Course: Credit Management (Module II: Credit Operations) NIBM, Pune

Module II: Credit Operations

Chapter 5: Credit Guarantee Fund Trust Scheme for Micro and Small
Enterprises

Dr M. Manickaraj and Dr K. Ramesha

Objective
Lack of institutional credit to small enterprises is a matter of serious concern for
governments across the globe. Credit guarantee is an enabler of enhancing the flow of
institutional credit to micro and small enterprises (MSEs) and many countries have
established credit guarantee schemes for the purpose. The objective of this lesson is to
make the readers become familiar with the fundamental concepts of credit guarantee and
the operational details of CGTMSE scheme in India.

Structure

1. Introduction to credit guarantee

2. Meaning of credit guarantee
3. Types of credit guarantees
4. Merits and demerits of credit guarantees
5. Credit guarantee for MSEs in India
5.1. Definitions under CGTMSE
5.2. Eligibility
5.3. Responsibilities of lending institutions under the scheme
5.4. Maximum risk cover
5.5. Fees for the guarantee
5.6. Claims and settlement
5.7. Appropriation of residual recovery
6. Steps to be followed for covering MSME accounts under CGTMSE
7. Summary

1. Introduction
In India and in most other developing countries, flow of credit from formal credit
institutions including banks and financial institutions is not up to the expectations. In fact,
the flow of credit to the micro enterprises is declining. More often banks cite lack of
adequate collateral as a reason for not providing credit to MSEs.

Generally, most of the new entrepreneurs do not have adequate capital to start a business
nor tangible assets to be provided as collateral for credit. Technical knowledge and
experience are the only resource they bring in while starting a business enterprise. Existing
MSEs too do not have adequate tangible assets to be offered as collateral. It must be noted
that MSEs in general are labour intensive in nature and hence provide employment to large
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number of people. As such, the value of fixed assets which can be provided as collateral will
be quite less. Lack of adequate collateral thus is an inherent characteristic of MSEs. However,
the level of current assets will be very high. Existing MSEs hence would need largely
working capital support from banks. Banks do not accept current assets as reliable security
and hence insist on fixed assets to be offered as collateral. Lack of collateral thus is a big
barrier in channeling adequate credit to the MSE sector. Realizing this, many countries have
established credit guarantee schemes for enabling flow of institutional credit to MSEs.

2. Meaning of Credit Guarantee

Credit guarantee is a guarantee given to a lender that he will be compensated if a
borrower fails to repay debt taken from him. In case a borrower becomes insolvent or
bankrupt, the lender can demand the payment of principal and interest from the company
who gave credit guarantee. Credit guarantee thus will act as collateral for loans and will
help many small entrepreneurs to avail credit from banks. To the lenders credit guarantee
is insurance for covering the risk of bad debts. Guarantee against loans given by a credit
guarantee organization hence will ward off the fear amongst the lenders about the risk of
default. This will motivate the banks to come forward to lend money to MSEs more
willingly.

3. Types of Credit Guarantees

Credit guarantee schemes in different countries vary in terms of funding, eligibility of
loans, approval process, etc. Various types of credit guarantee schemes are discussed
hereunder.

Direct and indirect guarantees: A guarantee fund in general may be established by a

sponsor/donor and guarantees will be provided and claims will be settled from out of
this fund. In many countries, government provides the capital for creation of the fund. In
some countries central bank of the country provides the capital. The donor, however, may
or may not be involved in managing the fund and the scheme. Under direct guarantees,
the donor will directly be involved in providing guarantee and settling claims. Under
indirect schemes, the donor will appoint a third party who will manage the fund and the
involvement of the donor in operating the fund will be minimal. In India, the Government
of India is the donor for the CGTMSE and it has been created as a separate entity. The
Government of India has chosen the indirect model and is not directly involved in
managing CGTMSE.

Funded and unfunded schemes: Funds necessary for credit guarantee can be provided
either by a donor like the Government or jointly by lending institutions. In some countries
central banks provide the capital for such funds. Funded credit guarantee

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schemes are the ones which are created with the capital provided by government or
central bank. If the lending institutions or any other party create the fund it will be called
as unfunded scheme.

