Credit Guarantee Fund Trust for Micro and Small Enterprises – Meaning, Objective and “How to apply for Business loan under CGTMSE scheme?”

Introduction

Every Indian entrepreneur and business owner needs to be aware of and knowledgeable about the CGTMSE Scheme. The availability of an investment in the form of loan or equity is essential for starting and managing a firm, and the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) plan offers simple access to debt funding. This article will help entrepreneurs in gaining knowledge about CGTMSE Scheme, Objective of CGTMSE, and “How to apply for Business Loan under CGTMSE Scheme?”

Meaning of CGTMSE Scheme

The Government of India established the Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) under the auspices of the Ministry of Micro, Small and Medium Enterprise (MoMSME) and the Small Industries Development Bank of India (SIDBI). The CGTMSE scheme, which was introduced in 2000, provides credit guarantees to financial institutions that lend money to Micro and Small Enterprises (MSEs). The CGTMSE scheme provides MSEs all over India with credit guarantees ranging from 75% to 85%.

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

Availability of Bank credit without any Collaterals 

The availability of bank credit without the hassles of collateral or third-party guarantees would be a significant source of assistance to first-generation entrepreneurs in achieving their dream of establishing their own Micro and Small Enterprise unit.

With this goal in mind, the Ministry of Micro, Small, and Medium Enterprises (MSME), Government of India, launched the Credit Guarantee Scheme (CGS) to strengthen the credit delivery system and facilitate credit flow to the MSE sector.

 Hybrid Security

CGTMSE has launched a new “Hybrid Security” product with the objective of providing  guarantee coverage for the portion of the credit facility not covered by collateral security. The partial collateral security model allows MLIs (Member Lending Institutions) to obtain collateral security for a portion of the credit facility, while the remaining portion of the credit facility, up to a maximum of 200 lakh, can be covered by the CGTMSE Credit Guarantee Scheme. However, CGTMSE will have a pari-passu charge on both the primary security and the collateral security provided by the borrower for the credit facility.

Lender to prioritize project viability

The primary objective is for the lender to prioritize project viability and secure the credit facility solely on the primary security of the assets financed. The lender providing the guarantee should also make an effort to provide composite credit to the borrowers, so that they can obtain both term loan and working capital from a single agency. The Credit Guarantee Scheme (CGS) seeks to reassure lenders that, in the event of an MSE unit utilizing collateral-free credit facilities, the lender will be repaid.

Credit Guarantee under CGTMSE program

Any collateral / third party guarantee free credit facility (both fund and non fund based) extended by eligible institutions to new and existing Micro and Small Enterprises, including Service Enterprises, with a credit limit of INR 200 lakh is eligible for coverage.

The scheme provides guaranty coverage up to 50%, 75%, 80%, and 85% of the credit facility’s sanctioned amount. For micro enterprises with credit up to 5 lakh, the guaranty cover is 85%. The extent of guarantee cover is 50% of the credit facility sanctioned amount for credit ranging from 10 lakh to 100 lakh per MSE borrower for retail trade activity.

Guarantee coverage is 80% for (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 INR 50 lakh. In the event of a default, the Trust will settle the claim up to 75% of the amount in default of the credit facility extended by the lending institution for credit facilities up to INR 200 lakh.

How to apply for Business loan under CGTMSE scheme?

1. Business formation  

Before applying for a loan under the CGTMSE Scheme, form a Private Limited Company or LLP, or a One Person Company or Sole Proprietorship, according to the needs of the business, and obtain the necessary tax registrations and approvals for doing business / executing the project.

2. Prepare business plan report

Conduct a market analysis and create a business plan or project report that includes information such as a business model, promoter profile, projected financials, and so on. The main goal of the CGTMSE scheme is for banks to prioritize project viability or business model validation and secure loan facilities without the use of collateral. Thus, it is critical that the business plan or project report be prepared by professionals with prior experience.

3. Obtain Bank Loan Approval

Submit the business plan or project report to the necessary banks that provide loans under the CGTMSE Scheme and request bank loan sanction from the banks that provide loans under the CGTMSE Scheme. A bank loan request may include both a term loan and working capital facilities. The loan application will be processed and sanctioned in accordance with the bank’s policy.

4. Obtaining CGTMSE program

Once the bank loan is approved, the bank will apply to the CGTMSE organization to obtain CGTMSE scheme coverage for the loan. The loan will be under the CGTMSE scheme once approved by the CGTMSE organization, and the borrower will be required to pay the CGTMSE guarantee and CGTMSE service fee.

FAQs on Credit Guaranty Fund Trust for Micro and Small Enterprise

1. Is it possible for Small Road Transport Operator loans to be covered by the Scheme?

Yes. Small loans for road and water transportation are eligible for guaranty coverage under CGTMSE Program.

2. Which types of borrowers are eligible for the Scheme?

Micro and Small Enterprises, both new and existing, engaged in manufacturing or service activity are eligible for the scheme.

3. Is it necessary for a borrower to obtain all of the necessary credit facilities from a single institution in order to be eligible?

Credit facilities can be extended jointly and/or separately by more than one bank and/or financial institution to eligible borrowers up to a maximum limit of 200 lakh per borrower subject to the ceiling amount of individual MLIs (Member Lending Institutions) or such amount as the Trust may specify. However, the sharing of securities will be prohibited.