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Credit Guarantee Scheme for Micro and Small Enterprises

To enable and support financially young or first-generation entrepreneurs to set up their own Micro and Small enterprises, the Government of India launched the Credit Guarantee Scheme in the year 2000 which offers guarantee cover for a specific portion of loans or credit which is not secured by collateral.

For instance, a micro-enterprise has taken a loan of Rs 4 lakh out of which it has provided a collateral loan for Rs 1 lakh only. Now as per the Credit Guarantee Scheme, 85% of the unsecured amount (3 Lakhs) i.e., Rs 255000 will be guaranteed under this scheme. To achieve this goal and operate this scheme, the Government of India (GOI) and the Small Industries Development Bank of India (SIDBI) have set up a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

The CGTMSE scheme primarily envisages the provision of loans to first-generation entrepreneurs so that they can flourish in the competitive environment without the burden of security or third-party guarantees. In turn, the financial institutions are provided cover for the absence of security to fund SMEs and MSMEs promoted by small Indian businessmen up to a certain limit.

The basic aim of CGTMSE is to encourage first-time entrepreneurs to establish SMEs and MSME, considered to be the bulwark of the Indian economy by availing of collateral-free loans from eligible financial institutions

Features of the Credit Guarantee Scheme

1. Type of Loan: The lender can extend either a Term Loan or a Working Capital facility alone.

2. Maximum Limit: The maximum limit for Guarantee Coverage is Rs 5 Crore (increased from Rs 2 Crore).

3. Pari-Passu Charge: Pari-Passu means equal footing. The lender and CGTMSE will have equal charge on the primary and collateral security provided by the borrower.

4. Additional Guarantee Fee: The borrower needs to pay an additional guarantee fee and service charge along with the interest charged by the lender. Annual Guarantee Fee structure has been reduced to as low as 0.37%.

5. Coverage Limit: The maximum coverage limit of the guarantee differs based on category of borrowers and the amount of loan or credit facility.

6. Concessions: The CGS Scheme also offers certain concessions to women or people from SC/ST or Agni veers or people with disability.

7. Lock-in Period: The lock-in period in CGS is 18 months (starting from the guarantee start date or last disbursement date whichever is late) which simply means that after the loan becomes NPA, there is a waiting period of 18 months. During the completion of these 18 months, the guarantee must remain in force, only then the lender can claim with CGTMSE.

8. Claim Lodgement: Before lodging a claim with CGTMSE, Lender needs to initiate legal action.

CGTMSE Guarantee Coverage Criteria

The lender should cover the eligible credit facilities as soon as they are sanctioned. Guarantee will commence from the date of payment of guarantee fee and shall run through the agreed tenure of the term credit in case of term loans / composite loans and for a period of 5 years where working capital facilities alone are extended to borrowers, or for such period as may be specified by the Guarantee Trust in this behalf.

Guarantee Fee Charged for Different Categories of Loans are as follows :

Lending Institutions Offering funds under CGTSME Scheme:

Scheduled Commercial Banks

Regional Rural Banks

Non-Banking Financial Companies

Small Finance Banks

Small Industrial Development Bank of India

National Small Industries Corporation

North Eastern Development Finance Corporation Ltd

NBFC List -

How to Apply for loans under CGTMSE

Business Entity: First of all, a business entity needs to be formed as per the nature of business. It could be a Private Limited Company, Limited Liability Partnership, Section 8 company and so on.

Business Report: Prepare a business containing important details such as business model, promoter profile, projected financials and so forth. Further, this Business report is presented to credit facility.

Application: The application is filled for availing loan under the CGTMSE Loan Scheme.

Loan Sanctioning: The lender carefully evaluates and anayze the business and process the loan application. If found viable and as per the bank’s policy, the loan is sanctioned.

Guarantee Cover: Post this, the bank applies to CGTMSE and obtains guarantee cover. If CGTMSE approves, the borrower will have to pay a guarantee fee and service charges.

It should be kept in mind that CGTMSE does not grant any loan or subsidy nor it has any agent. Loans or credit guarantees are offered via its Money Lending Institutions (MLIs). Also, it does not mean that borrowers can easily default on repayment of loan without fear of any legal action by lender.

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