Individual and portfolio models: Under individual model loan accounts are presented for
guaranteeing and the fund provides guarantee to each account/borrower separately. The
fee payable to the guarantee fund may be paid by the individual borrowers directly to the
fund. Alternatively, the lending institution can collect the fees from the borrowers and
then remit the same to the fund. The lending institution paying the guarantee fees and
then collecting the same from the borrower also is in practice. In some cases, the lending
institution may bear the cost of credit guarantee. Coverage under CGTMSE is based on
individual loan model.

Portfolio model is entirely different from the individual model. Instead of covering the risk
of individual loan accounts lending institutions can take guarantee for a defined portfolio.
For instance, a bank can take guarantee cover for their entire MSE loan portfolio instead
of taking guarantee for individual accounts. Under this model the lending institution will
negotiate with the guarantee fund and will reach the terms and conditions of guarantee
including the fee for guarantee. As such the lending institution will have to pay the fee to
the fund. The fee may in turn be collected from the individual borrowers explicitly or
implicitly. That is the fee can be collected from the borrowers as guarantee fee separately
or the cost involved in the guarantee cover can be loaded on to the interest or other charges
collectible from the borrowers. Credit gurantee offered by NCGTC for PMMY loans,
Standup India Scheme Loans, Education Loan are based on portfolio model.

Open and targeted schemes: Open scheme is one which is open to all types of borrowers.
On the other hand, targeted schemes are meant for a particular type of borrowers. For
example, CGTMSE in India is an open scheme under which risk of loan to any MSE can be
covered. Supposing the scheme is meant for women entrepreneurs or entrepreneurs from
weaker sections the scheme can be called as a targeted scheme.

Ex-ante and ex-post schemes: These schemes differ with respect to the timing of
obtaining guarantee and loan approval. A borrower can approach the credit guarantee
fund, obtain a letter of guarantee for the loan he is in need of and then may approach a
participating lending institution for loan. It is an ex-ante guarantee. Under the scheme it may
so happen the lending institution may find the project or the borrower is not credit worthy
and hence may not offer credit.

Under ex-post guarantee a borrower approaches a lending institution first and the lender
finds the borrower to be credit worthy and is ready to lend. Later, the lending institution
or the borrower can approach the guarantee scheme for guarantee cover. In this case, the
lending institution may be ready to provide credit but the guarantee scheme may refuse
to provide guarantee.

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Intermediary models: Banks find lending to small customers, particularly, to micro

enterprises is highly risky. Moreover, managing large number of small accounts will be
tedious and costly for them. Therefore, they may provide loans to NBFCs which in turn will
lend the money to the micro enterprises. NBFCs specializing in financing micro
enterprises would have the expertise in dealing with such customers and may follow
business models specially designed for the purpose and hence transaction cost would be
less. Under such arrangements, the banks may take guarantee cover for the loans given
to the NBFC and not on loans to individual borrowers.

4. Merits and demerits of credit guarantee

There are many arguments both in favour of and against credit guarantees. The merits and
demerits of credit guarantees are discussed below.

4.1 Merits

i. Improving access to credit from formal credit institutions: The prime objective of
any credit guarantee scheme is to improve the flow of credit from banks to sectors
and sections of the society who otherwise are not able to avail institutional credit.
The lending institutions are not interested in providing credit to certain sectors
like MSEs because of high risk involved and lack of collateral. Credit guarantee
helps in breaking this barrier and encourages banks to lend to such sectors.

ii. Enables new entrepreneurs to avail credit: The risk of financing new entrepreneurs
cannot easily be assessed due to lack of track record and credit history. Moreover,
new entrepreneurs would not be able to provide adequate collateral to the
lenders. Credit guarantee ensures recovery of such loans for the banks and hence
the banks would come forward to finance new entrepreneurs and new ventures.

iii. Hassle free recovering of loans: In case of default by borrowers banks will have to
recover their dues by selling the collaterals which may involve hassles and legal
delays. Besides, market value of collaterals under distress situations may decline
substantially and the proceeds from the sale may turn out to be much lower than the
outstanding loan amount. Guarantee cover, therefore, might be preferable to
collateral.

iv. Changing the risk perception of bankers: Banks are reluctant to lend money to
MSEs mainly because of high perceived risk. Credit guarantee can reduce lenders’
reluctance and perception towards risk in lending to MSEs and will enable
increased flow of credit to MSEs.

v. Increasing the reach of bank credit: In the absence of credit guarantee scheme
many small entrepreneurs, particularly new entrepreneurs, would not have
availed credit. Credit guarantee thus helps increase the reach of bank credit to
many new customers.

