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  • CGTMSE Scheme

    The Ministry of Micro, Small & Medium Enterprises (MSME) launched the Credit Guarantee Scheme (CGS) in order to improve the credit delivery system in the country and streamline the flow of credit to the Micro and Small Enterprise (MSE) sector.

    To make this scheme operational, the Indian government and SIDBI created the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

    Schemes under CGTMSE

    There are two Schemes under CGTMSE, as shown below:

    CGS-I for Banks/FIs

    CGTMSE created a scheme for the provision of guarantees for credit facilities extended by lenders to MSE borrowers. The scheme was named Credit Guarantee Fund Scheme for Small Industries (CGFSI). The key features of the scheme are as follows:

    1. CGTMSE will cover the fund-based and non fund-based credit facilities extended by Member Lending Institutions (MLIs) to MSE borrowers. These credit facilities can be term loans or working capital loans with the following limits:
      • Not more than Rs.50 lakh – Regional Rural Banks and some financial institutions
      • Not more than Rs.200 lakh - Scheduled Commercial Banks, NBFCs, and select financial institutions
      • Not more than Rs.50 lakh – Small Finance Banks
    2. A new Hybrid Security product has also been launched by CGTMSE wherein the MLIs can get collateral security for a portion of the credit facility while the remaining unsecured part will be covered by CGS-I. This unsecured portion can go up to Rs.200 lakh. It should be noted that CGTMSE will have pari-passu charge on the securities provided.

    Annual Guarantee Fee (AGF)

    AGF is charged on the guaranteed amount for the initial year, and on the amount outstanding for the rest of the tenure. The AGF structure is as follows:

    Category Maximum extent of Guarantee where credit facility is
    Up to Rs.5 lakh Above Rs.5 lakh and up to Rs.50 lakh Above Rs.50 lakh and up to Rs.2 crore
    Micro Enterprises 85% of the amount in default subject to a maximum of Rs.4.25 lakh 75% of the amount in default subject to a maximum of Rs.37.5 lakh 75% of the amount in default subject to a maximum of Rs.1.50 crore
    Women entrepreneurs or units located in North East Region including Sikkim (other than credit facility up to Rs.5 lakh to micro enterprises) 80% of the amount in default subject to a maximum of Rs.40 lakh
    All other section of borrowers 75% of the amount in default subject to a maximum of Rs.37.5 lakh
    Activity From Rs.10 lakh and up to Rs.1 crore
    MSE Retail Trade 50% of the amount in default subject to a maximum of Rs.50 lakh

    The AGF is usually paid to the Trust by the institution receiving the guarantee within 30 days of loan disbursal. This payment can be made through NEFT/RTGS.

    CGS-II for NBFCs

    The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has created a scheme for the provision of guarantees for credit facilities extended by NBFCs to MSE borrowers. The key features of this scheme are as follows:

    1. The Trust will cover loans extended by MLIs to eligible borrowers in the MSE sector. The loan in this case should not be more than Rs.200 lakh. For MSE Retail Trade, the credit facility coverage will be up to Rs.100 lakh.
    2. The credit facility should be standard and regular as per the RBI guidelines.
    3. The credit facility should not be used for the repayment of debts.

    Guarantee Fee

    • The trust with relation to the credit facilities and extended to the borrower may undertake provided an eligible lending body may provide a guarantee on account of the credit facility.
    • The trust is within its rights to accept or reject any proposal referred by the lending body provided it satisfies the norms of the scheme.

    Credit Facilities Covered under the CGTMSE Schemes

    • Credit facilities which are standard and regular as per the guidelines issued by the RBI.
    • The borrower’s business or activity for which the credit facility was offered is still operational.
    • The credit facility has not been deemed bad, doubtful or recovery, or adjusted for any debt partially or completely without obtaining any consent from the Trust.

