• Collateral Free Loans

    Collateral free loans imply any loan that is disbursed without a supporting collateral or security to limit the lender’s exposure to risk. A special type of collateral free loan scheme is available in India under the Credit Guarantee Fund Trust Scheme for Micro & Small Enterprises (CGTMSE). Under this scheme, the micro and small enterprises (MSEs) are eligible for collateral free loans up to Rs.1. crore in value.

    The CGTMSE scheme had been introduced as a propellant to the lagging MSE industry in India. The biggest problem faced by these enterprises has been a lack of funding, resulting in limited opportunities for growth, working capital needs or scaling. Most MSEs typically start with a service or product that may not earn revenue shortly. To ensure that these enterprises stay above water and can manage to sustain the business through cheap financing, the government had released the CGTMSE scheme.

    Under the new guidelines given by the Finance Minister, Nirmala Sitharaman, the subordinate debt will be given to MSMEs who require equity support. The government of India has allotted Rs.20,000 crore as a part of this subordinate debt to be given, out of which Rs.4,000 crore will be given to the CGTMSE and they will provide partial credit guarantee support to the banks.

    Even though the MSE industry has been lagging in the country, an economy suffering from COVID-19 has changed the direction of the MSME industry in India by providing relief for the companies falling under this category and to ensure their operations are not hampered due to the lack of funds.

    Updates from the Finance Minister

    Finance Minister, Nirmala Sitharaman had recently announced on 13 May that collateral-free loans will be given to businesses including MSMEs to help them sustain themselves in an economy which is greatly affected by COVID-19. With this loan, the MSMEs which have been struggling to survive and need additional funds to purchase raw material and restart their business can avail this loan as a part of the relief package by the government of the country.

    With the Collateral Free Loan which amounts up to Rs.3 lakh crore in total, MSMEs have been given an emergency credit line from banks amounting up to 20% of their outstanding limit as on 29 February 2020. All the borrowers who have an outstanding of Rs.25 crore and a turnover of Rs.100 crore are eligible for the loan which has a tenure of 4 years and a moratorium of 12 months for the payment of the principal amount. The interest will be capped for this loan and the banks will receive a 100% credit cover on the principal amount and interest.

    This scheme by the government of India can be availed until 31 October 2020 according to the Finance Minister.

    Major Banks offering Collateral Free Loans

    Collateral free loans can be availed from major banks in India including but not limited to:

    • Axis Bank
    • Bank of Baroda
    • Fullerton India’
    • UCO Bank
    • State Bank of India
    • State Bank of Hyderabad
    • HDFC Bank

    Features of Collateral Free Loans

    These loans are packed with features, such as:

    • Loans available up to Rs.1. crore for MSEs as per the terms of the MSMED Act, 2006.
    • Loan can be availed by both existing and new MSEs.
    • Higher loan amounts are available on a case-to-case basis. Upper amounts generally attract collateral, though at a lower percentage as compared to the general loan products.
    • Working capital assistance or Term Loan is available.
    • Margin of 75%, 80% or 85% as per the category of applicant.

    Benefits of Collateral Free Loans

    Collateral free loans are highly beneficial for people who don’t have collaterals to show against a loan. Major benefits include:

    • No collateral or third party guarantee needed.
    • Attractive and subsidised rate of interest.
    • Flexible repayment tenures up to 5 years.
    • Letter of credit/bill discounting up to 180 days.
    • No track record requirement.
    • Product development funding.
    • Moratorium period on repayment.
    • Quick and hassle free processing of applications, largely due to a special cell taking charge of these requests.

    Eligibility for availing Collateral Free Loans

    There are few requirements for availing these loans, such as:

    • Private limited companies with SME/SSI registration can apply.
    • Product development expenses, procurement of computers, tools machinery etc.
    • Share allotment proof.
    • Share purchase agreement.

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