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4.2 Demerits

i. Creates excess demand for credit: The existence of credit guarantee schemes may
probably motivate many entrepreneurs to avail credit often in excess of their
requirement. It may also encourage borrowers to avail credit beyond their
repaying capacity. Banks too are motivated to provide more and more credit
because of the risk cover available under the scheme. The scheme may also
encourage lending to high risk borrowers and high risk projects. This tendency is
likely to create systemic risk. That is, the credit guarantee is likely to have a
ballooning effect on credit portfolios of banks and exposure to high risk customers.
As the MSEs are highly vulnerable to adverse economic conditions and other
factors many customers would default at a time. Credit guarantee funds may not
be able to settle the claims of banks under such situations leading to the failure of
credit guarantee scheme itself.

ii. Do not really improve flow of credit: Source of credit is just a matter of choice.
Entrepreneurs can borrow money from alternative sources including banks,
NBFCs, money lenders or friends and relatives. They may prefer to borrow from
banks. If bank credit is not available they would borrow from other sources. In
effect, credit guarantee need not necessarily improve the flow of credit.

iii. Dependence on lenders for guarantee decisions: Credit guarantee funds do not
generally have qualified and experienced officials who can do credit appraisal.
Therefore, credit guarantees are given based on lenders’ recommendations.

iv. Moral hazard: Credit guarantees may spoil the credit culture on both the sides of
credit – borrowers as well as lenders. Borrowers may not be serious in repaying
the loans because of the guarantee. Lenders, on the other hand, may lend to high risk
customers who may have high propensity to default. Besides, lenders may not
initiate appropriate measures to recover loans from the borrowers and may not
take steps for recovery on time.

v. Credit guarantee schemes are not sustainable: Pricing of guarantees and claims
arising due to default of borrowers will ultimately decide the viability and
sustainability of any guarantee scheme. On the one hand, guarantee fees have to be
lower enough to attract more loans to be covered under the guarantee scheme. At
the same time, the income from fees should be adequate enough to cover the
claims and operating costs of the scheme. If the scheme should grow in size it should
necessarily make profits. Credit guarantee schemes in many countries have failed
to survive because of subsidised pricing of guarantees, inefficiencies and due to
problems like moral hazard.

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vi. Guarantee is not really required: Often cited reason for banks not extending loans to
MSEs is high risk. One way of covering the risk is collateral. Another is pricing loans
appropriately that would cover the risk cost as well. Therefore, if the risk of default
which may be high or low can be covered by pricing loans there is no need for
guarantee.

vii. Credit guarantee is not the right approach for increasing flow of credit: Some
detractors opine that if the purpose of credit guarantee schemes is to increase the
flow of funds to a target sector like MSEs the better option is to create specialized
lending institutions. They argue that if the capital invested in a credit guarantee
fund is used for creation and operation of a lending institution that would help
channel funds to the target sector more effectively than by providing guarantee.

5. Credit Guarantee for MSEs in India

In India too lack of collateral remains a barrier between the banks and MSEs in
providing/availing credit. There was an increasing demand from several quarters that the
government shall intervene to solve the problem so that flow of bank credit to the sector
can be improved. Government of India created a fund jointly with Small Industries
Development Bank of India (SIDBI) under the name “Credit Guarantee Fund Trust Scheme
for Micro and Small Enterprises (CGTMSE)” for providing insurance for the loans provided
by banks to MSEs which could not provide collateral. The fund became operational from
August 1, 2000.

