Credit Guarantee Fund Trust for Micro and Small Enterprises  – A Review

Introduction:

Credit Guarantee Fund for Micro and Small Enterprises (CGTMSE) organisation was set up jointly by Ministry of Micro, Small and Medium Enterprises (MSMEs), Government of India (GOI) and Small Industries Development Bank of India (SIDBI) in August 2000 to facilitate an access to institutional finance to first generation entrepreneurs and underprivileged section of the society. The CGTMSE scheme has been modified from time to time for ease of operations, enhancement of credit flow to a Micro and Small Entrepreneur (MSE) sector and to meet their requirements of such enterprises as well as lending institutions. The recent update of the scheme was made in April 2025. Generally, MSEs lack to offer collateral security and/or third-party guarantee to the lending institutions. Therefore, the Credit Guarantee Scheme of the CGTMSE is found to be a successful tool in facilitating MSEs to get the access to formal credit sources. But, it is necessary to strengthen efforts to reorient the lenders’ perspective from the age old collateral based lending to project viability, instil confidence on the part of their credit officers and branch managers and encourage to enhance the credit flow to MSEs, backed by a comfort of guarantee cover from CGTMSE. Further, while India is proposing to become a developed nation by 2030, MSEs will also have a key role to play in generating employment particularly in the backward regions. Because, CGTMSE is expected to continue to be responsive and proactive in meeting their credit needs. In this article, it is attempted to make an overview of the CGTMSE scheme and offer suggestions.

Benefits of Guarantee Cover:

There are several benefits of the guarantee cover which include: (i) By extending credit guarantee to the lending institutions, it would be possible to step up the credit flow to the MSE sector. (ii) By providing the guarantee cover to the lending institutions and covering part of the default risk, credit institutions shall lower their credit risk with the guarantee cover loan default. (iii) By ensuring the guarantee cover for a certain percentage of the financial institutions’ loan portfolio, the capital adequacy requirements against the portion of the guaranteed loan portfolio get correspondingly decline. Consequently this leads to institutional credit enhancement in the economy. (iv). Since the entire risk of default is partly borne by the lending institutions after the provision of credit guarantee, these need not have to charge a higher interest rate to take care of the risk associated with lending to the MSEs .By  just paying a nominal guarantee fee for  credit guarantee, it allows the lending institutions to extend loans at a cheaper rate to MSEs. (v)The scheme covers multiple sectors including manufacturing, trading, service, and more businesses. (vi)The guarantee cover is extended to a loan up to Rs.10 crore to help the enterprises to grow, invest in equipment, or meet working capital needs. (viii) Special support is provided for Women & SC/ST entrepreneurs and those businesses set up in the backward regions. Lastly, (ix) Due to the present arrangement of sufficient funding by the Government towards the guarantee  scheme, the MSE sector would increase production and boost for employment.

Extent of Guarantee Cover:

As per the recent update of CGTMSE guidelines, 2025, the Trust covers both Fund based and/or Non fund based credit facilities extended by a Member Lending Institution (MLI) to a single eligible borrower in the MSE sector.  To avail of guarantee cover, the credit facilities from MLIs wise are: (i) not exceeding Rs.10 crore (Public Sector Banks, Private Sector Banks, Foreign Banks, select Financial Institutions); (ii) not exceeding Rs. 200 lakh (Small Finance Banks -SFBs, Regional Rural Banks – RRBs, State Financial Institutions and Urban Co-operative Banks – UCBs, State Co-operative Banks and District Central Co-operative Banks – DCCBs (iii) not exceeding Rs. 50 lakh (Microfinance Institutions). Credit facilities also include  term loan  working capital facilities, without any collateral security and/or third party guarantees or such amount as may be decided by the Trust from time to time. The CGTMSE offers guaranteed coverage in the range of 75-85 % for loans . And, in case of MSEs in the North East Region (NER), Ladakh and Jammu & Kashmir seeking bank loan up to Rs. 5 lakh and above Rs. 5 Lakh, the guarantee cover is available is up to 80 % and 75 % respectively.  For Micro enterprises, the cover is 85% and  75%  for loan up to Rs. 5 lakh and above Rs. 5 lakh respectively. Similarly for Women Entrepreneurs, SC/ST Entrepreneurs and other special categories of borrowers availing of bank loan of Rs. 5 lakh , the guarantee cover is 90 %, 85 % and 75 % respectively. Further, the guarantee cover ensures that, even if the business fails to repay the loan, the bank will recover nearly the total amount under the scheme. Hence, the lender remains assured when it approves a collateral free MSE loan.  Further, both the new and existing MSE borrowers are considered including:(i) Manufacturing and service businesses, (ii) All trading firms, as long as they are under the MSME category, (iii) A loan can be taken only from banks, NBFCs, or financial institutions that are listed with CGTMSE, (iv) Enterprises, already supported by other state or national schemes, can also benefit,  (v) Any activities that fall under the Service sector as under the MSMED Act, 2006, are  also eligible, (vi)  Income Tax Permanent Account Number (IT PAN) is needed when the amount of the loan is more than Rs.5 lakh, (vii)  Udyam Registration Number is a must and, Lastly ( viii)  Viable and profitable business with a good track record.

