Considering a CGTMSE loan? Here’s all that you need to know!
What is CGTMSE?
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Board of Trustees has established a scheme aimed at offering guarantees for credit facilities provided by lending institutions to micro and small enterprises (MSEs).
Objectives:
Providing bank credit without the complexities of collaterals or third-party guarantees is a crucial support for first-generation entrepreneurs seeking to fulfil their aspirations of establishing their own Micro and Small enterprises (MSE). With this goal in mind, the Ministry of Micro, Small & Medium Enterprises (MSME), Government of India, introduced the Credit Guarantee Scheme (CGS) to enhance the credit delivery system and promote the smooth flow of credit to the MSE sector. To implement the scheme, the Government of India and SIDBI established the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
Eligible Borrowers:
Both newly established and existing Micro and Small Enterprises that have received credit facilities from lending institutions without requiring collateral security or third-party guarantees. However, CGTMSE has introduced a "Hybrid/Partial Collateral Security" product, which provides guarantee cover for credit facilities that include collateral security. This applies specifically to the unsecured portion of the credit facility, allowing MLIs to obtain collateral security for a portion of the credit, while the remaining part can be covered under the Credit Guarantee Scheme of CGTMSE.
Credit Facilities Covered Under the Scheme:
The Trust covers credit facilities (both fund-based and non-fund-based) provided by Member Lending Institutions to individual borrowers in the Micro and Small Enterprises sector. The credit limit varies: up to ₹50 lakh for Regional Rural Banks, select Financial Institutions, and Microfinance Institutions, and up to ₹200 lakh for Scheduled Commercial Banks, select Financial Institutions, Small Finance Banks, and Scheduled Urban Co-operative Banks. This support is offered through term loans and/or working capital facilities without requiring collateral or third-party guarantees.
The maximum guarantee coverage is ₹200 lakh per borrower, inclusive of outstanding credit facilities. Member Lending Institutions can apply for guarantee cover during the loan tenure, provided the credit facility has not been restructured or in a stressed status in the last year. The guidelines, effective from October 08, 2021, apply to new coverage or credit facilities applying for the first time.
Trading activities, including retail and wholesale trade, are now eligible under CGTMSE for all Member Lending Institutions. Educational/Training Institutions are also eligible, following the terms of the existing scheme. A "Hybrid Security" product allows MLIs to secure part of the credit facility, while the remaining unsecured portion, up to ₹200 lakh, can be covered under CGTMSE. In cases of joint credit facilities by multiple institutions, the maximum coverage is ₹200 lakh per borrower, subject to individual MLI limits specified by the Trust.
Credit Facilities Not Covered Under the Scheme:
The Scheme does not provide guarantees for certain types of credit facilities. Here are the conditions under which credit facilities will not be eligible for guarantee:
- Any credit facility already covered by schemes operated by Deposit Insurance and Credit Guarantee Corporation or the Reserve Bank of India will not be eligible.
- Credit facilities covered by the Government, general insurers, or any other entity involved in insurance, guarantee, or indemnity will not be eligible for the guarantee.
- Credit facilities covered by NCGTC Ltd. for guarantee will not be eligible under the Scheme.
- Credit facilities that do not comply with existing laws or directives issued by the Central Government or the Reserve Bank of India will not be eligible.
- If a borrower has availed of credit facilities covered under this Scheme or other specified schemes and has defaulted without repaying, any new credit facility granted to the same borrower will not be eligible for guarantee.
- Credit facilities secured against collateral or third-party guarantees are generally not eligible. However, under the Hybrid Security model, MLIs can cover the unsecured part of the credit facility(ies) under CGTMSE up to the overall exposure of ₹200 lakh.
The Extent of the Guarantee Coverage:
Maximum Guarantee Coverage (where guaranteed credit facility)
| Category | Up to ₹ 5 lakh | Above ₹ 5 lakh & up to ₹ 50 lakh | Above ₹ 50 lakh & up to ₹ 500 lakh |
|---|---|---|---|
| Micro Enterprises | 85% | 75% | 75% |
| MSEs located in North East Region (incl. Sikkim, UT of Jammu & Kashmir, and UT of Ladakh) | 80% | 75% | |
| Women entrepreneurs / SC/ST entrepreneurs / MSEs situated in Aspirational District / ZED certified MSEs / Person with Disability (PwD) / MSE promoted by Agniveers | 85% | ||
| All other categories of borrowers | 75% | ||
| The extent of guarantee coverage for MSEs situated in Identified Credit Deficient Districts (ICDD) is an additional 5% over and above the applicable guarantee coverage w.e.f December 15, 2023(i.e., for a guarantee of 75%, the coverage would be 80%; for 80%, it would be 85%; and for 85%, it would be 90%). | |||
Annual Guarantee Fee:
Borrowers opting for CGTMSE coverage have to pay an annual guarantee fee to CGTMSE. The fee is incurred based on the guaranteed amount for the initial year and on the outstanding amount for the remaining duration of the credit facilities. This applies to all approved or renewed guarantees, including enhancements to existing working capital accounts covered under the Guarantee Scheme, effective from December 01, 2022.
CGTMSE hired an external agency to analyse its portfolio. The agency categorized Banks and Financial institutions based on factors like NPA rate, claim rate, quick mortality ratio, and net flows. MLIs (Money lending institutions) with a lower risk in their portfolio will receive a 10% discount on the standard rate, while those with higher risk may be charged a maximum risk premium of up to 70% of the standard rate. Each MLI will be personally informed about the applicable risk premium or discount based on their specific situation.
| Slab | Standard Rate (SR) | RP 15% | RP 30% | RP 50% | RP 70% |
|---|---|---|---|---|---|
| 0-10 lakh | 0.75 | 0.86 | 0.98 | 1.13 | 1.28 |
| 10-50 Lakh | 1.1 | 1.27 | 1.43 | 1.65 | 1.87 |
| 50 Lakh-2 Crores | 1.2 | 1.38 | 1.56 | 1.8 | 2.04 |
Conclusion:
In summary, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) provides a vital scheme offering guarantees for credit facilities to micro and small enterprises (MSEs). The scheme aims to support entrepreneurs by facilitating bank credit without the complexities of collateral or third-party guarantees. CGTMSE covers various credit facilities for MSEs, including a "Hybrid Security" option for partial collateral coverage.
However, certain credit facilities are not eligible for guarantees, including those covered by other schemes, non-compliance with laws, and facilities with defaulted repayments. The extent of guarantee coverage varies based on categories and regions, with additional benefits for specific groups.
Borrowers under CGTMSE coverage must pay an annual guarantee fee, calculated based on the guaranteed amount. An external agency categorizes lending institutions, with MLIs facing discounts or risk premiums depending on the risk associated with their portfolios. This fee structure applies to guarantees approved or renewed after December 01, 2022.
Still have questions?
If you still have questions or doubts about whether CGTMSE is the right option for you, you can tap into our lending expertise by signing up on our website: https://creditnama.com/
One of our lending experts will give you a FREE consultation call within minutes. Until then, wishing you the best in your search!
About the article: Got any questions or point of view on our article? We would love to hear from you.
