This article is written by Anjali, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho).

Introduction

It is estimated that India has about 63.5 million micro and small enterprises (MSEs). These MSEs provide employment to an estimated 55 million people. The MSE sector gives nearly 45% to the manufacturing sector production and 39 % of the country’s exports.  MSEs faced a problem of non-attainability of timely and appropriate credit at a suitable interest rate.  High-risk perception of the banks while giving loans to MSEs is one of the main reasons for the low attainability of bank finance to this sector. 

CGTMSE is an acronym for Credit Guarantee Fund Scheme of Micro and Small Enterprises. This scheme was launched by The Ministry of Micro, Small & Medium Enterprises (MSME) on August 30, 2000, to provide non-guaranteed credit to the MSE sector. All existing and new small & medium enterprises are eligible to be covered under the scheme. 

Definitions 

Collateral security

Security provided in addition to the primary security, in connection with the credit facility offered by a lending institution to a borrower is called Collateral Security.

SIDBI

Small Industries Development Bank of India also known as SIDBI, regulates the overall licensing and regulation of MSEs. SIDBI was established on April 2, 1990.

Guarantee cover

It means maximum cover available per competent borrower of the amount in default in respect of the credit facility offered by the lending institution.

Lending institution(s)

It is a commercial bank for the time being included in the;

• Second Schedule to the Reserve Bank of India Act, 1934,
• New Age Fin-Tech NBFCs, 
• Scheduled Urban Co-operative Banks and Small Finance Banks as may be specified by the Trust every now and then, or 
• NBFCs, Regional Rural Banks, 
• Any other institution(s) as may be directed by the Govt. of India every now and then.

MSME

Ministry of Micro, Small & Medium Enterprises.

Guideline for CGTMSE

• As per this scheme, the government of India will take 85% (Eighty-Five percent) of the loan amount on your behalf. 
• In this scheme, you can apply for a loan of 10(Ten) Lakhs to 2(Two) crore Indian Rupees.
• If you will take a loan of up to 5 (Five) lakhs, then the government will give you up to 85% (Eighty-Five percent) guarantee and for 5(Five) lakhs to 2(Two) crores 75% guarantee.

Accessibility of bank credit without the requirement of collaterals/third party guarantees would be an important source of support to the first-generation business person to realise their goal of setting up a unit of their own Micro and Small venture.

Why do we need this scheme?

To find the investment and funding one has to work hard. This problem existed even fifty years ago. For any business, be it a start-up or an established business, money always works like fuel. Before this scheme, MSME (micro, small & medium enterprises) played an important role in the Indian economy and contributed an estimated 10% to the country’s GDP. MSME provides employment to 7 crore people as per conservative estimate. But it faces so many problems in procuring finances and loans. In spite of their existence in the market segments, they still face several challenges and hardships.

To control such situations, the government of India has launched the scheme CGTMSE under the MSME, and SIDBI to prompt the flow of institutional credit to micro-small enterprises (MSES).

Eligibility criteria for the CGTMSE scheme

1. Lending Borrower:- All existing micro and new small enterprises engaged in manufacturing or service activity extended training institutions, agriculture, Self Help Groups, educational institutions etc.
2. Lending Institutions:- Lending institutions that provide financial support to specific zones are in agreement with CGTMSE. These include:

1. Scheduled commercial banks (SCBs).
2. Small Financial Banks (SBFs).
3. Regional Rural Banks (RRBs).
4. Small Industrial Development Bank of India (SIDBI).
5. North Eastern Development Finance Corporation Ltd.
6. Non-Banking Financial Companies (NBFCs).
7. National Small Industries Corporation (NSIC).

Guarantee Cover: – Below are the guarantee cover available under this scheme

1. The extent of 75% (Seventy-Five percent) of the sanctioned amount of the credit facility. 
2. The extent of guarantee cover is 80% (Eighty percent) for:

• Women operated or owned MSEs;
• Loans up to ₹5 Lakhs for Micro Enterprises; and 
• Loans distributed in the North-East Region. In case of default, Trust settles the claim up to 75% (Seventy-Five percent) or 80% (Eighty percent) wherever applicable of the amount in default of the credit facility offered by the lending institution. 

For the abovementioned point, the amount in default is calculated as the principal amount unpaid in the account of the borrower, in respect of term loan, and amount of unpaid working capital facilities, including interest, as on the date of the account turning Non-Performing Asset (NPA).

The process to get a bank loan under CGTMSE

1. Idea: – Have a successful business idea or project in mind to execute.
2. Incorporated: – Incorporate a business entity and obtain necessary registration to apply for a bank loan.
3. Business plan: – Create a business plan or project report to submit to the banker for sanction of bank loan.
4. Bank loan sanction: – Submit the business plan or project report to banks providing loans under the CGTMSE scheme and obtain sanction.
5. CGTMSE Cover: – Once the loan is sanctioned, the bank will apply to CGTMSE and provide CGTMSE scheme coverage.