Bank Procedures:

To begin with, the MLIs have to apply for the guarantee cover anytime during the tenure of the loan, provided the same was not restructured / remained in Special Mention Account (SMA)-2 status in the last one year from the date of submission of the application. Further, other conditions for applying to seek the guarantee cover include:  (i) The business activity of the borrower for which the credit facility was granted has not ceased; and (iii) The credit facility has not wholly or partly been utilized for adjustment of any debt deemed bad or doubtful of recovery, without obtaining a prior consent in this regard from the Trust. Now a days, Trading (Retail/Wholesale) has been made eligible activity under the CGTMSE scheme.  And, trading activity has been aligned with other activities in respect of the extent of coverage, ceiling of credit guarantee coverage and guarantee fee. In addition, Educational / Training Institution are also made eligible activity under the scheme and would attract fee, extent of coverage and other terms and conditions as applicable. Further, ‘Hybrid Security’ product has been introduced where the MLIs will be allowed to obtain collateral security for a part of the credit facility.

Regarding bank procedures, to start with, a borrower approaches a registered lender and submits the loan application along with documents namely, (i) Loan application form (ii) Business registration and Udyam Registration Certificate. (iii) Promoters’ identity and address documents. (iv)  IT PAN card for loans of over Rs. 5 lakhs.  Lastly, (v) Detailed business  plan and financial statements.

Then, the lender verifies the borrower’s document and business plan, and assesses the repayment capacity. If the borrower is found eligible, the lender approves the loan without requesting for collateral. The lender, thereafter, approaches CGTMSE to subsidize this loan under the guarantee scheme. Generally, it takes a week or two for verification by the CGTME. After approval, the borrower pays the prescribed Annual Guarantee Fee and, the loan amount is disbursed to the borrower’s account. In case the borrower defaults, the CGTMSE reimburses the lender a considerable portion of the defaulted loan. This reduces the financial burden of the lender as well as the entrepreneur.

For the smooth conduct of operations relating to the guarantee cover, there are certain expectations from the lending institutions too. These include: (i) The lending institution shall evaluate credit application by exercising prudent banking judgement and shall use its due diligence in selecting commercially viable proposals and observing the conduct of the account(s). (ii) The lending institution shall closely monitor the borrower account. (iii) It shall safeguard the primary securities, if taken from the borrower in respect of the credit facility sanctioned, in good and enforceable condition. (iv)The MLIs are required to inform the date on which the account was classified as non performing asset (NPA) in a particular calendar quarter. (v)Further, the lending institution shall ensure that the guarantee claim in respect of the credit within such time as may be specified. (vi) 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. In other words, the lending institution shall continue to take necessary actions for recovery of the amount outstanding. (vii) 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. (viii) Regarding the settlement of the claim, the amount received from the lending institutions shall be appropriated in the order in which the service fee / annual guarantee fee, penal interest and other charges have fallen due. (ix)As per the normal practices, the lending institution recovers money subsequent to the recovery proceedings initiated by it and, the same shall be deposited by the lending institution with the Trust, after adjusting towards the legal cost incurred by it for recovery of the amount. The Trust shall appropriate the same first towards the pending annual service fee / annual guarantee fee, penal interest, and other charges due to it. If there is any balance, the same shall be appropriated in such a manner so that losses on account of deficit in recovery of the credit facility between the Trust and the lending institution are in same proportion in which guarantee has been extended.

