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What is the CGTMSE Scheme?
A brainchild of the Ministry of Micro, Small and Medium Enterprises, the CGTMSE Scheme is a unique offering which aims to bridge the gap between a business idea and its execution, offering financial support to entrepreneurs. Under the scheme, eligible members can get credit facilities from banks to finance medium and small enterprises. Loans up-to a maximum of Rs1crore can be availed, with the differentiating factor being the Credit Guarantee provided by the government.
This Credit Guarantee offers security to entrepreneurs in the event of their business failing. A maximum cover equivalent to 85% of the loan amount is available under the scheme. In cases where a borrower is unable to repay the loan, the scheme will cover the loss, paying lending institutions the financial loss incurred by them due to non-repayment of loan. The quantum of repayment depends on the amount borrowed, the borrower (male/female) and the purpose of loan.
Advantages of CGTMSE:
MSEs are an important part of the Indian economy and contribute approx. 10% to the country’s GDP. They give employment to more than 7 crores people even though they face many hurdles in procuring finances and business loans. Despite their large presence across various market segments, lending institutions stay apprehensive about the high rate of NPAs in small and micro businesses. Even though it is a valid risk, the liability that these factors entail creates problems for both the businesses and the banks. For instance, SMEs do not find the loan approval procedure simple or business-friendly. Banks prefer not to lend unless they have checked and rechecked all documents and got a guarantee.
To counter such situations, CGTMSE has come forward to play a crucial role. It has shared the risk factor and has helped bring relief to both borrowers and lending institutions.
CGTMSE offers significant advantages for new and existing MSMEs. The major advantage of CGTMSE is that you can acquire cover for the credit facility even if you have minimum or no experience in setting up a business. Although the credit cover remains optional under this scheme, the MSME Ministry has given due importance to the scheme and monitored its progress on a regular basis.
CGTMSE Scheme Salient Features
Let us look at the eligibility criteria for CGTMSE scheme for credit providers and credit borrowers.
Lending Institutions: All scheduled commercial banks and specified regional rural banks including NSIC, NEFDi, and SIDBI can be considered as eligible lending institutions. The institutions that enter into an agreement with CGTMSE are called Member Lending Institutions (MLIs).
Eligible Borrowers: All new and existing micro and small enterprises are eligible for this credit guarantee under certain conditions. The conditions are:
Small and micro enterprises owned and/or operated by women are eligible for a guarantee cover of 80% whereas all the credit / loans in the North East Region (NER) for credit facilities are eligible for a guarantee of Rs. 50 lakh. Retail trade, educational institutions, agriculture, training institutions, and self-help groups (SHGs) are not eligible for guarantee cover under CGTMSE.
CGTMSE also provides rehabilitation assistance to the business units. If a business unit is in a bad condition due to factors that are beyond the control of the management, then CGTMSE covers the loan for rehabilitation extended by the lender within the credit cap of Rs. 100 lakh (Rs. 1 crore).
Scope and Extent of the Scheme:
Credit facilities eligible under the Scheme
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 sector for credit facility (i) not exceeding 50 lakh (Regional Rural Banks/Financial Institutions) and (ii) not exceeding 200 lakh (Scheduled Commercial Banks and select Financial Institutions) (iii) above 10 lakh and not exceeding 200 lakhs for Non-Banking Financial Company (NBFCs) by way of term loan and/or working capital facilities 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.
Provided that the lending institution applies for guarantee cover in respect of credit proposals sanctioned in the quarter April-June, July-September, October-December and January-March prior to expiry of the following quarter viz. July-September, October-December, January-March and April June respectively.
Provided further that, as on the material date
Credit facilities extended by more than one bank and/or financial institution jointly and/or separately to eligible borrower up to a maximum of `200 lakh per borrower subject to ceiling amount of individual MLI or such amount as may be specified by the Trust.
Credit facilities not eligible under the Scheme
The following credit facilities shall not be eligible for being guaranteed under the Scheme: –
Responsibilities of lending institution under the scheme:
i) The lending institution shall evaluate credit applications by using prudent banking judgement and shall use their business discretion / and conduct the account(s) of the borrowers with normal banking prudence.Diligence in selecting commercially viable proposals and conduct the account(s) of the borrowers with normal banking prudence.
ii) The lending institution shall closely monitor the borrower account.
iii) The lending institution shall safeguard the primary securities taken from the borrower in respect of the credit facility in good and enforceable condition.
iv) The lending institution shall ensure that the guarantee claim in respect of the credit facility and borrower is lodged with the Trust in the form and in the manner and within such time as may be specified by the Trust in this behalf and that there shall not be any delay on its part to notify the default in the borrowers account which shall result in the Trust facing higher guarantee claims.