Documents required 

1. Aadhaar card/PAN card/Business PAN.
2. Passport-size photographs.
3. Business incorporated letter.
4. Shop act licence/LLP.
5. Udhayam Aadhar.
6. Business project report.
7. Rent agreement.

Conditions of availing credit

1. The lending institution should have applied for a guarantee prior to credit proposals sanctioned quarter.
2. The activity or business of the borrower for which the credit facility was accepted has not ceased.
3. Without prior consent, the credit facility has not been utilized for the adjustment of any bad or doubtful debt.
4. The dues to the lending institution have not become bad or uncertain of recovery.

The extent of guarantee coverage

Cases sanctioned on or after April 01, 2018, the trust shall provide a guarantee as per the below table:

Category (Borrowers)	Maximum extent of Guarantee Coverage where credit facility is
Up to ₹5 Lakhs	Above ₹5 Lakhs & up to ₹50 Lakhs	Above ₹50 Lakhs & up to ₹200 Lakhs
Micro Enterprises	85% (maximum of ₹4.25 Lakhs)	75% (maximum of ₹37.50 Lakhs)	75% (maximum of ₹150 Lakhs)
Womenentrepreneurs/ Enterprises Located in North East Region (including Sikkim) (other than credit facility up to ₹5 Lakhs to micro-enterprises)	80% (maximum of ₹ 40 Lakhs)
MSE Retail Trade (up to ₹100 Lakhs)	50% (maximum of ₹50 Lakhs)
All other eligible categories of borrowers	75% (maximum of ₹150 Lakhs)

Annual Guarantee Fee (AGF) 

AGF will be charged on the guaranteed amount for the first year and on the outstanding amount for the remaining tenure of the credit facilities sanctioned/renewed to MSEs:

Credit Facility	Annual Guarantee Fee (AGF) [% per annum] *
Women, Micro Enterprises and Units covered in North East Region	Others
Up to ₹5 Lakhs	1.00% plus Risk Premium as per guidelines provided by Trust
Above ₹5 Lakhs and up to ₹50 Lakhs	1.35% plus Risk Premium as per guidelines provided by Trust	1.50% plus Risk Premium as per guidelines provided by Trust
Above ₹50 Lakhs and up to ₹200 Lakhs	1.80% plus Risk Premium as per guidelines provided by Trust
Retail Trade (up to ₹100 Lakhs)	2.00% plus Risk Premium as per guidelines provided by Trust
* For the first year AGF will be charged on the guaranteed amount and for remaining tenure on the outstanding amount of the credit facility.

Lock-in period in CGTMSE

CGTMSE scheme has an 18 (Eighteen) months lock-in period from either the date of last payment of the loan or when the guarantee came effective in respect of the particular credit facility, whichever later is considered. 

Payment of AGF

1. AGF shall be paid to the Trust by the institution availing of the guarantee within 30 (Thirty) days from the date of the first payment of credit facility (not applicable for Net Working capital) or 30 (Thirty) days from the date of Demand Advice of guarantee fee whichever is later or such date as stated by the Trust.
2. The Annual Guarantee fee (subsequent to first time fee) at a specified rate (as specified above) on a pro-rata basis for the first and last year and in full for the intervening years would be generated by 2nd week of February every year. AGF so demanded would be paid by the MLIs on or before 15th April each year or any other specified date by CGTMSE, of every year.

Conclusion

The Indian Economy is heavily dependent on the MSME sector. The MSME sector creates employment opportunities and also works for the development of artisans. CGTMSE scheme definitely helps the MSME sector and Indian Economy.

The logo of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) — a colourful flying bird — reflects the entrepreneurial zest of the country’s youth, who have sensational ideas, but have no third-party guarantee or collateral security to get loans from formal sources. CGTMSE aims to support these young, aspiring entrepreneurs in setting up sustainable micro and small enterprises, transforming them from employment seekers to employment providers

The CGTMSE scheme, a brainchild of the Government of India’s Ministry of Micro, Small and Medium Enterprises, intends to improve the credit distribution system and ease the flow of credit to MSEs. (Micro and Small Enterprises). The unique offering fills the vacuum between an idea and its execution, by extending financial support to micro and small entrepreneurs. 

References

• https://www.india-briefing.com/news/micro-small-medium-enterprises-india-explainer-17887.html/
• https://www.cgtmse.in/
• https://www.sidbi.in/en
• https://rbidocs.rbi.org.in/rdocs/publications/pdfs/84656.pdf
• https://muds.co.in/fintech-based-nbfc-everything-you-need-know/
• http://www.aurobindo.du.ac.in/uploads/pdf/1586407470_Regional_Rural_Banks.pdf
• https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf

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