MSME is the pillar of economic growth in many developed and developing countries in the world. Though India is still facing infrastructural problems, lack of proper market linkages, and challenges in terms of flow of institutional credit, it has seen a tremendous growth in this sector.
THE CREDIT GUARANTEE SCHEME (CGS)
Businesses, especially MSMEs, require a steady source of finance if they are to meet the hiccups of kick-starting their business and growing it. Though business loans are available, they are difficult to obtain in when the MSME is in its nascent stage. The Credit Guarantee Scheme offers unsecured loan facilities to MSME businesses. MSME businesses can avail term loans or working capital loans under the scheme.
The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a MSE unit, which availed collateral- free credit facilities, fails to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 85 per cent of the outstanding amount in default.
CREDIT GUARANTEE FUND TRUST FOR MICRO & SMALL ENTERPRISES (CGTMSE)
Ministry of Micro, Small & Medium Enterprises (MSME), Government of India (GOI) and Small Industries Development Bank of India (SIDBI) set up Credit Guarantee Fund Trust for Small Industries (CGTSI) in August 2000. The GOI and SIDBI as settlors of the Trust have committed a corpus of Rs.2,500 crore in the ratio of 4:1 to the CGTMSE, out of which Rs. 1,906 crore has been contributed till date. Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) w.e.f. 2nd July 2007. CGTMSE updated his policy on regular basis. Major changes announced by CGTMSE in February 2018. We have considered the CGTMSE circular upto July 2020.
POLICY CHANGES IN CGTMSE IN 2018
Following policy changes in Credit Guarantee Scheme were announced in an event “Rebooting CGTMSE” organized by Ministry of MSME and CGTMSE on February 20, 2018:-
- Charging Annual Guarantee Fees (AGF) on Outstanding Loan Amount rather than sanction amount.
- Expanding the Coverage of the Credit Guarantee Scheme (CGS) to cover MSE Retail Traders segment.
- Allowing loans with Partial Collateral Security under Credit Guarantee Scheme.
- Increase in the extent of guarantee coverage to 75% from existing 50% for proposals above ₹50 lakh.
- Enhancing IT infrastructure of the Trust to improve operational efficiencies and reduce the turnaround time for claim settlement.
The above-mentioned steps undertaken by the Trust are expected to greatly increase the attractiveness of the scheme and increase the operational efficiency of the Trust. This in turn is expected to increase the credit guarantees availed by MLIs and help in enhanced flow of credit to the MSE sector and betterment of the sector as a whole.
ELIGIBLE LENDING INSTITUTIONS UNDER THE SCHEME
All Scheduled Commercial Banks (either PSU, Private or Foreign Banks), selected Regional Rural Banks, selected state financial corporations or NBFC’s or such of those institutions as may be directed by GOI can avail of guarantee cover in respect of their eligible credit facilities under the Scheme. Small Industries Development Bank of India (SIDBI), National Small Industries Corporation Ltd. (NSIC) and North Eastern Development Finance Corporation Ltd. (NEDFC) have been included as eligible institutions.
Eligibility of Borrowers for CGTMSE Coverage:
- All Credit Facilities sanctioned to Micro & Small units defined as per MSMED act 2006, on the basis of investment in Plant & Machineries/Equipment.
- Units under both the sectors viz. Manufacturing and Services including Retail Trade, can be covered under CGTMSE.
- All the units should be engaged in the activity as approved by CGTMSE for coverage.
- All units should have a valid Udyog Adhaar No. (UAN).
- Maximum Quantum of loan to a single borrower eligible for coverage should not exceed Rs. 200 Lakhs.
- A borrower can be given benefit of coverage only once in his/her lifetime under CGTMSE cap of ₹200 lakh is removed by 06 December 2019 notification. Now the borrowers can avail incremental credit facilities (i.e. to the extent of reduction in the outstanding exposure limit) under Credit Guarantee Scheme of CGTMSE, subject to maximum cap of ₹200 lakh.
- For loans up to Rs 10 Lakhs, no collateral security or third party guarantee should be obtained, to be eligible under the scheme.
- For loans above Rs 10 Lakhs, Partial Collateral security may be obtained. The details of the same has been explained in para 10, under Hybrid model of the scheme.
- Under the Credit Guarantee Scheme, the CGTMSE encourages composite credit being extended to a single borrower by a Bank. Joint financing by a financial institution (e.g. Small Industries Development Bank of India, National Small Industries Corporation, and North Eastern Development Finance Corporation Ltd.etc) and commercial bank can be covered under the scheme. For example, MSE unit is financed by term loan from State financial institution/development financial institution and Working capital from a commercial bank. However, sharing of securities will not be permitted.