The main objective of CGTMSE is to bring about a transformation in banks' lending to MSEs
by providing support and incorporating confidence building measures in its operations
to make collateral-free lending to MSEs the most preferred and profitable option. Another
major objective of the scheme is to facilitate securitization of the loans guaranteed by the
Trust (CGTMSE). Keeping in view the securitization models operated by the Small Business
Administration of USA and in other developed countries, the Trust has plans to facilitate
securitization of guaranteed loans. It has also plans to create a secondary market for the
securitized loans in order to facilitate trading in these securities in the secondary debt
market.

5.1 Definitions under CGTMSE

Understanding the definition and meaning of various terms under the scheme is very
important for understanding the operational issues in taking guarantee cover under
CGTMSE. Definitions of various key terms and terminologies under the scheme are as
follows:

i. Amount in Default means the principal and interest amount outstanding in the
account(s) of the borrower in respect of term loan and amount of outstanding
working capital facilities (including interest), as on the date of the account
becoming NPA, or the date of lodgment of claim application whichever is lower

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or such of the date as may be specified by CGTMSE for preferring any claim against
the guarantee cover subject to a maximum of amount Guaranteed.

ii. Collateral security means the security provided in addition to the primary security
in connection with the credit facility extended by a lending institution to a borrower.

iii. Credit facility means any financial assistance by way of term loan and / or fund
based and non-fund based working capital (e.g. Bank Guarantee, Letter of credit
etc.) facilities extended by the lending institution to the eligible borrower. For the
purpose of calculation of guarantee fee, the "credit facility extended" shall mean the
amount of financial assistance committed by the lending institution to the
borrower, whether disbursed or not. For the purpose of the calculation of service
fee, the credit facility extended shall mean the credit facilities (both fund and non-
fund based) covered under the guarantee and for which guarantee fee has been
paid, as at March 31, of the relevant year.

iv. Eligible borrower means new or existing MSEs to which credit facility has been
provided by a lending institution without any collateral security and/or third
party guarantees.

However, a “Hybrid / Partial Collateral Security” allowing guarantee cover on

credit facilities having collateral security, for the portion of credit facility not
covered by collateral security (unsecured portion), has also been introduced by
CGTMSE. In the partial collateral security model, the MLIs will be allowed to obtain
collateral security for a part of the credit facility, whereas the remaining part of
the credit facility, can be covered under Credit Guarantee Scheme of CGTMSE.

v. Guarantee Cover means maximum cover available per eligible borrower. That is
the maximum amount in default covered under the guarantee in respect of the
credit facility extended by the lending institution to the borrower.

vi. Lending institution(s) means a commercial bank, for the time being included in the
second Schedule to the Reserve Bank of India Act, 1934, and Regional Rural Banks,
NBFCs and Small Finance Banks as may be specified by the Trust from time to time,
or any other institution(s) as may be directed by the Government of India from time
to time. The Trust may, on review of performance, remove any of the lending
institutions from the list of eligible institutions.

vii. Material date means the date on which the guarantee fee on the amount covered in
respect of an eligible borrower becomes payable by the Member lending
institution to the Trust.

viii. Non-Performing Assets means an asset classified as non-performing based on the

instructions and guidelines issued by the Reserve Bank of India from time to time.
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ix. Primary security in respect of a credit facility shall mean the assets created out of
the credit facility so extended and/or existing unencumbered assets which are
directly associated with the project or business for which the credit facility has
been extended.

x. "Scheme" means the Credit Guarantee Fund Scheme for Micro and Small Enterprises

xi. Tenure of guarantee cover: The maximum period of guarantee cover shall run
through the agreed tenure of the term credit and for a period of 5 years or block
of a 5 years from Guarantee start date where working capital facilities alone are
extended or loan termination date, whichever is earlier or such period as may be
specified by the Trust.

xii. "Third Party Guarantee" means any guarantee obtained by a Member Lending
Institution in connection with the credit facility extended by it to a borrower
except from proprietor in case of Sole Proprietorship concern, Partners in case of
partnership firms / limited liability partnerships, Trustees in case of Trusts, Karta
& Coparceners in case of HUFs and promoter directors in case of private/ public
limited companies and owner of the immovable property in case of guarantee
under Hybrid / Partial collateral security model.