v) The payment of guarantee claim by the Trust to the lending institution does not in any way take away the responsibility of the lending institution to recover the entire outstanding amount of the credit from the borrower. The lending institution shall exercise all the necessary precautions and maintain its recourse to the borrower for entire amount of credit facility owed by it and initiate such necessary actions for recovery of the outstanding amount, including such action as may be advised by the Trust.
vi) The lending institution shall comply with such directions as may be issued by the Trust, from time to time, for facilitating recoveries in the guaranteed account, or safeguarding its interest as a guarantor, as the Trust may deem fit and the lending institution shall be bound to comply with such directions.
vii) The lending institution shall, in respect of any guaranteed account, exercise the same diligence in recovering the dues, and safeguarding the interest of the Trust in all the ways open to it as it might have exercised in the normal course if no guarantee had been furnished by the Trust. The lending institution shall, in particular, refrain from any act of omission or commission, either before or subsequent to invocation of guarantee, which may adversely affect the interest of the Trust as the guarantor. In particular, the lending institution should intimate the Trust while entering into any compromise or arrangement, which may have effect of discharge or waiver of personal guarantee(s) or security. The lending institution shall also ensure either through a stipulation in an agreement with the borrower or otherwise, that it shall not create any charge on the security held in the account covered by the guarantee for the benefit of any account not covered by the guarantee, with itself or in favour of any other creditor(s) without intimating the Trust. Further the lending institution shall secure for the Trust or its appointed agency, through a stipulation in an agreement with the borrower or otherwise, the right to list the defaulted borrowers’ names and particulars on the Website of the Trust.
Steps to Follow for Loan Application under CGTMSE Scheme
First of all, you can’t apply for the loan under CGTMSE Scheme online. You have to contact to the banks nearby you. Broadly, there are four steps for applying for the loan under this scheme.
Forgetting the fund for a new business, you have to form the business organization first. According to the mode of operation, register your business. Additionally, obtain the necessary licenses and permissions from the respective Govt. authority. Furthermore, open a current bank account and apply for business PAN Card.
This is the most important aspect of getting the bank loan approved under this scheme. Because the project viability is the most crucial factor that the bank considers. Therefore, you must submit a full-proof project report with market analysis, ROI, Break Even and Payback calculations.
It is advisable to take the help from the professional to craft the project report properly. Additionally, you must put the feasible data and information to make it acceptable to the banks.
After getting the project report, you can apply for the loan. It is advisable to talk with at least 2 to 3 banks that are nearby you. If you already have an account in any of nearby bank, the first thing is to start talking to them.
After getting the sanction of the loan, the bank will apply for the subsidy to the CGTMSE organization. For the approval of the scheme, the bank needs to submit several documents. After the approval, you have to pay the CGTMSE guarantee and service fee if any.
Business loan under CGTMSE:
A simple process is followed by most lending institutions who are part of the CGTMSE Scheme, with borrowers expected to follow a few basic steps in order to get credit.
Any collateral / third party guarantee free credit facility (both fund as well as non-fund based) extended by eligible institutions, to new as well as existing Micro and Small Enterprise, including Service Enterprises, with a maximum credit cap of 200 lakh (Rupees Two Hundred lakh only) are eligible to be covered. Recently, guarantee coverage made eligible to select NBFCs and Small Finance banks.
The guarantee cover available under the scheme is to the extent of 50%/ 75% / 80% & 85% of the sanctioned amount of the credit facility. The extent of guarantee cover is 85% for micro enterprises for credit up to 5 lakh. The extent of guarantee cover is 50% of the sanctioned amount of the credit facility for credit from 10 lakh to 100 lakh per MSE borrower for retail trade activity.
The extent of guarantee cover is 80%(i) Micro and Small Enterprises operated and/or owned by women; and (ii) all credits/loans in the North East Region (NER) for credit facilities up-to 50 lakh. In case of default, Trust settles the claim up to 75% of the amount in default of the credit facility extended by the lending institution for credit facilities up-to 200 lakh.
Fees and Interest rate charged under CGTMSE Scheme
Being a scheme which is implemented by Member Lending Institutions (MLIs) on behalf of the government, there are certain fees and charges associated with it. One can classify the fees into two major categories, a Guarantee Fee and an Annual Service Fee.
Almost every financial institution is comfortable in providing loans against collaterals. This is because of the fear of NPA and ambiguity of financial decisions made by first-time entrepreneurs. This is why a major precondition of CGTMSE states that the company should not have a loan secured by collateral or a third party or both. Also, it is better for entrepreneurs to have a clean financial history along with a healthy financial status. Additionally, entrepreneurs need to prepare a project report that clearly indicates the viability of their project. This should also be easily understandable for lending institutions.