- Loan under Consortium are not eligible under the scheme.
- Loans to SHGs are not eligible under the scheme.
- Educational Institutions/Training Institutions are not covered under the Scheme.
CREDIT FACILITIES & PARAMETERS
Fund and non-fund based (Letters of Credit, Bank Guarantee etc.) credit facilities up to Rs. 200 lakh per eligible borrower are covered under the guarantee scheme provided they are extended purely on the project viability without collateral security or third party guarantee. A lender can extend either term loan or working capital facility alone and still be eligible for a guarantee cover if it meets the other eligibility parameters (wef 31.10.2018, CGTMSE has removed rate of interest limit cap of 14% for all eligible loan account).
CGTMSE COVER FOR BORROWERS ENGAGED IN RETAIL TRADE
Credit Facility extended to borrowers engaged in Retail Trade activity will now be covered under CGTMSE scheme with effect from 28.02.2018 (credit facility eligible for coverage on or after 28.02.2018). The Details are hereunder:
- Exposure Limit for Credit facility of all Retail Trade segment will be up to Rs 100 Lakh per MSE Borrowers (w.e.f 31.10.2018, CGTMSE has removed floor limit of Rs. 10 lakh in Retail Trade Segment).
- Extent of Guarantee coverage to such credit facility would be 50% of amount in default irrespective of the category of the borrower.
- Applicable Fee i.e. AGF will be charged at the rate of 2% of the guaranteed amount for the first year and on outstanding amount for the remaining tenure of the credit facility. Differential pricing structure depending upon NPA percentage and Claim payout ratio of the Member Lending Institution (MLI) will also be applicable on the AGF.
COLLATERAL SECURITY ACCEPTED UNDER THE SCHEME
No collateral Security for loans up to Rs. 10 Lakh. Collateral Security would mean any asset other than business asset. Waiver of collateral security may be extended for loans over Rs.10 Lakh and up to Rs.25 Lakh subject to good track record and financial position of the borrower.
In view of several requests from various MLIs regarding coverage of Partial Collateral Security, it has been decided to make it effective from the date of issue of Circular. Therefore, the modification of allowing partial collateral security under the ambit of Credit Guarantee Scheme of CGTMSE is applicable to fresh credit facilities eligible for guarantee coverage by MLIs on or after February 28, 2018.
Modified AGF Structure- Standard rate (SR)
With a view to incentivize the borrowers with good repayment track record, AGF would be charged on the outstanding loan amount instead of guaranteed amount for credit facilities sanctioned / renewed to MSEs on or after April 01, 2018 as detailed below:
|Credit Facility||Annual Guarantee Fee (AGF) % p.a.*|
|Women, Micro Enterprises and Units covered in North East Region||Others|
|Up to Rs. 5 Lakhs||1.00 + Risk Premium as per extant guidelines of the Trust|
|Above Rs.5 Lakhs and up to Rs.50 Lakhs||1.35 + Risk Premium as per extant guidelines of the Trust||1.50 + Risk Premium as per extant guidelines of the Trust|
|Above Rs. 50 Lakhs and up to Rs.200 Lakhs||1.80 + Risk Premium as per extant guidelines of the Trust|
MSE RETAIL TRADE ACTIVITY
The AGF will be charged at 2% of the guaranteed amount for the first year and on the outstanding amount for the remaining tenure of the credit facility. Differential pricing structure depending upon NPA / Claim pay-out ratio of the MLI will also be applicable on the AGF as per CGTMSE Circular No.107/2015-16 dated January 28, 2016.
Additional risk premium of 15% will be charged on the applicable rate to MLIs who exceed the pay-out threshold limit of 2 times more than thrice in last 5 years. This premium will be applicable for all guarantee accounts irrespective of the sanction date.
Guarantee cover for entire agreed tenure of the Term Credit/ Composite Credit for the defaulted principal amount. Other Charges such as interest in term loan, Penal Interest, Commitment Charge, Service charge or any other expenses shall not qualify for guarantee cover. Lock in period is 18 months from date of last disbursement of loan or date of payment of guarantee fee whichever is later.