5.2 Eligibility

Eligible Lending Institutions: CGTMSE operates the credit guarantee scheme through
members which have entered into an agreement with it. These members are called the
member lending institutions (MLIs).

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(As number of MLIs available in the website)

Eligible Borrowers: All micro and small enterprises as per MSMED Act, 2006 are eligible to
be covered under CGTMSE. Both manufacturing and service enterprises falling under MSE
category are eligible.

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);(ii) not exceeding ₹200
lakh (Scheduled Commercial Banks, select Financial Institutions and Non-Banking
Financial Companies (NBFCs); (iii)not exceeding ₹200 lakh for Small Finance Banks
(SFBs)byway 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.

CGTMSE has extended credit guarantee for loans to Retail Traders for fresh credit
facilities upto ₹100 lakh by MLIs. (Refer Circular No.141 / 2017-18 dated February 28,
2018). CGTMSE has also introduced a new “Hybrid Security” product where the MLIs will
be allowed to obtain collateral security for a part of the credit facility and the unsecured
part of the credit facility, upto a maximum of ₹200 lakh, can be covered under CGS-I.
CGTMSE will, however, have pari-passu charge on the primary security as well as on the
collateral security provided by the borrower for the credit facilities. Under the hybrid
security product, there is no requirement for MLIs to create security / charge in favour of
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CGTMSE by way of legal documentation. (Refer Circular No.142A, 142B / 2017-18 dated
February 28, 2018 and June 11, 2018 respectively; CGTMSE ref No:44/391
dt.31.10.2018).

Time limit for obtaining guarantee: Application for guarantee cover shall be made prior
to the expiry of following quarter from the quarter in which the credit facilities were
sanctioned. For example, if credit limits were sanctioned to a customer during April- June
quarter the MLI shall apply for guarantee cover before end of July-September quarter (i.e.
on or before September 30).

Provided further that, as on the material date

i. Credit facility is standard and regular (not SMA) as per RBI guidelines (refer
Circular No. 151/2018-19 dated July 12, 2018); and / or
ii. The business or activity of the borrower for which the credit facility was granted
has not ceased; and / or
iii. The credit facility has not wholly or partly been utilised for adjustment of any
debts deemed bad or doubtful of recovery, without obtaining a prior consent in
this regard from the Trust.

Loans under multiple banking: Credit facilities extended by more than one bank and/or
financial institution jointly and/or separately to eligible borrowers up to a maximum of
Rs.200 lakh per borrower subject to ceiling amount of individual MLI or such amount as
may be specified by the Trust are also eligible.

Credit facilities not eligible under the Scheme:

The following credit facilities are not eligible for guarantee under CGTMSE:

i. Any credit facility in respect of which risks are additionally covered under a
scheme operated / administered by Deposit Insurance and Credit Guarantee
Corporation or the Reserve Bank of India, to the extent they are so covered.
ii. Any credit facility in respect of which risks are additionally covered by
Government or by any general insurer or any other person or association of
persons carrying on the business of insurance, guarantee or indemnity, to the
extent they are so covered.
iii. Any loan upto ₹10 lakh to Micro Enterprises shall not be eligible for credit guarantee
under the Scheme if the said credit facility has been covered under MUDRA
Guarantee Scheme of NCGTC Ltd. (Refer CGTMSE Circular No.117/2016-17 dated
November 10, 2016)
iv. Any credit facility, which does not conform to, or is in any way inconsistent with the
provisions of any law or with any directives or instructions issued by the Central
Government or the Reserve Bank of India, which may, for the time being, be in force.
v. Any credit facility granted to any borrower, who has availed himself of any other
credit facility covered under this scheme or under the schemes mentioned in
clause (i), (ii) and (iii) above, and where the lending institution has invoked the
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guarantee provided by the Trust or under the schemes mentioned in clause (i),
(ii) and (iii) above, but has not repaid any portion of the amount due to the Trust or
under the schemes mentioned in clause (i), (ii) and (iii) above, as the case may be,
by reason of any default on the part of the borrower in respect of that credit
facility.
vi. Any credit facility which has been sanctioned by the lending institution against
collateral security and / or third party guarantee. However, after the introduction
of Hybrid Security Model, MLIs can cover the unsecured part of the loan under
CGTMSE.

vii. Any credit facility which has been sanctioned by the lending institution (scheduled
commercial banks, selected financial institutions and RRBs) with interest rate not
more than 14% p.a. including cost of credit guarantee would be eligible for
coverage under CGS (Refer Circular No.121/2016-17dated January 09, 2017 and
131/2016-17 dated July 21, 2017).

