Lack of access to timely and adequate credit at reasonable interest rates is the biggest challenge faced by small businesses in India.
According to Dun & Bradstreet Research, for every 100 companies in India, there are more than 95 micro enterprises. This is because only four percent of MSMEs in India have access to a formal source of finance.
The high risk perception in lending to MSMEs is a major cause of this lack of access to finance. Further, banks often insist on collateral security – something not easily available for all MSMEs.
To combat this, the Government of India (GoI) launched the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS) to make available collateral-free credit to micro and small businesses.
The MSME Ministry and Small Industries Development Bank of India (SIDBI) established the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) in 2000 to implement the Credit Guarantee Fund Scheme. The corpus of CGTMSE is contributed by the GoI and SIDBI in the ratio of 4:1 respectively.
How it works
The scheme assures the lending institution that if a borrowing MSE unit fails to discharge its liabilities to the lender, the trust will make good the loss incurred by the lender up to a certain percent of the credit facility.
Under the scheme, collateral-free credit (fund and non fund-based) extended by eligible financial institutions to new and existing micro and small enterprises, up to a limit of Rs 200 lakh (Rs 2 crore), are eligible to be covered by the fund trust.
The financial institutions eligible to lend under the scheme are scheduled commercial banks such as public sector banks, private sector banks, foreign banks, and select regional rural banks (which have been classified under ‘sustainable viable’ category by National Bank for Agriculture and Rural Development). NBFCs and Small Finance Banks also recently became eligible.
Some eligible lending institutions are Delhi Financial Corporation, Kerala Financial Corporation, Jammu & Kashmir Development Finance Corporation Ltd, Andhra Pradesh State Financial Corporation, Export Import Bank of India, The Tamil Nadu Industrial Investment Corporation Ltd., National Small Industries Corporation (NSIC), North Eastern Development Finance Corporation (NEDFI) and Small Industries Development Bank of India (SIDBI).
CGTMSE has also introduced a Hybrid Security product where lending institutions will be allowed to obtain collateral for a part of the credit facility. In such cases, CGTMSE will have equal charge on primary security as well as on collateral security provided by the borrower.
Guarantee coverage
Guarantee coverage is available under the scheme to the extent of 85 percent for micro enterprises for credit up to Rs 5 lakh. The guarantee cover is 50 percent of the sanctioned amount for credit ranging from Rs 10 lakh to Rs 100 lakh per MSE borrower for retail trade activity.
The extent of guarantee cover is 80 percent for MSEs operated and/or owned by women. The guarantee is also applicable on all credit/loans in the North East Region (NER) for credit facilities up to Rs 50 lakh.
In case of a loan default on the credit facility extended by a lending institution, the trust settles the claim up to 75 percent of the amount in default, for credit facilities up to Rs 200 lakh.
For units covered under the scheme which become sick due to factors beyond the control of management, rehabilitation assistance could also extended by the lender.
The guarantee cover under the scheme is for the agreed tenure of the term loan/composite credit. In case of working capital, the guarantee cover is for five years or a block of five years.
However, any enterprise with a credit facility where risks are covered under a different scheme, operated by government or other agencies, will not be eligible for coverage under CGTMSE.
How to apply
Candidates meeting the eligibility criteria may approach eligible banks, financial institutions or select regional rural banks. to apply for loans under CGTSME.
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