Performance of CGTMSE:

As per the Annual Report of CGTMSE 2023-24, CGTMSE’s performance has shown significant growth, with a rapid increase in the amount of credit guarantees approved and a sharp rise in the number of guarantees issued, particularly in the recent years. It achieved major milestones, such as approving Rs.1 lakh crore in guarantees in a single year (FY 2022-23) and cumulative guarantees reaching Rs.5 lakh crore in October 2023. Key drivers include government policies, improved technological infrastructure, and enhanced collaborations. The scheme has expanded its support to a wider range of entrepreneurs and has improved its service delivery through enhanced technology and streamlined processes.  The Government contributes to the CGTMSE corpus regularly  which would not only be financial boost to the CGTMSE scheme to extend collateral-free guaranteed credit but also to reduce the cost of the credit by about 1 percent.  Similarly, in the Union Budget – 2024, the Government proposed to introduce Credit Guarantee Scheme for MSEs in the Manufacturing Sector for facilitating term loans to them for purchase of machinery and equipment without collateral or third-party guarantee. Further, the borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance. Lastly, the guarantee cover has been extended to include more sectors and higher loan amount, providing comprehensive support to MSEs and start ups.

Suggestions:

Appreciating the increasing contribution of MSEs in the economy, CGTMSE needs to be further strengthened for which a few suggestions are offered as under:

Lending Institutions: The adoption of the Guarantee cover amongst the MLIs is still very low. One of the reasons for the same is that the loan default by MSEs has been declining very fast which is evident from the Economic Survey – 2024 when the Gross Non Performing ratio remained at  as low as 2.8 percent as on March end, 2024. Efforts are needed to bring more and lending institutions under the scheme.

Medium Enterprises: it is suggested that CGTMSE shall include Medium enterprises also, as it will resolve the issue of MSEs becoming ineligible on their up-gradation to Medium category from Small category on account of investment in the plant and machinery/equipment.

Guarantee Fees: It is observed that the Guarantee fee collected by CGTMSE from the MLIs seems to be high. Therefore, it is suggested to reduce the annual guarantee fees up to 0.50 percent of the loan amount across all the slabs and also to make the guarantee coverage mandatory for all MSE loans up to Rs10 crores .

Guarantee by SFCs: At present, State Finance Corporations (SFCs) provide financial assistance to MSEs in various forms, such as sanctioning of term loan, subscription to the debentures or the equity and, seed capital. In addition, these also provide guarantee to the lending institutions to a limited extent. Appreciating the need to step up the credit flow to MSEs, efforts need to be strengthened for increasing the share of guarantee business in the total business by SFCs.

Setting up Credit Guarantee at the State level:  It is suggested for setting up a state-level credit guarantee trust for MSEs on the lines of CGTMSE, which is at the national level. This would meet the state-specific requirements, and provide MSEs with easy access to funds and banks with higher reliability.

More Guarantee to the special Target Groups: As recommended by the Standing Committee on Finance (Chair: Mr Jayant Sinha) on ‘Strengthening credit Flows to the MSME Sector’, Government of India, 2022, the weaker borrowers, dealing in seasonal activities with much lower demand due to external reasons or located in a specific geographical area affected by the natural activities need a special treatment, deserve the higher government guarantee so that they would be able to get more credit during the period of crisis.

Credit Guarantee for Sick MSEs: Relatively speaking, MSEs experience a higher rate of mortality due to disrupted supply chains, destroyed infrastructure, reduced access to finance, labor shortages etc.. This can lead to a decline in their economic activity & job losses, and increased poverty. Such MSEs deserve the rehabilitation support when more amount  and timely credit guarantee is made available to banks so that such enterprises shall be able to get more credit to operate even in the face of the challenging circumstances.

Credit Guarantees Infrastructure – MSEs: These are indirectly engaged in the long duration infrastructure projects which shall become non-operative due to natural calamities or any other unexpected external factors. Consequently, the concerned MSEs find it difficult to operate. In such cases, more credit guarantee to such MSEs would assist in facilitating their reconstruction and rehabilitation for .

Others: The Government should make elaborate provisions to make all the bankers and prospective & existing entrepreneurs aware of loan procedures for which’ awareness camp’ shall be organized in different locations. Provisions should also be made for the MSE borrowers to directly apply to CGTMSE for credit guarantee and on the basis of a ‘eligibility certificate’ issued by CGTMSE , they shall approach the banks and get loan at a competitive rate. And, keeping in view the significant contribution of this sector to the Indian Economy, more emphasis should be given on promotion of entrepreneurship. A topic on entrepreneurship should be included in the higher secondary curriculum, so that the young generation shall choose entrepreneurship as their career.  Further, training programmes on CGTMSE shall be organized for both bankers and entrepreneurs at different locations.

Authored by:

Dr. V.S.Kaveri, Former faculty, NIBM, Pune.