5.3 Responsibilities of lending institutions under the scheme

The MLIs are supposed to follow all the prudential practices with respect to the loan
accounts covered under CGTMSE. The responsibilities of MLIs specified under the scheme
are as under.

iv. The lending institution shall evaluate credit applications by using prudent banking
judgment and shall use their business discretion / due diligence in selecting
commercially viable proposals and conduct the account(s) of the borrowers with
normal banking prudence.
v. The lending institution shall closely monitor the borrower account.
vi. The lending institution shall safeguard the primary securities taken from the
borrower in respect of the credit facility in good and enforceable condition.
vii. 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.
viii. 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.
ix. 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

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institution shall be bound to comply with such directions.

x. 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

5.3 Maximum Risk Cover

The CGTMSE shall provide guarantee cover as under for loans sanctioned on or after April
01, 2018 (Refer Circular No.140/2017-18 dated February 28, 2018):

Table 1: Details of Guarantee Cover under CGTMSE for loans covered from 01.04.2018
Maximum Guarantee Cover
Category Upto ₹ 5 lakh Above Rs.5 Above ₹ 50 lakh upto
lakh upto ₹ 200 lakh
₹50 lakh
Micro Enterprises 85% of the 75% of the
amount in amount in
default subject default subject
to a maximum to a maximum
75 % of amount in
Of ₹4.25 lakh Of ₹ 37.50 lakh
default subject to a
Women 80% of the amount in default
maximum of ₹150 lakh
entrepreneurs/ Units subject to a maximum of ₹40
located in North East lakh.
Region (including
Sikkim)

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MSE Retail Trade 50% of the amount in default subject to a maximum of

(from ₹10 lakh upto ₹ 50 lakh.
₹100 lakh)

All other category of 75% of the amount in default subject to a maximum of ₹

borrowers 37.50 lakh

All proposals for sanction of guarantee approvals for credit facilities above ₹50 lakh upto
₹200 lakh will have to be rated internally by the MLI and should be of investment grade.

Period of Cover: The guarantee cover will commence from the guarantee start date and
shall run through the agreed tenure of the term credit in respect of term credit /
composite credit. Where working capital alone is extended to the eligible borrower, the
guarantee cover shall be for a period of 5 years or a block of 5 years, keeping maximum
period of guarantee cover of 10 years or for such period as may be specified by the trust
in this behalf (Refer Circular No. 149/2018-19 dated June 07, 2018).

Eligible amounts for claim under the scheme: Of the credit facilities extended by MLIs, the
Trust shall guarantee, in case of default by the borrower, up to 75 per cent (85% for select
category of borrowers), of the defaulted principal amount in respect of term credit
including interest on principal and / or outstanding working capital advances (inclusive
of interest), as on the date of account becoming NPA, or as on the date of or the date of
lodgment of claim application whichever is lower. Other charges such as penal interest,
commitment charge, service charge, or any other levies/ expenses shall not qualify for the
guarantee cover.

Rehabilitation assistance: For the unit covered under CGTMSE and becoming sick due to
factors beyond the control of management, assistance for rehabilitation extended by the
lender could also be covered under the scheme (CGTMSE/(44)/1236/ dt May 12, 2014.
This condition is not specified in the current Master circular)

5.4 Fees for the Guarantee

Two types of fees are payable to the trust including the guarantee fee which is payable
upfront and service fee which is payable every year during the currency of the guarantee.
The annual service fee is to be paid by the MLI on or before 31st May of that year. The fees
payable for different credit limits and different regions are hereunder. (The Trust
reserves the right to revise the guarantee fee / annual service fee from time to
time.).please check

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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 on or
after April 01, 2018.

