How to get an MSME loan without collateral?

About 60 million people are employed by the country's estimated 26 million micro, small and medium enterprises (MSMEs). This sector accounts for about 45% of the country’s total manufacturing output and 40% of its total exports. The lack of timely and adequate credit at a reasonable interest rate without collateral is one of the most pressing issues MSMEs faced previously.      

The Reserve Bank of India has now included micro and small businesses in its list of priority lending sectors because banks are the primary source of financing in India. Banks have also been urged to increase credit to micro and small businesses by 20% annually and the number of micro enterprise accounts by 10% annually. Let's know what is credit guarantee is and how it aids in obtaining collateral free loans for MSME.

Did you know? In India, the average growth rate of micro, small and medium enterprises is 11.93%.

What is Credit Guarantee?

The Government of India (GoI) established the "Credit Guarantee Fund Scheme for Micro and Small Enterprises" (CGS) to provide collateral-free loans to the MSMEs. Both existing and new businesses are eligible for coverage under the scheme. The Small Industries Development Bank of India (SIDBI), the Government of India, and the Ministry of Micro, Small, and Medium Enterprises formed the "Credit Guarantee Fund Trust for Micro and Small Enterprises" (CGTMSE) to carry out the "Credit Guarantee Fund Scheme for Micro and Small Enterprises".

• This scheme provides funding assistance to banks and financial institutions, allowing them to lend MSME loans without collateral.
• The scheme was formally launched on August 30, 2000, and it went into effect on January 1, 2000. The Government and SIDBI contribute to the CGTMSE corpus in a 4:1 ratio, respectively.

Also Read: Super Tips To Start A Small Business By Yourself 

Objectives of Credit Guarantee Scheme

• Credit Guarantee Scheme's objective is to make credit available to Micro and Small Enterprises for loans up to ₹100 lakhs without the requirement of collateral or third-party guarantees, which are not readily available to these enterprises. The credit is secured solely on the primary security of the assets financed and project viability.
• The CGTMSE was established to strengthen the credit delivery system and facilitate the flow of credit to the MSE sector, create access to finance for underserved, unserved, and underprivileged, and make conventional lenders' financing available to new generations of entrepreneurs.
• CGTMSE plays a key role in providing collateral-free loans for MSME or third-party guarantee-free credit facilities to eligible Member Lending Institutions (MLIs) for MSEs. 
• Another goal is for the lender providing the guarantee facility to attempt to provide composite credit to the borrowers so that the borrowers can obtain both working capital facilities and term loans from a single agency.
• The Credit Guarantee under CGTMSE seeks to reassure lenders that if an MSME unit that used a collateral-free MSME loan scheme fails to discharge its liabilities to the lender, the CGTMSE will make good the lender's loss up to 50% or 75% or 80% or 85% of the credit facility.

Eligible for Availing Credit Facility

Loans of up to ₹100,000 per borrowing unit, without collateral security or third-party guarantee, are eligible for coverage under the program. If a unit covered by the guarantee scheme becomes sick due to circumstances beyond the control of management, rehabilitation assistance provided by the lender may also be covered by the guarantee scheme. Although the scheme may cover loans exceeding ₹50 lakhs, the guarantee will only extend to loans up to ₹50 lakhs. 

Another key requirement of the plan is that the borrowing unit must use the same lending institution for its borrowing needs. However, under certain conditions, the unit already receiving assistance from the State Level Institution/National Small Businesses Corporation Ltd (NSIC)/North Eastern Development Finance Corporation Ltd. (NEDFi) can be included in the program for a credit facility obtained from a member bank. Any credit facility already covered by a government or other agency's insurance program will not be eligible for the program's coverage.

Eligible Lending Institutions

The eligible institutions under the scheme are 

• Scheduled commercial banks (Private Sector Banks/Public Sector Banks/Foreign Banks) 
• Select Regional Rural Banks (which NABARD has classified as 'Sustainably Viable'). 
• North Eastern Development Finance Corporation Ltd. (NEDFi), National Small Businesses Corporation Ltd. (NSIC), and SIDBI have also been designated eligible institutions.

Guarantee Tenure

There are two options for guaranteeing a loan: a term loan or a composite loan and a working capital loan. The term loan guarantees will begin when the guarantee fee is paid, and the term credit guarantees will run through the agreed term of the term credit or the working capital loan, whichever comes first.

Guarantee Fee

One-time guarantee fees of 1.5% and annual service fees of 0.75 % are payable to the Trust under the program. There is a one-time guarantee fee of 1% and an annual service fee of 0.5 % for loans up to ₹5 lakhs, respectively. The one-time guarantee fee for loans in the North-East Region is only 0.75%.

Scheme highlights

• Non-fund-based and fund-based credit facilities (Bank Guarantees, Letters of Credit, etc.) up to ₹200 lakhs per eligible borrower are covered under the credit guarantee scheme if extended based on project viability without a third-party guarantee or collateral security.
• The scheme provides a guarantee cover of 50%, 75%, 80%, and 85% of the credit facility's sanctioned amount. For loans up to ₹5 lakhs, a guarantee of 85% is provided to micro-enterprises. For retail trade activity, the guarantee cover is 50% of the credit facility amount sanctioned by the MSME borrower from ₹10 lakhs to ₹100 lakhs.
• 80% of guarantee coverage is available for (i) Micro, and Small Enterprises (MSEs) owned and operated by women, and (ii) all credit facilities up to ₹50 lakh in the North-East Region (NER). If a borrower defaults on a loan, Trust will pay up to 75% of the amount owed by the lending bank/institution, up to a maximum of ₹200 lakhs.

Also Read: All you need to know about MSME registration 

Some recent facts:

• A total of 8.36 million guarantees have been approved for a total of ₹36,954 crores (CGSI NBFC CGSD) in the Financial Year 2020-21. 
• The CGTMSE has already issued more than 14,000 guarantees for ₹1,435 crores under the "PM SVANidhi" scheme, run by the Ministry of Human Resources and Development (MoHUA).
• A cumulative of Rs.2.59 lakh crore (CGSI+NBFC+CGSSD) has been approved as a guarantee for over 51.4 lakh accounts as of March 31, 2021 (excluding the PM SVANidhi scheme).

Conclusion

Since 2017, CGTMSE has undergone significant reforms to broaden the scope of its programs to include previously untapped markets like retail trade, partial collateralized loans, and unregulated lenders like NBFCs, small finance banks, and scheduled cooperative banks, all of which fall under the MSME loans category. Technology has helped CGTMSE achieve this scale, and all operations, including NPA marking and claim settlements, are carried out online. Technology upgrades are a constant part of the trust's mission for increased efficiency and better customer service.

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