|Extent of Guarantee Cover available w.e.f. 01/04/2018|
|CATEGORY||Up to Rs. 5.00 Lakh||Above Rs. 5.00 Lakh to Rs.50.00 Lakh||Above Rs. 50.00 Lakh to Rs.200.00 Lakh|
|Micro Enterprises||85% of default amount Maximum Rs. 4.25 Lakh||75% of default amount Maximum Rs. 37.50 Lakh||75% of default amount maximum Rs. 150.00 Lakh|
|Women/NE Region||85% of default amount Maximum Rs. 4.25 Lakh||80% of default amount Maximum Rs. 40 Lakh||75% of default amount maximum Rs. 150.00 Lakh|
|All others||85% of default amount Maximum Rs. 4.25 Lakh||75% of default amount Maximum Rs. 37.50 Lakh||75% of default amount maximum Rs. 150.00 Lakh|
Salient features and limitation about guarantee and invoke of guarantee are as under:
- Where working capital alone is financed, the tenure of guarantee cover is fixed for a block of 5 years. Thereafter the guarantee cover needs to be renewed for a further period of 5 Years. Based on the suggestions received from the Member Lending Institutions (MLIs), CGTMSE has been decided to remove the tenure cap of 10 years for coverage of working capital facilities under Credit Guarantee Scheme as per his circular dated 18 Feb 2020. However, a review would be undertaken after each block of 5 years by CGTMSE before renewal of the guarantee coverage for next 5 years. Only Standard account at the end of the block of five years will be renewed and substandard accounts will be rejected.
- The Guarantee Cover shall run through the entire agreed tenure of the Term Credit in case Term Loan, sanctioned alone
- In case of Composite Loan (wherein Cash Credit & Term loan are sanctioned together), the guarantee cover will run through the entire period of term loan or term loan termination date whichever is earlier. For example, if the term loan is repaid in 48/60/72 months from the guarantee start date the guarantee cover will expire for both Cash Credit and Term Loan in 48/60/72 months, as the case may The guarantee cover for Cash Credit alone will be renewed thereafter for a block of 5 years, subject to coverage for Cash Credit will be valid from the original cover start date.
Claim settlements on default of a loan are as under:
- The lender shall prefer a claim on the defaulted account on recall of loan and initiation of recovery proceedings under due process of Law. The lender can, however, invoke the guarantee given by the Trust only after the lock-in period of 18 months either from the date of last disbursement of credit to the borrower or from the date of the guarantee cover coming into force in respect of the particular credit facility, whichever is later.
- After satisfying itself about the procedural aspects met by the lender, regarding lodgement / preferment of claim for guarantee, the Trust will honour 75% of the guaranteed portion of the amount in default, subject to maximum of 75%/ 80%/85% of the amount in default. The balance 25% shall be paid on conclusion of the recovery proceedings.
- For the purpose of the scheme, issue of notice under Lok Adalat is sufficient to prove the legal proceedings have initiated.
- Mere issuance of recall notice under SARFAESI Act cannot be construed as initiation of legal proceedings for purpose of preferment of claim under CGS. Lending institution should take further action as contained in Section 13 (4) of the above Act.
NPA REPORTING AND CLAIM SETTLEMENT
NPA Reporting: If an account slipped to NPA, Branch has to report through Nodal official. Nodal official will generate the report and update on CGTMSE website. Branch has to report on or before last day of Next Quarter.
CGTMSE Guarantee Invocation Period: Guarantee of CGTMSE in respect of accounts covered under CGTMSE may be invoked if the following conditions are satisfied –
- Within a maximum period of one year from date of NPA, if NPA is after lock in period or within one year of expiry of lock-in period, if NPA is within lock-in period for accounts sanctioned before 01.01.2013.
- The Branch/Bank can invoke the guarantee in respect of credit facility within a maximum period of two years from date of NPA, if NPA is after lock-in period or within two years of expiry of lock-in period, if NPA is within lock-in period, for accounts sanctioned on or after 01.01.2013 but turned NPA before 15.03.2018.
- The Branch /Bank can invoke the guarantee in respect of credit facility within a maximum period of three Years from the date of NPA, if NPA is after lock in period or within three years of expiry of lock in period, if NPA is within lock in period for accounts turned NPA on or after 15.03.2018, irrespective of sanction date.
Submission of Claim: Branch has to report the claim through Nodal official. Before claiming the credit facility has been recalled and the recovery proceeding have been initiated under due process of law. Mere issuance of recall notice under SARFAESI Act cannot be construed as initiation of legal proceedings for purpose of preferment of claim under CGS. Lending institution should take further action as contained in Section 13 (4) of the above Act.
Settlement of Claim: Settlement of claim is to be entered and verified by this menu. The CGTMSE shall pay 75% of guaranteed amount within 30 days.
The balance 25% will be paid on conclusion of recovery proceeding or after 3 years from decree of recovery, whichever is earlier. Any amount realized from sale of security should be remitted in full to the corporation after deducting our expenses etc.
CGTMSE has its Registered Office at Mumbai and does not have any branches. Since the entire operations are online, CGTMSE is able to cater to the needs of its MLIs from Mumbai.