Overview:
CGTMSE is an initiative of the Government of India in collaboration with the Ministry of Micro, Small and Medium Enterprises (MSME) and the Small Industries Development Bank of India (SIDBI) launched on 30th August 2000. The CGTMSE full form is Credit Guarantee Fund Trust for Micro and Small Enterprises, and as is evident from the name, it is a Trust which provides the financial institutions with credit guarantee to provide loans to SMEs and MSMEs.
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. The guarantee covers default by the borrower to repay the advance. Thus, 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.
Features of the Credit Guarantee Scheme:
One of the key objectives of CGTMSE coverage is the focus on the creation of a robust credit relief system that promotes better credit flow to SMEs and the MSME sector. The stand-out features of the CGTMSE scheme is:
- Guaranteed repayment of 75% or 85% in some cases for the defaulted principal loan amount up to Rs.50 lakh.
- The maximum guarantee is 50% for loan amounts greater than Rs.50 lakh but under Rs.1 crore.
- Provides 85% repayment for loans up to Rs.5 lakhs to micro-enterprises.
- The guarantee amount for repayment is 80% of the loan amount in case the MSME is promoted by a woman or the location of the unit is in the North East Region (NER).
- The repayment procedure or CGTMSE loan recovery covers the entire loan amount inclusive of the interest component for a period of 3 months and/ or the entire outstanding loan amount along with the accrued interest from the suit filed date or the day when the loan turns into an NPA, whichever is lower.
- Rehabilitation of business units if the failure is beyond the control of the management to the extent of Rs.1 crore as support to the lender for assistance in resuscitating the enterprise.
Maximum Guarantee Cover:
| Category | Up to Rs. 5 lakh | More than Rs. 5 lakh to Rs. 50 lakh | More than Rs.50 lakh to Rs. 2 crores |
| Micro Enterprises | 85 percent of the default amount maximum of Rs. 4.25 lakhs. | 75 percent of the default amount maximum of Rs. 37.50 lakhs. | 75 percent of the default amount maximum Rs.1.5 crores |
| Women and Units in NER | 80 percent of the default amount maximum Rs.40 lakhs for credit facility up to Rs.50 lakhs. | 80 percent of the default amount maximum Rs.40 lakhs for credit facility up to Rs.50 lakhs. | 80 percent of the default amount maximum Rs.40 lakhs for credit facility up to Rs.50 lakhs. |
| All others | 75 percent of the default amount maximum Rs.40 lakhs for credit facility up to Rs.50 lakhs. | 75 percent of the default amount maximum Rs.40 lakhs for credit facility up to Rs.50 lakhs. | 75 percent of the default amount maximum Rs.40 lakhs for credit facility up to Rs.50 lakhs. |
| Business activity | Credit from Rs.10 lakhs to Rs. 1 crore |
| MSE Retail Trade | 50% of the default amount maximum of Rs.50 lakhs. |
CGTMSE Scheme Eligibility Criteria:
As per the CGTMSE guidelines, a credit guarantee is deemed to back a borrower with collateral and third party guarantee free advance. Under the scheme, the member lending institution which can be an NBFC also, who lend to the SME and MSME sector are eligible for a maximum credit cap of Rs. 2 crores, which in any case is meant to cover a large proportion of the loan amount. The eligibility norms prescribed both for the credit providers and borrowers are.
- Lending Institutions: It covers the whole gamut of scheduled commercial banks, specified Regional Rural Banks, SIDBI, NSIC, NEDFi, SFB and NBFCs who lend to the specific sector and have entered into an agreement with CGTMSE or the Trust for the purpose. These are designated as Member Lending Institutions (MLIs) and number 131 at present.
- Lending Borrowers: The CGTMSE coverage is conditional to all new and existing SMEs:
- The maximum credit facility is Rs.50 lakhs for a guarantee cover not exceeding Rs. 62.50 lakhs / Rs.65 lakhs.
- For credit facilities above Rs.50 lakhs, the guarantee cap is limited to Rs. 1 crore.
- Term credit for the entire outstanding amount on the date the loan is declared to be an NPA or on the date of filing a suit.
- Exclusions: Some entities are excluded from the CGTMSE coverage. They are:
- Retail Trade.
- Educational Institutions.
- Agriculture.
- Self Help Groups (SHG).
- Training Institutes.
