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 the flow of institutional credit, it has seen tremendous growth in this sector.
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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 when the MSME is in its nascent stage. The Credit Guarantee Scheme offers unsecured loan facilities to MSME businesses. MSME businesses can avail of term loans or working capital loans under the scheme.
The Credit Guarantee Scheme (CGS) seeks to reassure the lender that, in the event of an 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 to date. Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) w.e.f. 2nd July 2007.
UPDATION IN CGTMSE POLICY
CGTMSE updated his policy regularly. Major changes were announced by CGTMSE in February 2018. In January 2023 CGTMSE has recently brought out many modifications in the existing guarantee scheme and added Benefits to Agniveers under CGTMSE. Three major modifications have been considered by the CGTMSE as per the circular dated 31st March 2023.
MAJOR POLICY CHANGES IN CGTMSE IN FEBRUARY 2018
Following policy changes in Credit Guarantee Scheme were announced in an event “Rebooting CGTMSE” organized by the 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 the MSE Retail Traders segment.
- Allowing loans with Partial Collateral Security under Credit Guarantee Scheme.
- Increase in the extent of guarantee coverage to 75% from the existing 50% for proposals above ₹50 lakh.
- Enhancing the 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.
POLICY CHANGES IN CGTMSE IN JANUARY 2023
CGTMSE has brought out the following modifications in January 2023 in his existing guarantee scheme as below.
- Extending special benefits to units of UT of Jammu & Kashmir, UT of Ladakh, and units promoted by Persons with disability (PwD), Agniveers.
- Increase in the threshold for waiver of Legal Action.
- Modification in the alignment of guarantee for Retail/Wholesale trade with other segments.
- Introduction of Manipur Credit Guarantee Scheme (MCGS).
POLICY CHANGES IN CGTMSE IN MARCH 2023
CGTMSE has recently brought out the following modifications in the existing guarantee scheme as per circulars dated 31st March 2023 as under.
- Increase in the ceiling of coverage from Rs.2 Cr to Rs.5 Cr.
- Reduction in Annual Guarantee Fee.
- Increase in the threshold for Waiver of Legal Action to Rs.10 Lakhs & option for claim settlement in a single instalment.
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 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 the MSMED act 2006, based on investment in Plant & Machineries/Equipment.
- Units under both 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).
- The maximum Quantum of loan to a single borrower eligible for coverage should not exceed Rs. 500 Lakhs.
- 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 the 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 g. 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.
- Wholesale Trade & Educational Institution are now covered to be covered under the scheme.
CREDIT FACILITIES & PARAMETERS
Fund and non-fund based (Letters of Credit, Bank Guarantee etc.) credit facilities up to Rs. 500 lahks 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 a term loan or working capital facility alone and still be eligible for a guarantee cover if it meets the other eligibility parameters.
CGTMSE COVER FOR BORROWERS ENGAGED IN RETAIL TRADE
Credit Facility extended to borrowers engaged in Retail Trade activity will now be covered under the CGTMSE scheme with effect from 28.02.2018 (credit facility eligible for coverage on or after 28.02.2018). In the initial stage of eligibility, AGF of the Retail Trade was different from other activities. Now all the features of Retail Trade are at par with other activities.
COLLATERAL SECURITY ACCEPTED UNDER THE SCHEME
No collateral security for loans up to Rs.10 Lakhs. Collateral Security would mean any asset other than a business asset. Waiver of collateral security may be extended for loans over Rs.10 Lakhs and up to Rs. 25 Lakhs subject to the 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)
In pursuit of revamping of Credit Guarantee Scheme to increase the flow of credit to MSEs, it has been decided to bring down the cost of the guarantee. Further, guarantee fees for Retail / Wholesale Trade is made at par with other activities. The revised Annual Guarantee Fee (AGF) structure under Credit Guarantee Scheme (CGS -I) applicable to all the guarantees approved/ renewed on or after April 01, 2023, is given in the table below.
|Standard Rate with
Risk Premium (%pa)
|Above 10-50 lakh||0.55||0.94|
|Above 50-1 crore||0.60||1.02|
|Above 1-2 crore||1.20||2.04|
|Above 2-5 crore||1.35||2.30|
Guarantee cover for the entire agreed tenure of the Term Credit/ Composite Credit for the defaulted principal amount. Other Charges such as interest in term loans, Penal Interest, Commitment Charges, Service charges, or any other expenses shall not qualify for guarantee cover. Lock in period is 18 months from the date of the last disbursement of the loan or the date of payment of the guarantee fee whichever is later.