In case of term loans, AGF would be calculated on outstanding amount as on 31st December
against each loan account and for working capital AGF would be calculated on maximum
(peak) working capital limit availed by the borrower during the previous calendar year. For
cases covered under Hybrid Security Model Guarantee fee will be charged on the
guaranteed amount for the first year and on the proportionate outstanding amount
subsequently. Additional risk premium of 15% will be charged on the applicable rate to
MLIs who exceed the payout threshold limit of 2 times more than thrice in last 5 years. This
premium will be applicable for all loans irrespective of the sanction date.
The guarantee fee and / or annual service fee once paid by the lending institution to the
Trust is non-refundable.

Charging of Annual Service Fee (ASF) / Annual Guarantee Fee (AGF) at differential rates
depending upon NPA levels/ Claim Payout ratio of MLIs

MLIs have the discretion to decide about passing on the incidence of Guarantee Fee and
Annual Service Fee to the borrower or alternatively they may bear it themselves.

Guarantee fee for the first year shall be paid to the Trust within 30 days from the date of
first disbursement of the loan (not applicable for Working capital) or 30 days from the date
of Demand Advice (CGDAN) of guarantee fee whichever is later or such date as specified by
the Trust. The Annual Guarantee fee for subsequent years shall be paid at specified rate on
or before 15th April each year or any other specified date by CGTMSE.

5.5 Claims & Settlement

Lock-in-period: Prior to preferring any claim on the Trust, there shall be a lock-in-period of
18 months from either the date of last disbursement of loan to the borrower or the date
of the guarantee cover coming into force in respect of the particular credit facility,
whichever is later.
The MLIs should prefer a claim on the defaulted account immediately after recall of loan.
They should also initiate recovery proceedings by way of legal action as specified by the
Trust from time to time.
The lending institution may invoke the guarantee in within a period of 3 years from the
NPA date or lock-in period whichever is later, if the NPA date is on or after 15/03/2018
(Refer Circular No.145/2017-18 dated March 15, 2018). For NPAs prior to 15/03/2018,
time period for claim lodgment will be 1 year for cases sanctioned prior to 01/01/2013
and 2 years for cases sanctioned after 01/01/2013

Settlement of claim: The Trust will honour 75 per cent of the eligible claim within 30 days
of receiving the claim. The balance 25 per cent will be paid on conclusion of recovery
proceedings by the MLI.
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Who can file the claims: Operating offices of MLIs only can file the claims against the Trust.
The Guarantee Claims received directly from the branches or offices other than respective
operating offices of MLIs will not be entertained.

5.6 Appropriation of Residual Recovery

In case of default, the lenders would exercise the right to take over the assets. However, the
Trust would have the priority in appropriation of sale of assets by the lenders before
making the final settlement of the claim. Therefore, the amount realised from the sale of
assets (residual recovery) must first be credited in full by the lenders to the Trust before
they can finally claim the remaining 25 per cent of the default / guaranteed cap amount.

Steps to be followed for covering MSME accounts under CGTMSE

Before covering a loan account under CGTMSE the following steps have to be taken:

i. Check whether the account is a micro or small enterprise as defined by the

MSMED Act. CGTMSE is not available for Self Help Groups, Educational
Institutions, Joint Liability Group.
ii. Coverage is available for ₹ 200 lakhs to a borrower from the banking system as a
whole. Search facility using ITPAN was introduced vide Circular No.
136/2017-18 dated December 19, 2017. The information on total exposure of the
borrower under CGTMSE and status of the account (NPA/Standard) are made
available to the MLIs for a fee.
iii. Audited financial statements are normally insisted for accounts with loans
above Rs.10 lakhs.
iv. In case of others Entrepreneur Memorandum issued by District Industries
Centre can be relied upon. It is a one page format for small entrepreneur to
apply for and get the certification from DIC.
v. ZED (Zero Defect Zero Effect) rating is also available for MSME industries.
(https://www.zed.org.in)
vi. The branch after fulfilling the above conditions, upload the application for
guarantee if they are provided with access to the software for CGTMSE
coverage. If the account is processed in Loan Automation System (LAS) then the
application is generated by the LAS system itself but still gaps, if any, need to be
filled. Otherwise a physical application should be forwarded to the concerned
Regional Office of the lending institution.
vii. Since the minimum authority is Regional Office (RO) of banks for all
communications with the CGTMSE, the Technical Officer in the ROs will check the
details at their end for all accounts opened during each quarter.
viii. Loan accounts opened in a quarter has to be covered under the CGTMSE before
the end of next quarter under. For instance, accounts opened between 1st
January and 31st March have to be covered before 30th June.
ix. Once the account is accepted for coverage under CGTMSE scheme then CGPAN
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account number is allocated to the account. CGPAN number is the