CGTMSE Application:
It is incumbent upon the lender to apply for eligible credit facilities when they are sanctioned. The accepted norms for seeking guarantee cover and applicable terms are:
- Sanctioned during the calendar quarter latest by the end of the subsequent calendar quarter.
- The guarantee will commence the date the CGTMSE fee is paid.
- The cover shall run for the agreed-upon tenure for the Term and Composite Loans.
- If only Working Capital Loan is provided to the borrower, the period of cover shall be 5 years or any other period specified by CGTMSE.
Documents Required for CGTMSE Loan Process:
Availing of a credit facility or loan from the lender entails a series of activities on the part of the borrower for a seamless experience. The major steps for the CGTMSE loan scheme can be tabulated as under:
- Establishment of the Business Entity: The unit has to be incorporated a distinct business enterprise in the appropriate category like proprietorship, partnership or a limited company and necessary approvals, certificates and tax registrations are need to be obtained to execute the project.
- Business Project Report: The components of the project must be well defined based on a thorough market study and analysis. The factors to be mandatorily covered are:
- Business Model.
- Promoter Profile.
- Cost and other Financials.
- Submission: The project report and the CGTMSE loan application form are to be submitted to the lender for further processing. If the homework is proper, the first step towards successful completion of the process is taken.
- CGTMSE Scheme Banks Sanction: Once the CGTMSE application forms are successfully submitted, the processing begins. After proper evaluation and gauging of the viability of the project, sanction is accorded in alignment with the lender’s policy.
- Obtaining CGTMSE Loan Cover: After according sanction to the loan, it is the responsibility of the lender to file for guarantee cover at the CGTMSE.
Interest Rate for CGTMSE Loan:
All lenders impose a certain cost on the borrower. The major component of the cost to the borrower is the interest rate for the loan. The majority of the lenders recover the CGTMSE loan interest rate that does not exceed 14% to 18% including the guarantee cover.
Recovery of CGTMSE Fee named Annual Guarantee Fee (AGF):
Annual Guarantee fee recovered after 1st April 2018 per annum. The fee charged is on the Guarantee amount for the 1st year and on the outstanding amount in subsequent years.
| Quantum of credit facility | MEs for women and NER |
| Up to Rs.5 lakhs | 1.00 + Risk Premium | |
| Over Rs.5 lakhs up to Rs.50 lakhs | 1.35 + Risk Premium | 1.50 + Risk Premium |
| Over Rs.50 lakhs up to Rs.2 crores | 1.80 + Risk Premium |
| Risk Premium on NPA – Guaranteed | Risk Premium of CGTMSE claim |
| NPA Percent | Risk Premium | Claim Payout | Risk Premium |
| 0-5% | SR | 0-5% | SR |
| >5-10% | 10% of SR | >5-10% | 10% of SR |
| >10-15% | 15% of SR | >10-15% | 15% of SR |
| >15-20% | 20% of SR | >15-20% | 20% of SR |
| >20% | 25% of SR | >20% | 25% of SR |
#SR stands for Standard Rate
CGTMSE Scheme FAQs:
- Apart from the AGF, is there any Annual Service Fee at CGTMSE?
All loans prior to 1st January 2013 enjoying guarantee cover provided by any MLI shall continue to pay ASF at the following rates:
- Credit facility up to Rs.5 lakhs: 0.50% of the guarantee amount.
- Credit facility from Rs.5 lakhs up to Rs. 1 crore: 0.75% of the guarantee amount
- What is the CGTMSE claim settlement procedure?
There is a lock-in period of 18 months after the disbursal of the final tranche of the loan for preferring claim. The lender shall however prefer the claim once the defaulted account has been notified as NPA and recovery proceedings have commenced by way of filing suit as defined by CGTMSE from time to time. - Is a private sector or a foreign bank eligible for CGTMSE cover?
Yes, on condition that the lender listed as a commercial bank to the Schedule I to the RBI Act, 1934. - Does the Trust re-evaluate the recommended guarantee cover forwarded by the MLI?
It is assumed that the MLIs have exercised due diligence and only viable proposals are forwarded. Accordingly CGTMSE accepts the proposal. - How is CGTMSE advantageous for business?
SMEs and MSME contribute about 10% of the GDP in India. Additionally they provide employment to 7 crore people as per a conservative estimate. Considering the constraints faced by the sector in accessing credit facilities, the CGTMSE goes a long way in removing the hurdles allowing the lenders to be liberal in extending credit.
