Credit Guarantee Scheme: Benefits, Eligibility, Application process

Being a business owner of a Micro, Small, or Medium Enterprise (MSME) means facing challenges when securing funds for your capital needs. To assist entrepreneurs like you, the Government of India has introduced different schemes and grants to support MSMEs financially. One important initiative is the CGTMSE or the Credit Guarantee Scheme. How can it help your business financially? What is the Credit Guarantee Scheme in India? Let’s understand.

What is CGTMSE?

CGTMSE full form stands for Credit Guarantee Funds Trust for Micro and Small Enterprises. It is a trust established by the Government of India under the MSME Ministry and the Small Industries Development Bank of India (SIDBI). Launched in 2000, the scheme offers credit guarantees to financial institutions providing loans to Micro and Small Enterprises (MSEs), covering 75%-85% of the loan amount.

Applying for a loan under CGTMSE means your loan is supported by the scheme without requiring external collateral or a third-party guarantee. The lending institution receives substantial backing from CGTMSE, enabling new and existing MSMEs to access credit facilities of up to Rs.2 crores. 

In FY2023, 11,65,786 guarantees were approved under the CGTMSE scheme. The government's success with this scheme led to an additional Rs.9,000 crore added to its corpus from April 2023. Under the revised CGTMSE scheme, businesses can now secure loans up to Rs.5 crores from multiple financial institutions or banks, either independently or jointly, depending on each lender's limit. Moreover, Microfinance institutions (MFIs) have also been included as scheme members. MFIs, like banks, provide smaller loans known as microfinance loans.

How much does the Credit Guarantee Scheme cover?

Guarantee coverage for credit facilities varies based on the loan amount and borrower category. Micro Enterprises receive coverage as follows: 

• Up to Rs.5 lakh, 85%; 
• Above Rs.5 lakh to Rs.50 lakh, 75%; 
• Above Rs.50 lakh to Rs.500 lakh, 75%. 

In the North East Region, this coverage is 80%, and the women entrepreneurs, SC/ST entrepreneurs, and others listed receive 85% coverage. All other borrowers get a coverage of 75%. For Micro Enterprises in Identified Credit Deficient Districts (ICDD), from December 15, 2023, coverage increased by an extra 5% (e.g., from 75% to 80%). 

The guarantee coverage tenure starts after payment of the fee, lasting either the loan tenure for term loans/composite loans, five years for working capital loans, or a period set by the Guarantee Trust.

Features of the Credit Guarantee Scheme:

• CGTMSE provides credit guarantees to banks and NBFCs, reducing lending risks for micro and small enterprises.
• Eligible borrowers can access collateral-free loans up to a specific limit, subject to scheme regulations.
• The scheme offers flexible repayment terms, allowing borrowers to repay over an extended period based on business needs.
• CGTMSE covers a broad spectrum of business activities, making it accessible across various economic sectors.
• Micro and small enterprises often struggle due to a lack of collateral. CGTMSE addresses this by offering primarily collateral-free loans.
• Business loans under the Credit Guarantee Scheme usually have competitive interest rates, attracting entrepreneurs seeking financing.
• This scheme encourages financial institutions to lend to high-risk businesses, promoting economic growth. It also makes the loans more accessible for MSMEs.
• Businesses in manufacturing, service, and retail are eligible. However, educational/training institutions, self-help groups, and agriculture are not covered.
• The guarantee fees for CGTMSE have been reduced to 10%. 

Credit Guarantee Scheme Eligibility:

The eligibility criteria are defined for both eligible borrowers and lenders-

1. Borrowers: To avail of the Credit Guarantee Scheme, the entity should be-

• A startup recognized by DPIIT (Department for Promotion of Industry and Internal Trade) as per Gazette Notifications.
• A startup with a stable revenue stream verified from audited monthly statements over 12 months.
• A startup that is suitable for debt financing.
• A startup that is not in default to any lending/investing institution.
• A startup that isn’t classified as a Non-Performing Asset as per RBI guidelines.
• A startup whose eligibility has been certified by a member institution for guarantee coverage under the Credit Guarantee Scheme.

2. Lenders: Eligibility criteria for the lender/ investing institutions include the following-

• Scheduled Commercial Banks and Financial Institutions can be lending or investing institutions.
• An NBFC that is registered with RBI, has a rating of BBB and above from RBI-accredited credit rating agencies, and has a net worth of at least Rs.100 crore. If the NBFC's credit rating falls below BBB, it becomes ineligible for guarantee cover until it upgrades to the eligible category.
• SEBI-registered Alternative Investment Funds (AIFs)

How can you avail yourself of the business loan under CGTMSE?

Here's how to apply for loans under CGTMSE:

1. Establish the Business:

Before applying for a CGTMSE loan, set up a business entity like a private limited company, LLP, one-person company, or proprietorship. Obtain necessary approvals and tax registrations.

2. Prepare a Business Report:

Conduct market research and create a business plan with details like the business model, promoter profile, and financial projections. Professional help in preparing these reports can improve approval chances.

3. Loan Approval from the Bank:

Submit the business plan to the bank for loan approval. The bank evaluates the business model's viability before sanctioning the loan per its policies.

4. Obtain Guarantee Cover:

Once sanctioned, the bank applies for guarantee cover from CGTMSE. Borrowers must pay guarantee fees and service charges over and above the bank interest. The guarantee fee varies between 0.37% to 1.35% depending on the loan amount. However, it is 0.75% for the North-Eastern region.

5. Disbursal:

Once the guarantee is obtained, the financial institution (lender) will disburse the amount, after which the repayment will continue per the institution’s terms and conditions. 

6. Documentation: 

Certain documents can change depending on the nature of your business and lending institution. However, some standard documents required include-

• Business plan in detail
• Project report in detail
• Business owner’s KYC documents
• Financial statements or projections
• Registration and license details of the business
• Income tax returns of the business and business owner
• Bank statements

Conclusion:

The government took the initiative to offer support to numerous small businesses through the CGTMSE scheme, providing guaranteed cover. This means credit constraints won't hold you back. As a small business owner, you can access an unsecured loan through these guarantee schemes. All you need to do is gather your documents, pay the CGTMSE fee, and fuel your business growth and development. 

FAQs:

Q1. What is the duration of the CGTMSE coverage?

Ans. The Credit Guarantee Scheme provides five-year coverage. However, this coverage can be renewed by paying the applicable charges.

Q2. Does the scheme cover Mudra Loan as well?

Ans. No, the CGTMSE scheme doesn’t cover Mudra loans. 

Q3. Can I pay the annual CGTMSE fee after the claim is lodged?

Ans. Yes, the annual guarantee fee can be paid after the claim is lodged, but it must be paid before the first installment of 75% of the guaranteed amount is disbursed. However, no claims can be lodged during the initial lock-in period and after the guarantee cover tenure expires.

Q4. What is the Credit Guarantee Fund Scheme for Education Loans?

Ans. CGFSEL guarantees education loans for economically disadvantaged students per the Model Education Loan Scheme of the Indian Banks’ Association (IBA). The scheme supports student borrowers who cannot offer collateral or a third-party guarantee. Under this initiative, eligible students can secure a collateral-free loan of up to INR 7.5 lakhs.

Q5. What is the CGTMSE scheme full form?

Ans. CGTMSE stands for Credit Guarantee Funds Trust for Micro and Small Enterprises.