identification for the accounts. The same is communicated to the branches by
Regional Office subsequently.
x. Once the CGPAN is allocated then the annual guarantee fee is to be paid by the
branch.
xi. Normally there should not be any collateral upto Rs.200 lakhs and any third
party guarantee for the accounts covered under CGTMSE scheme.
xii. Annual Service Fee is to be paid by the branches.
xiii. CGTMSE policy taken for Term Loan account should be informed to other
banks at the time of takeover of the account.

6. Summary

Micro and small enterprises find it difficult to avail credit from formal credit institutions like
commercial banks. One major reason for the bankers’ reluctance to lend money to MSEs is
lack of collateral. Credit guarantee is a substitute for tangible collateral and provides
insurance for credit risk. Many nations across the globe have established credit guarantee
corporations in order to enable the MSEs to borrow from commercial banks and other
lending institutions. There are different types of credit guarantee schemes differing in
terms of management, source of capital, type of guarantee cover, target beneficiaries and
the like. The types of schemes include the schemes managed
directly or indirectly by the provider of capital to the scheme, guarantee to individual loan
accounts or portfolio of loans, ex-ante and ex-post guarantee and guaranteeing loans
provided to intermediaries than guaranteeing loans to ultimate borrowers.

Credit guarantee schemes offer many benefits like improving the flow of credit to the
target sector, enabling new entrepreneurs to avail credit from banks, hassle free recovery
of loans, motivating banks to provide credit to MSEs and increasing the reach of bank
credit. There are some arguments which are against credit guarantees. They are creating
excessive demand for credit, moral hazard, credit guarantees do not yield profits and
hence are not sustainable, alternative approaches for improving the flow of credit which
are more efficient than credit guarantees, etc.

CGTMSE is the organization established by the Government of India jointly with SIDBI for
the purpose of providing credit guarantee to banks for loans provided to MSEs.
Commercial banks, RRBs and financial institutions like SIDBI, NSIC and NEDFi which have
signed an agreement with the CGTMSE are eligible for availing credit guarantee. They are
called MLIs. All MSEs as per the MSMED Act 2006 are the eligible borrowers under the
scheme. Both term loans as well as working capital credit facilities provided to the MSEs
can be covered. The eligible loan size including term loans, fund based working capital
credit and non-fund based working capital credit per borrower is Rs. 200 lakh. The fees
payable to the CGTMSE includes a onetime fee payable upfront and annual service fee. The
fee can be borne by the MLI or can be collected from the borrowers. The MLIs are
supposed to follow all the prudential norms with respect to the accounts covered under
the scheme. If any borrower defaults despite best efforts of the lender CGTMSE will
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compensate the loss as per the norms.

The CGTMSE was established in the year 2000 and the pickup for the scheme was very slow
during the first five years. Thereafter it has picked up well and as of January 2010 a
cumulative total of about 264,000 MSE loan accounts have been guaranteed. Still, there is
great scope for scaling up the business of lending to MSEs by availing the benefit of credit
guarantee under the scheme.

Reference

 RBI (2010), Report of the Working Group to Review the Credit Guarantee Scheme
of the Credit Guarantee Fund Trust Scheme for Micro and Small Enterprises
(available at www.rbi.org.in)

 Navajas, Alvaro Ruiz (2001), Credit Guarantee Schemes: Conceptual Frame,

Financial System Development Project, GTZ/FONDESIF

 (www.cgtmse.in)

 Master circular dated CGTMSE Ref. No. / 44 dt. August 21, 2018

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