|EXTENT OF GUARANTEE COVER AVAILABLE W.E.F. 01/04/2023|
|Category||Up to ₹ 5.00 lakh||More than ₹ 5.00 lakh to ₹ 50.00 lakh||More than ₹ 50.00 lakh to ₹ 500.00 lakh|
|Micro Enterprises||85% of the amount default amount Max. ₹ 4.25 Lakh||75% of the amount default amount Max. ₹ 37.50 Lakh||75% of the amount default amount Max. ₹ 375.00 Lakh|
|MSE Located in UT of J&K/ UT of Ladakh/ NE Region||80% of the amount default amount Max. ₹ 40. Lakh||75% of the amount default amount Max. ₹ 375.00 Lakh|
|Women/SC/ST/PwD/MSE promoted by Agniveers/ MSE situated in Aspirational District/ ZED Certified MSEs||85% of the amount default amount Max. ₹ 425.00 Lakh|
|All others||75% of the amount default amount Max. ₹ 375.00 Lakh|
PERIOD FOR THE GUARANTEE COVERAGE
The guarantee cover will commence from the guarantee start date and shall run through the agreed tenure of the term credit in respect of term credit / composite credit. Where working capital alone is extended to the eligible borrower, the guarantee cover shall be for a period of 5 years or a block of 5 years or for such period as may be specified by the trust on this behalf.
APPLICATION FOR GUARANTEE COVER PAYMENT OF AGE
Application for Guarantee cover lodged online through Administrative Office designated as Nodal Offices.
(i) Annual Guarantee fee (first-time fee) shall be paid to the Trust by the institution availing of the guarantee within 30 days from the date of first disbursement of credit facility or 30 days from the date of Demand Advice (CGDAN) of guarantee fee whichever is later or such date as specified by the Trust.
(ii) The Annual Guarantee fee (after first time fee) at a specified rate (as specified above) on a pro-rata basis for the 2nd and last year and in full for the intervening years would be generated by the 2nd week of February every year. AGF so demanded would be paid by the MLIs on or before 30th March each year or any other specified date by CGTMSE, of every year.
INVOCATION OF GUARANTEE
MCGS’s total guarantee coverage is a maximum upto 10% NPA level of the crystalized portfolio of MLI. The claims for the entire year will be processed for payment by MCGS after the crystallization of the annual portfolio of the MLI with MCGS.
The Member Lending Institutions (MLIs) are required to inform the date on which the account was classified as NPA in a particular calendar quarter by the end of the subsequent quarter using the following option in the online system.
CLAIM SETTLEMENTS ON DEFAULT OF A LOAN ARE AS UNDER
The lending institution may invoke the guarantee in respect of the credit facility within a maximum period of 3 years from the NPA date or lock-in period whichever is later
- The lender shall prefer a claim on the defaulted account on recall of the 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 the 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 a claim for the guarantee, the Trust will honour 75% of the guaranteed portion of the amount in default, subject to a maximum of 75%/80%/85% of the amount in default. The balance of 25% shall be paid at the conclusion of the recovery proceedings.
- For the scheme, the issue of notice under Lok Adalat is sufficient to prove the legal proceedings have been initiated.
- Mere issuance of recall notice under the SARFAESI Act cannot be construed as an initiation of legal proceedings for the preferment of a claim under CGS. Lending institutions should take further action as contained in Section 13 (4) of the above Act.
WAIVER OF LEGAL ACTION IN NPA ACCOUNTS
- For the scheme, the issue of notice under Lok Adalat is sufficient to prove that legal proceedings have been initiated for the cases where the total default is up to ₹ 20 lakhs only.
- Waiver of Legal action in respect of smaller loans: CGTMSE has waived the pre-condition of initiation of legal proceedings for invoking guarantees where the aggregate outstanding amt. considered eligible for claim settlement by CGTMSE does not exceed ₹ 5 lacks for those claims lodged on or after 02.01.2023.
- Now, CGTMSE has revised the threshold for waiver of legal action to ₹ 10 lacks per claim for claims lodged on or after 01.04.2023.
- In all such cases, where the filing of legal proceedings is waived, a committee headed by an officer, not below the rank of Assistant General Manager of MLI should examine all such accounts and decide not to initiate legal action and file a claim under the Scheme. The report of such a committee may be submitted along with the claim application.
SETTLEMENT OF CLAIM
- Settlement of claim is to be entered and verified by this menu. The CGTMSE shall pay 75% of the guaranteed amount within 30 days.
- The balance 25% will be paid at the conclusion of the recovery proceeding or after 3 years from the decree of recovery, whichever is earlier. Any amount realized from the sale of security should be remitted in full to the corporation after deducting our expenses etc.
CGTMSE CLAIM SETTLEMENT OFFER IN NPA ACCOUNTS
Further, CGTMSE has decided to offer MLIs two options for claim settlement at the time of claim lodgement for cases where a waiver of legal action is applicable.
- Option-1: Single instalment of claim settlement with reduced extent of guarantee by 15%. Eg: in respect of the extent of coverage of 75%, reduced coverage would be 60%, and 80% would be 65% likewise.
- Option-2: Existing claim settlement process in two instalments i.e. 75% 1st instalment and 25% after 3 years as 2nd
CGTMSE has its Registered Office in Mumbai and does not have any branches. Since the entire operations are online, CGTMSE can cater to the needs of its MLIs from Mumbai.