Guarantee Scheme:

  • It would be very difficult to avail credit without collateral security / third party guarantee. Providing collateral security is a difficult thing for the entrepreneurs, especially for a new enterprise it is near impossible and this stipulation is creating hardships for the young entrepreneurs to establish new units. Considering these difficulties, Ministry of Micro, Small and Medium enterprises, Government of India has come out with a scheme “Credit Guarantee Scheme (CGS)”. This scheme will be a major source of support for the entrepreneurs and this will strengthen credit delivery system and this will improve credit flow to the MSME sector. To implement the scheme, Small industries Development Bank of India (SIDBI ) has set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This CGTMSE trust will credit guarantee for the loans availed by various MSMEs.

  • With the credit guarantee scheme, now, the lender / financing bank will prioritize project viability and on the primary security.

  • All the Public sector banks, Private sector banks, Foreign banks, Regional Rural banks and some Non-Banking Finance companies can extend the scheme.

  • Important Terminology:

    • Primary Security: Assets which are created out of bank finance.

        • Ex: If we are financing for manufacturing activity then, the plant & machinery for which we have financed will be primary security.

    • Collateral security: Security provided by the borrowers in addition to the primary security.

        • Ex: In the above example if the borrower offers his house which not related to the activity then it is treated as collateral security.

    • Third party guarantee: Any person other than the borrowers are third party and if any such person(s) offers guarantee to the proposed loan it is called third party guarantee.

    • Credit Facility: Financial assistance from the lending bank it may be term loan or working capital or both. Further, it may be either fund based / non fund based limits.

  • Eligibility for availing credit guarantee from CGTMSE :

      • Unit should be established under MSMED Act and the unit should be under manufacturing and services sector.

      • Both fund based and non-fund based facilities are permitted.

      • To be eligible for credit guarantee, the financing bank should not have obtained either Collateral security or third party guarantee.

      • Maximum credit guarantee is for the MSE loans upto Rs. 2 crores.

      • Maximum guarantee coverage is upto 85 % of credit facility and guarantee coverage is 50 % for credit facilities above Rs. 50 lakhs.

  • Which credit facilities are not eligible for CGS ?

      • Credit facilities covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) or Reserve Bank of India (RBI) or by Government of India or any other insurer.

      • Credit facilities sanctioned to micro units i.e upto Rs. 10 lakhs if the loan is covered under CGFMU.

  • Fees payable (Standard rates):

Credit Facility

Annual Guarantee fee ( % p.a.)

Women, Micro enterprises and units in N.E Region

Others

Upto Rs. 5 lakhs

0.75 %

1 %

Above Rs. 5 lakhs to Rs. 200 lakhs

0.85 %

      • However, Credit Guarantee Trust has introduced risk premium and it varies from 0 % to 25 % of standard rate. Applying the risk premium depends on the individual banks and credit guarantee trust.

  • Extent of guarantee cover:

    Category

    Maximum extent of guarantee

    Credit facility is Rs. 5 lakhs

    Credit facility is above Rs. 5 lakhs and upto Rs. 50 lakhs

    Credit facility is above Rs. 50 lakhs and upto Rs. 200 lakhs

    Micro Enterprise

    85 % of the amount in default subject to a maximum of Rs. 4.25 lakhs

    75 % of the amount in default subject to a maximum of Rs. 37.50 lakhs

    50 % of the amount in default subject to a maximum of Rs. 100 lakhs.

    Women entrepreneurs (other than credit facility of Rs. 5 lakhs to micro enterprises

    80 % of the amount in default subject to a maximum of Rs. 40 lakhs.

    All other category of borrowers

    75 % of the amount in default subject to a maximum of Rs. 37.50 lakhs.

  • For details of classification of MSME unit into Micro, Small and Medium enterprises please go through the topic / video on “Udyog Aadhar Memorandum”.

  • Earlier, the guarantee cover was for Rs. 100 lakhs only. However, since 01st January 2017, credit facilities upto Rs. 200 lakhs may be covered under the Credit Guarantee scheme. If any working capital limits which are enhanced beyond Rs. 100 lakhs and upto Rs. 200 lakhs after 01st January 2017 can also be covered under the said CGS provided otherwise the unit is eligible for credit guarantee.

  • Credit limits includes both fund based and non fund based limits.

  • Select RRBs can extend this credit guarantee scheme for credit facilities upto Rs. 50 lakhs only.

  • The guarantee cover will be available till the tenure of the Term loan / composite term loan. If the limits are sanctioned under working capital limits, the guarantee cover will be available for a block of 5 years or in multiples of 5 years ( if the trust agrees to cover the limits).

  • Invocation of guarantee:

    • If the unit is not running on profitable lines and not able to repay the loans availed then, the lending institution can claim credit insurance. However, to get the insurance amount, the lending bank / institute should have started the recovery proceedings as per law before claiming the insurance.

  • Eligible borrowers for availing this CGS :

    • New and existing Micro and Small enterprises engaged in manufacturing or services activity.

    • All the activities which are permitted as per MSMED Act 2006 are eligible.

    • Small road and water transport operators are eligible to avail the credit guarantee scheme (CGS).

  •  Ineligible borrowers for availing this CGS : 

    • Activities like Retail trade, educational institutes, agriculture, SHGs are not eligible to avail this credit guarantee scheme (CGS).

  • Conclusion:

    • Therefore, while establishing an enterprise or availing any credit facilities from Banks don’t think much about guarantee to be offered to the lenders, instead concentrate on the viability of the unit and accordingly proceed and prosper with the Credit Guarantee scheme offered by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

All the best

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