What is credit guarantee for MSE scheme?
Credit guarantee for MSE is scheme launched by government of India in the year 2000, where collateral free credit sanctioned by member lending institution (MLI), is backed by a trust ,which provides guarantee for a substantial portion of the loan amount. The scheme is aimed at facilitating the flow of credit to MSE sector and promote their growth. The MLI gives loan to an applicant under credit guarantee and the trust takes the guarantee of the loan.
The Applicant does not have to provide anything as collateral. Major portion of the loan gets covered by the scheme.
Corpus:
MSE Ministry of the Government of India and the Small Industries Development Bank Of India, jointly established a trust named Credit guarantee fund trust for micro and small Enterprises (CGTMSE) to implement the credit guarantee scheme.
The corpus of the trust is contributed by the GOI and SIDBI in ratio of 4:1 scheme offers credit guarantee to financial institution that offer credit facilities to MSEs, up to limit of Rs 5 crores.
What is the Need for Credit Guarantee to MSE?
MSE sector contributes to 45% of the country's total Exports (FY 2021-22 data) and employs about 1.3 crore people & contributes to about 30% of India’s GDP.
Banks are reluctant when it comes to lending to MSEs, since they are unsure about the MSE’s repayment capabilities Many MSE's who have potential for growth may not have the capability to fulfill the Collateral requirements of banks and could not scale up the operations.
These Issues in availability of timely and adequate credit at nominal interest rate is pivot reason hampering growth of MSE, which necessitated the requirement for credit guarantee.
Trust, by providing guarantees to lending Institutions and thereby covering a portion of the risk of default by borrowing MSEs, on one hand credit Guarantee lowers the lender's risk, and on other hand, it bridges the difficulty faced by performing MSEs in getting credit.
Eligible lending institutions:
- All scheduled commercial banks(PSU,private,foreign banks)
- Identified Regional Rural bank,
- selected State financial corporations
- Non banking financial companies
- Urban/State/District Co-operative banks,
- National small industries corporation,
- Micro finance institutions, Small finance bank and
- such other institutions notified by GOI from time to time
are eligible money lending institutions.
These eligible landing institutions will have to enter into one time agreement with CGTMSE trust for becoming member lending Institution.
Eligible credit facility & eligible activity for credit:
Credit facilities eligible for coverage under the scheme are
1) Term loans 2)Working capital facility, extended without any collateral or third party guarantee to MSE.
Activities eligible for guarantee cover under this scheme are Manufacturing, retail trade & services.
Credit to Educational and Training institutions, Agriculture and Self Help Group financing are not covered under this scheme. This scheme is also not applicable for credit that is given on basis of third party guarantee.
There is also another part of this scheme known as partial collateral security model, where MLIs can accept Collateral security for a portion of facility and the remaining portion of credit facility, up to a maximum of 5 crores can be covered under the scheme.
The MLI are to aid only viable proposals using their commercial discretion and due diligence. The trust will not re-evaluate the process sanctioned by MLIs again, while extending the credit guarantee, provided the basic norms under CGS are complied with.