Of all the problems faced by the MSEs, non-availability of timely and adequate credit at reasonable interest rate is one of the most important. One of the major causes for low availability of bank finance to this sector is the high-risk perception of the banks in lending to MSEs and consequent insistence on collaterals which are not easily available with these enterprises. The problem is more serious for micro enterprises requiring small loans and the first-generation entrepreneurs.
The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS) was launched by the Government of India (GOI) to make available collateral-free credit to the micro and small enterprise sector.
Both the existing and the new enterprises are eligible to be covered under the scheme.
The Ministry of Micro, Small and Medium Enterprises, GOI and Small Industries Development Bank of India (SIDBI), established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises.
Eligible Lending Institution:
The Banks / Financial Institutions, which are eligible under the scheme, are scheduled commercial banks (Public Sector Banks/Private Sector Banks/Foreign Banks) and select Regional Rural Banks (which have been classified under ‘Sustainable Viable’ category by NABARD). As on May 31, 2016, there were 133 eligible Lending Institutions registered as MLIs of the Trust, comprising of 26 Public Sector Banks, 21 Private Sector Banks, 73 Regional Rural Banks (RRBs), 4 Foreign Banks and 9 other institutions i.e. Delhi Financial Corporation, Kerala Financial Corporation, Jammu & Kashmir Development Finance Corporation Ltd, Andhra Pradesh State Financial Corporation, Export Import Bank of India, The Tamil Nadu Industrial Investment Corporation Ltd., National Small Industries Corporation (NSIC), North Eastern Development Finance Corporation (NEDFI) and Small Industries Development Bank of India (SIDBI).
Eligible Credit Facilities:
The credit facilities which are eligible to be covered under the scheme are both term loans and/or working capital facility up to Rs.100 lakh per borrowing unit, extended without any collateral security and / or third party guarantee, to a new or existing micro and small enterprise.
For those units covered under the guarantee scheme, which may become sick owing to factors beyond the control of management, rehabilitation assistance extended by the lender could also be covered under the guarantee scheme.
Any credit facility in respect of which risks are additionally covered under a scheme, operated by Government or other agencies, will not be eligible for coverage under the scheme.
The guarantee cover available under the scheme is to the extent of maximum 85% of the sanctioned amount of the credit facility. The guarantee cover provided is up to 75% of the credit facility up to Rs.50 lakh (85% for loans up to Rs. 5 lakh provided to micro enterprises, 80% for MSEs owned/ operated by women and all loans to NER including Sikkim) with a uniform guarantee at 50% for the entire amount if the credit exposure is above Rs.50 lakh and up to Rs.100 lakh. In case of default, Trust settles the claim up to 75% (or 85% / 80% / 50% wherever applicable) of the amount in default of the credit facility extended by the lending institution.
For this purpose the amount in default is reckoned as the principal amount outstanding in the account of the borrower, in respect of term loan, and amount of outstanding working capital facilities, including interest, as on the date of the account turning Non-Performing Asset (NPA).
Tenure of Guarantee:
The Guarantee cover under the scheme is for the agreed tenure of the term loan/composite credit.
In case of working capital, the guarantee cover is of 5 years or block of 5 years.
Fee for Guarantee:
A composite all-in Annual Guarantee Fee of 1.0 % p.a. of the credit facility sanctioned (0.75% for credit facility upto Rs. 5 lakh and 0.85% for above Rs. 5 lakh and upto 100 lakh for Women, Micro Enterprises, and units in NER including Sikkim) is now being charged.
Example: If you have been provided with loan of Rs. 40.00 Lakhs then you need to pay 1.0% percent every year as a fee which is Rs. 40,000.00 to Central Government for providing guarantee.
New and existing Micro and Small Enterprises engaged in manufacturing or service activity excluding Educational Institutions, Agriculture, Self Help Groups (SHGs), Training Institutions etc.
As of now, all activities that come under service sector as per MSMED Act, 2006 are eligible for coverage under the scheme.
Is Pan Mandatory Pan for this loan:
Under the Guarantee Scheme, a borrower is required to obtain IT PAN number prior to availing of credit facility from the eligible lending institution. Also, it is a mandatory requirement under section 139A (5) read with section 272(C) of the I.T Act 1961 to indicate IT PAN on all tax documents which include returns, challans, appeals, etc. However, in respect of loans up to 5 lakhs, CGTMSE is presently not insisting that the IT PAN be obtained at the time of availing of the guarantee cover. IT Pan No. is to be indicated in respect of credit facility above 5 lakhs. Nevertheless, the MLIs have been advised to inform their borrowers to apply for IT PAN number. It is desirable to indicate IT Pan No. in all the application irrespective of the amount. (Refer Circular no. 112). It is advisable to obtain Udyog Aadhaar Number of every borrower and feed it in the system at the time of submission of new application.
Documents required for Loan:
Availing of a credit facility or loan from the lender entails a series of activity on the part of the borrower for a seamless experience. The major steps for CGTMSE loan scheme can be tabulated as under:
Establishment of the Business Entity: The unit has to be incorporated a distinct business enterprise in the appropriate category like proprietorship, partnership or a limited company and necessary approvals, certificates and tax registrations are need to obtained to execute the project.
Business Project Report: The components of the project must be well defined based on a thorough market study and analysis. The factors to be mandatorily covered are:
- Business Model.
- Promoter Profile.
- Cost and other Financials
Submission: The project report and the CGTMSE loan application form is to be submitted to the lender for further processing. If the homework is proper, the first step towards a successful completion of the process is taken.
CGTMSE Scheme Banks Sanction: Once the CGTMSE application forms are successfully submitted, the processing begins. After proper evaluation and gauging the viability of the project sanction is accorded in alignment with the lender’s policy.
Obtaining CGTMSE Loan Cover: After according sanction to the loan, it is responsibility off the lender to file for guarantee cover at the CGTMSE.
All lenders impose a certain cost to the borrower. The major component of the cost to the borrower is the interest rate for the loan. Majority of the lenders recover CGTMSE loan interest rate that does not exceed 14% to 18% including the guarantee cover.
Not all banks which we come across in our day to day life shall provide you this facility. Hence people just walk-in to the bank and say that banks refuse to provide loan. Hence proper verification of listed banks and its branches is 1st and foremost step.
Secondly you need to have a professional assistance in documentation and preparation of documents since this process is the main object for the loan. If you fail to provide the same, then your project will not be approved. Hence no compromise to be done on documentation. Hence the selection of professional help should be careful, and it should be most important one.
Banks or Institution will start processing and they will come out with their viewpoints if they find any issues or the loan shall be processed.
Proper sanction procedure and payment of guarantee fee to government is to be carefully reviewed since if delay in guarantee payment then your loan will not be secured.
Utilization of loan is to be reviewed carefully since mis utilization of funds shall make business unit negative listed and shall lose all its benefit.