The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS) in India is a pivotal program designed to facilitate access to collateral-free credit for MSMEs. Managed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), established by the Government of India and SIDBI in 2000, this scheme helps small businesses secure loans by providing a credit guarantee to lenders, encouraging them to offer loans without requiring collateral from the borrower.
Objectives and Purpose of the CGS
The core objective of the CGS is to support MSMEs, especially those unable to provide collateral, by guaranteeing a portion of the loan amount extended by financial institutions. This approach strengthens the credit delivery system and helps improve access to formal credit, which is essential for the growth and expansion of small businesses in both rural and urban areas.
Key Features of the Scheme
- Collateral-Free Loans: The CGTMSE provides guarantee coverage for loans up to â‚ą5 crore. Loans under â‚ą10 lakh do not require any legal proceedings for claim settlements, streamlining access and reducing procedural bottlenecks.
- Coverage of Loans: The scheme supports both term loans and working capital facilities. For new and existing micro and small enterprises, eligible credit facilities are offered up to â‚ą5 crore per borrowing unit.
- Guarantee Coverage:
- Up to 75% coverage for loans up to â‚ą50 lakh.
- 85% coverage for micro-enterprises with loans up to â‚ą5 lakh, loans extended to women entrepreneurs, and loans for businesses in the North-Eastern region.
- For larger loans, the guarantee cover is capped at 50% for credit facilities above ₹50 lakh​MSME​Press Information Bureau.
- Reduced Guarantee Fees: Recent revisions lowered the annual guarantee fee to as low as 0.37% for loans up to ₹1 crore, making it more affordable for MSMEs. This reduction significantly decreases the cost of borrowing for businesses, supporting their financial health and ability to manage credit effectively​MSME​Press Information Bureau.
- Special Provisions for Women and Priority Areas: The CGTMSE offers additional support to women-owned businesses, with an increased guarantee cover of up to 85%. This provision also extends to enterprises in special regions like the North-Eastern states and aspirational districts, further promoting inclusive growth​.
How the Scheme Works
MSMEs seeking collateral-free loans can approach any of the registered lending institutions, including public sector banks, private banks, Regional Rural Banks (RRBs), and other eligible financial entities. Once the loan is approved, CGTMSE covers a portion of the loan amount, mitigating risks for the lender in case of borrower default. This arrangement helps MSMEs secure credit even if they lack collateral or a strong credit history​
Eligibility and Application Process
- Eligible MSMEs: Both new and existing micro and small enterprises across manufacturing, services, and trade sectors qualify for this scheme.
- Application Process: MSMEs can apply directly through participating banks. After the loan sanction, the bank submits the loan details to CGTMSE for guarantee coverage. The guarantee remains in effect for the loan tenure or up to five years for working capital loans.
Recent Enhancements and Revamp
In the 2023 budget, the government infused an additional ₹9,000 crore into the CGTMSE corpus, raising the total guaranteed credit limit to ₹2 lakh crore. This infusion was accompanied by an increase in the guarantee ceiling from ₹2 crore to ₹5 crore and a reduction in guarantee fees to make the scheme more accessible to MSMEs​
Benefits and Impact of the CGS
Since its inception, the CGS has provided guarantees to millions of MSMEs, disbursing over â‚ą4.5 lakh crore in credit, including significant assistance to women-led enterprises. This support has helped bridge the financial gap for MSMEs, enhancing their contribution to employment and economic growth across India.
Conclusion
The Credit Guarantee Fund Scheme remains a powerful tool for enabling MSME growth by improving credit access without collateral requirements. For MSMEs, especially first-time borrowers and those in underserved regions, the CGTMSE’s collateral-free guarantee offers a critical pathway to accessing essential financing. Interested MSMEs can contact participating banks or visit the CGTMSE website for more details on eligibility and application procedures​
