You have skills, knowledge, ideas, experience and confidence to become an entrepreneur but needs financial assistance. If you make a project report then, approach a bank for financing the project, they simply ask what is the guarantee for repayment? They will ask you to provide collateral security as the secondary security to get back the fund you have been used in case failure in the business.
In such cases many of them may revert their intention, back to the job market for finding livelihood. A few of them go ahead with the proposal for giving collateral security. Fund without the collateral security would be a major source of support to the first generation entrepreneurs to realize their dream of setting up a unit of their own Micro and Small Enterprise (MSE).
If a system provides assurance to your credit, you would become a successful entrepreneur rather an employee. Here is the role CGTMSE handles. It acts as a trust giving support to entrepreneurs, particularly in the first generation business risk under MSE sector.
CGTMSE or Credit Guarantee Fund Trust for Micro & Small Enterprises Scheme
CGTMSE is a Trust formed by Govt. Of India in association with SIDBI (Small Industries Development Bank of India) to support collateral-free credit facility program implemented in MSE sector. The Trust shall cover credit facilities (Fund based and / or Non fund based) extended by Member Lending Institution(s) to a single eligible borrower in the Micro and Small Enterprises (MSE) sector for credit facility. The CGTMSE facility will cover MSE customers from the following amount and banks / financial Institutions:
- Upto Rs. 50 lakhs: Regional Rural Banks / Financial Institutions
- Upto Rs. 100 lakhs: Scheduled Commercial Banks and select Financial Institutions
The facility will be as Term Loan and / or working capital loan on or after entering into an agreement with the Trust, without any collateral security and / or third party guarantees or such amount as may be decided by the Trust from time to time.
In short, CGTMSE scheme acts as a Trust that undertakes credit facilities extended to an eligible borrower from time to time by an eligible institution which has entered into the necessary agreement for this purpose with the Trust, to provide a guarantee on account of the said credit facilities.
Principles of CGTMSE Scheme
- Only Micro and Small Enterprises engaged in manufacturing activities and those in service sector excluding retail trade are eligible to be covered under the Scheme.
- Credit facilities extended by more than one bank and/or financial institution jointly and/or separately to eligible borrower up to a maximum limit of 100 lakh per borrower subject to ceiling amount of individual MLI or such amount as may be specified by the Trust.
- The entire credit facility has to be given without collateral and/or third party guarantee. Loans may be secured against the primary security which has been defined under the Scheme to include assets created out of the credit facility extended to the borrowers and / or which are directly associated with the business/project of the borrower for which the credit facility has been extended. In those cases where MLIs have already obtained collateral security from the borrowing units to secure existing credit facilities, the collateral security needs to be released before covering under the Scheme any additional credit facility sanctioned to the same borrowing unit.
- Any credit facility which has been sanctioned by the lending institution on or after September 01, 2015 with interest rate more than 2% and 3% over the Base Rate/ (Average Base rate decided by the Trust from time to time as applicable to RRBs) for loans up to 50 lakh and loans above 50 lakh respectively. However, in case of those MLIs for whom Reserve Bank of India has not enjoined Base Rate concept, the existing provision of CGS will continue.
- The dues of the borrowing unit to the lending institution should not have become bad or doubtful of recovery as on material date.
- MLI should obtain the guarantee cover for credit facility sanctioned before the end of subsequent quarter.
- Both the existing and the new enterprises are eligible to be covered under the scheme.
Eligible Lending Institutions for CGTMSE Scheme
- Scheduled commercial banks (Public Sector Banks / Private Sector Banks / Foreign Banks)
- Select Regional Rural Banks (which have been classified under 'Sustainable Viable' category by NABARD).
Eligible Credit Facility for CGTMSE Scheme
- The credit facilities which are eligible to be covered under the scheme are both term loans and / or working capital facility up to Rs.100 lakh per borrowing unit, extended without any collateral security and/or third party guarantee, to a new or existing micro and small enterprise.
- For those units covered under the guarantee scheme, which may become sick owing to factors beyond the control of management, rehabilitation assistance extended by the lender could also be covered under the guarantee scheme.
- Any credit facility in respect of which risks are additionally covered under a scheme, operated by Government or other agencies, will not be eligible for coverage under the scheme.
Guarantee Cover Under CGTMSE Scheme
- The guarantee cover available under the scheme is to the extent of maximum 85% of the sanctioned amount of the credit facility.
- The guarantee cover provided is up to 75% of the credit facility up to Rs.50 lakh (85% for loans up to Rs. 5 lakh provided to micro enterprises, 80% for MSEs owned/ operated by women and all loans to NER including Sikkim) with a uniform guarantee at 50% for the entire amount if the credit exposure is above Rs.50 lakh and up to Rs.100 lakh.
- In case of default, Trust settles the claim up to 75% (or 85%/80%/50% wherever applicable) of the amount in default of the credit facility extended by the lending institution.
