Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

Overview

The SME sector in India has made a significant contribution to the country’s GDP. To enable further growth and employment opportunities, the Union Government has encouraged the setting up of more SMEs in the years to come. However, small-scale businesses face challenges such as tough market competition, insufficient funding, and limited financial resources to operate and grow their business. Therefore, if you are a SME business you need to have complete knowledge about the Credit Guarantee Fund Trust for Micro and Small Enterprises or the (CGTMSE) loan scheme.

What is the CGTMSE Loan Scheme

CGTMSE or the Credit Guarantee Fund Trust for Micro and Small Enterprises is a collective initiative by the Union Ministry Micro and Small Enterprises, the Union Government and the Small Industries Development Bank of India (SIDBI) with the primary intention of empowering SMEs and the entrepreneur’s easier access to business credit facilities in order to, establish, grow and expand their business. Further, it also intends to extend a seamless credit facility to the underserved and unserved segment of society.

Under this scheme, SMEs can get access to credit facilities either in the form of term loans or working capital loans without the hassle of worrying about collateral or third-party guarantees to the lending institutions. The credit facilities extended under the CGTMSE scheme include-

Credit Guarantee Scheme (CGS)-

The CGS scheme offers guarantee cover for any existing as well as newly set-up SME units either engaged in the manufacturing or service sector covering a sum up to Rs. 500Lakhs or Rs.5Cr. to entrepreneurs from conventional lending institutions and guarantee cover offering collateral-free/third party guarantees.

Hybrid Security product-

This allows the loan sanction to SME business units with partial guarantee coverage enclosed under the CGS.

Nominal Guarantee Fee (AGF) –

AGF is nominal for small ticket loans for up to a sum of Rs. 10L but could be more depending upon the sum for instance a sum of Rs. 2cr to Rs. 5cr, chargeable up to 1.35% of the sum of the loan.

SME Financing Option – CGTMSE

Salient Features of CGTMSE Loan Scheme

1. Loan Amount – Under the CGTMSE loan scheme, a credit facility of up to Rs. 5cr. through member lending institutions could be enclosed for the SME industry (i.e. for certain RRBs and selected MLIs, the maximum sum of Rs. 50L).
2. Interest Rate – The applicable interest rate is levied as per the RBI directions.
3. Credit guarantee coverage – Under the scheme, a guarantee covering up to 75-85% would be included for term credit and outstanding capital advances, including interest.
4. Eligible member lending institutions – Under the scheme, 100+ financial institutions have been included encompassing banks, NBFCs, PSUs, RRBs, foreign banks, SUCBs, and SFBs.
5. Collateral requirements – The SME borrowers availing the scheme do not need any collateral or third-party guarantee.

Eligibility for CGTMSE Loan Scheme

As mentioned above, the CGTMSE loan scheme is eligible for all existing as well as newly set-up SMEs. However, all SME borrowers must fulfill the following eligibility criteria to avail of the scheme-

1. Category of Business – The business entity shall be engaged in either manufacturing, trading, or services, and not agriculture or self-help group activities.
2. Loan amount – The upper limit to avail the credit facility under this scheme is up to Rs.5cr.
3.  Business growth prospects and viability – The business shall be profitable and viable with promising growth prospects with a good track record.
4. No repayment defaults – The applicant SME borrower shall have a clean record of making timely repayments for any business loans taken previously with any lending institution.
5. UDYAM Registration – The SME applicant shall hold a UAM registration through the MSME Udyam Portal launched by the union Ministry for MSME.
6. Ineligibility – However, self-help groups, educational and training institutions, and agricultural activities are not eligible to make applications for loans under the CGTMSE loan scheme.

Procedure to make an application for loan under the CGTMSE Loan Scheme

An SME needs to adhere to certain procedures while applying for a loan under the CGTMSE scheme. Following is a list to make the application process easy to follow:

1. Collect Requisite Documents – First of all, gather crucial documents such as a certificate of incorporation or registration, annual reports, financial statements, annual reports, etc. We need to ensure that all legal and tax-related compliances are fulfilled.
2. Create a strong business plan – Next, you will be required to make a business plan or project report that will include all the details including the product/service offered, financials, sales projections, key management, business expansions, market research and strategies, etc. Once these documents are prepared and are ready to be reviewed, the borrower SME entity can go ahead with the application.
3. Lender Identification and Approval – Now, do a little research to identify lending institutions offering loans under the CGTMSE scheme. Once you are done, make an application along with the requisite documents. Like any other lender, the concerned bank/NBFC will verify and validate the contents of the SME applicant.
4. Approval and Loan Sanction – If your application is genuine and the lender is satisfied with your eligibility as per its lending policies, it will communicate the loan approval and also apply for the loan guarantee cover to the CGTMSE scheme. After receipt of guarantee approval from the CGTMSE loan authority, the SME shall be required to make payment of certain charges (service charge and guarantee fees including a risk premium).

Documentation and Submissions Required

• CGTMSE loan application complete with passport-size photo of the business owner;
• Certificate of Incorporation or Business Registration;
• Loan Guarantee coverage letter;
• Loan application acceptance letter from the lending institution;
• Any other specific documents required by the lending institution;

Benefits of the CGTMSE loan Scheme

• Collateral-free loans-Under the scheme, SMEs can access credit facilities and guarantee cover without any need for any collateral.
• Guarantee Free loans – In this type of loan the borrower doesn’t have to give any personal or bank guarantee to get a loan. When any bank or individual guarantees your loan, it means that, if you default, the lender can hold the guarantor responsible for fulfilling the terms and paying the loan. This type of loan offers borrowers the advantage of not risking personal assets in case of default.
• Variety of Loans available- SMEs could seek term loans or working capital loans or any other purposes such as purchasing assets, expansion of business units, etc. as per the business requirements within the prescribed limits.
• Streamlined processes- The process of loan application and disbursal has been made easier and effective for SMEs.

Conclusion

Therefore, the CGTMSE loan scheme is a lifesaver for SME industries which offers critical financial support and growth prospects. It acts as a cover against business uncertainties’ by assuring micro and small enterprises’ credit facilities. In other words, offering credit guarantees empowers SMEs to expand their business units and bring sustainability. BankKeeping can help your SME business in managing the loan journey and documentations with ease and expetise.