    Credit Facilities not Covered under the CGTMSE Schemes

    Listed below are some of the credit forms that would not be eligible for the guarantee cover under the CGTMSE schemes:

    • Any credit facility for which the risks are also covered under a scheme governed by the Deposit Insurance and Credit Guarantee Corporation or the RBI
    • Any credit facility for which the risks are also covered by the government or any general insurance company
    • Any credit facility that is not in conformance with legal provisions or instructions by the Central Government or RBI
    • Any credit facility provided to a borrower who also has another credit facility on which there was a payment default

    Responsibilities of the Lending Institution

    • The lender will assess the loan applications using business discretion and select the commercially viable projects.
    • The borrower account will also be closely monitored by the lender.
    • The lender will safeguard the securities that have been procured from the borrower in good condition.
    • The lender will ensure that the guarantee claim is lodged with the Trust in the prescribed manner. There will not be any delay in notifying defaults in the borrower’s account to the Trust.
    • While the guarantee claim payment is made by the Trust to the lender, the latter still assumes responsibility of recovering the entire outstanding amount of the loan from the borrower.
    • The lending institution should comply with the loan recovery directions issued by the Trust from time to time.
    • The lender will have to exercise the same diligence in loan recovery as it may have exercised in the scenario wherein there was no guarantee from the Trust.

    FAQs on CGTMSE Scheme

    1. What kind of borrowers are eligible for guarantee cover under the CGTMSE schemes?

      Ans: Existing and new micro and small enterprises that are involved in service/manufacturing activities are eligible for guarantee cover under the CGTMSE schemes. It should be noted that enterprises engaged in retail trade, educational institutions, and SHGs are not eligible under the schemes.

    2. Are loans provided to small road transport operators offered coverage under the CGTMSE schemes?

      Ans: Yes, loans offered to small water and road transport operators are eligible for guarantee coverage provided by CGTMSE.

    3. Is it compulsory for a borrower to have an Income Tax Permanent Account Number (IT-PAN) to fulfill the eligibility criteria?

      Ans: It may be necessary for a borrower to have an IT-PAN number before availing a loan from a lender. Section 139A(5) read with section 272(C) of the Income Tax Act 1961 indicates that IT-PAN is needed on returns, appeals, and challans.

      However, for loans that go up to Rs.10 lakh, CGTMSE does not make it mandatory to furnish the IT-PAN for guarantee cover. For all loans above Rs.10 lakh, the IT-PAN is needed.

      It is a good practice to indicate the IT-PAN on all applications, irrespective of the amount of loan taken.

    4. To be eligible for the CGTMSE credit guarantee, is it necessary that a borrower should get all the credit facilities from a single lender?

      Ans: No, this is not mandatory. The loan can be taken from more than one lender jointly or separately up to a maximum amount of Rs.100 lakh per borrower.

    5. Up to what extent does CGTMSE offer guarantee cover for a loan that an MLI offers to a borrower?

      Ans: CGTMSE provides guarantee cover up to a maximum of 75% of the claim amount within 30 days of the claim. The remaining 25% of the claim amount will be paid after the recovery proceedings are completed by the lending institution.

    6. Can credit facilities that have already become NPA be covered under the CGTMSE schemes?

      Ans: No, this is not possible.

    7. What is the difference between collateral security and primary security?

      Ans: Primary security is the asset that is created out of the loan taken by the borrower. This is directly associated with the business of the borrower.Collateral security is an additional security that is provided for this loan. This can include the mortgage of a house, hypothecation of jewellery, etc.

    8. When will the guarantee cover commence for a loan?

      Ans: The guarantee cover will start being effective from the date on which the guarantee fee is credited to the account of the Trust.

    9. Can MSEs directly approach the Trust to seek credit guarantee for loans sanctioned by banks?

      Ans: CGTMSE provides guarantee to the MLIs registered with it. Hence, entrepreneurs in the MSE sector will be required to approach the lenders (that are already registered with the Trust as MLIs) for credit needs. The MLIs, in turn, will get the credit guarantee based on their requirements. The list of MLIs of the Trust can be found at the CGTMSE website.

    10. Can a lender seek a single guarantee cover for all the loans outstanding for its eligible MSE borrowers?

      Ans: No, a single guarantee cover is not allowed for all the outstanding MSE loans. The MLIs should individually apply for guarantee cover for each borrower separately.

    11. Will the guarantee cover continue if a borrower unit undergoes a change in management during the guarantee period?

      Ans: If the new management satisfies the norms of eligibility, continues to perform the existing activities of the borrower, or performs new activities that are eligible under the scheme, then the guarantee cover will continue. However, if the new management does not satisfy any of these norms, the guarantee cover will be terminated from the date of transfer of management.

    12. Is the credit facility for the rehabilitation of a sick unit eligible for guarantee cover under the CGTMSE schemes?

      Ans: The unit should have been an eligible borrower under the scheme and was later found to be sick due to unavoidable factors. In this case, the rehabilitation credit offered by the lender can also be covered under the scheme, as long as the overall credit amount is within Rs.100 lakh.

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