- For this purpose the amount in default is reckoned as the principal amount outstanding in the account of the borrower, in respect of term loan, and amount of outstanding working capital facilities, including interest, as on the date of the account turning Non-Performing Asset (NPA).
Tenure of Guarantee Under CGTMSE
The Guarantee cover under the scheme is for the agreed tenure of the term loan/composite credit. In case of working capital, the guarantee cover is of 5 years or block of 5 years.
Fee for CGTMSE Scheme
A composite all-in Annual Guarantee Fee of 1.0 % p.a. of the credit facility sanctioned (0.75% for credit facility upto Rs. 5 lakh and 0.85% for above Rs. 5 lakh and upto 100 lakh for Woman, Micro Enterprises and units in NER including Sikkim) is now being charged.
Frequently Asked Questions About CGTMSE Scheme (FAQ)
1. What is Collateral Security?
Collateral security means the security provided in addition to the primary security, in connection with the credit facility extended by a lending institution to a borrower.
2. What is Amount in Default?
Amount in Default means the principal and interest amount outstanding in the account(s) of the borrower in respect of term loan and amount of outstanding working capital facilities (including interest), as on the date of the account becoming NPA, or the date of lodgment of claim application whichever is lower or such of the date as may be specified by CGTMSE for preferring any claim against the guarantee cover subject to a maximum of amount Guaranteed.
3. What is Credit facility?
Credit facility means any financial assistance by way of term loan and / or fund based and non-fund based working capital (e.g. Bank Guarantee, Letter of credit etc.) facilities extended by the lending institution to the eligible borrower. For the purpose of calculation of guarantee fee, the "credit facility extended" shall mean the amount of financial assistance committed by the lending institution to the borrower, whether disbursed or not. For the purpose of the calculation of service fee, the credit facility extended shall mean the credit facilities (both fund and non-fund based) covered under CGS and for which guarantee fee has been paid, as at March 31, of the relevant year.
4. What is Eligible borrower?
Eligible borrower means new or existing Micro and Small Enterprises to which credit facility has been provided by the lending institution without any collateral security and/or third party guarantees.
5. What is Guarantee Cover?
Guarantee Cover means maximum cover available per eligible borrower of the amount in default or credit facility covered under CGS whichever is lower in respect of the credit facility extended by the lending institution.
6. What is Lending institution(s)?
Lending institution(s) means a commercial bank for the time being included in the second Schedule to the Reserve Bank of India Act, 1934 and Regional Rural Banks as may be specified by the Trust from time to time, or any other institution(s) as may be directed by the Govt. of India from time to time. The Trust may, on review of performance, remove any of the lending institution from the list of eligible institution.
7. What is Material date?
Material date means the date on which the guarantee fee on the amount covered in respect of eligible borrower becomes payable by the eligible institution to the Trust.
8. What is Non-Performing Assets (NPA)?
Non-Performing Assets (NPA) means an asset classified as a non- performing based on the instructions and guidelines issued by the Reserve Bank of India from time to time.
9. What is Primary security?
Primary security in respect of a credit facility shall mean the assets created out of the credit facility so extended and/or existing unencumbered assets which are directly associated with the project or business for which the credit facility has been extended.
10. What is Prime Lending Rate?
Prime Lending Rate for a lending institution means the rate so declared by that lending institution for the relevant time period / duration for which the credit facility has been extended.
11. What is Scheme?
Scheme means the Credit Guarantee Fund Scheme for Micro and Small Enterprises.
12. What is SIDBI?
SIDBI means the Small Industries Development Bank of India, established under Small Industries Development Bank of India Act, 1989 (39 of 1989).
13. What is Micro and Small Enterprises?
Micro and Small Enterprises As per the MSMED Act, 2006 an "enterprise" means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services; and "Micro and Small Enterprises" are defined in 7.1.a.i) and ii) & in 7.1.b.i) and ii) of the said Act.
14. What is Tenure of guarantee cover?
Tenure of guarantee cover means the maximum period of guarantee cover which shall run through the agreed tenure of the term credit and for a period of 5 years or block of a 5 years from Guarantee start date where working capital facilities alone are extended or , whichever is earlier or such period as may be specified by the Trust.
15. What is Trust?
Trust means the Credit Guarantee Fund Trust for Micro and Small Enterprises set up by Government of India and SIDBI with the purpose of guaranteeing credit facility(ies), extended by the lending institution(s) to the eligible borrowers.
16. What is Base Rate?
Base Rate for a lending institution means the rate so declared by that lending institution for the relevant time period / duration for which the credit facility has been extended.
17. What is Third Party Guarantee?
Third Party Guarantee means any guarantee obtained by a Member Lending Institution in connection with the credit facility extended by it to a borrower except from Sole-Proprietor in case of Sole Proprietary concern, Partners in case of partnership / limited liability partnership, Trustees in case of Trust, Karta & Coparceners in case of HUF and promoter directors in case of private/ public limited companies.