The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), established by the government of India and the Small Industries Development Bank of India (SIDBI) intends to provide credit guarantee support to 57,500 MSEs in 2009. In 2008, CGTMSE approved about 53,700 MSEs for guarantee support, but ultimately, only 43,555 were covered. This year, CGTMSE has raised USD 451.5 million for guarantee payment to MSEs. In 2008, CGTMSE had raised USD 441.3 million, but was only able to guarantee loans worth USD 343.8 million for undisclosed reasons. CGTMSE is a fund that gives guarantee payments to lending institutions so that microentrepreneurs may obtain collateral-free loans. If a borrower defaults on a loan, CGTMSE compensates the lender up to 75, 80, or 85 percent of the loan depending on the loan amount and the profile of the borrower. The CEO of CGTMSE, OS Vinod, has stated in an interview, “What we are trying to tell the banks is — you don’t appraise the collateral but the project. If the project is good, then the second issue of collateral comes in and we will step in. So, banks have to move from collateral-based lending to project-based lending, which was not happening.” CGTMSE does not directly interact with borrowers and lenders must approve loans before seeking a guarantee from CGTMSE. The Indian government’s Ministry of Micro, Small & Medium Enterprises (MSME) created the Credit Guarantee Scheme (CGS) to improve credit access for MSEs. Together with SIDBI, the government instituted CGTMSE to implement this scheme.
CGTMSE was established in 2000 and, over nine years, has approved 150,034 applications which demanded USD 968.1 million in guarantee payments to lenders. In actuality, guarantees worth USD 800.7 million were given to 48 lending organizations to provide 121,229 loans over the nine-year span. 43 percent of this sum was paid in 2008 alone. Mr. Vinod claims that only USD 2.2 million have been paid for defaulted loans. 85 percent of those seeking guarantees need collateral-free loans of less than USD 10,000. Their cumulative guarantees amounted to 28 percent of the guarantee amount paid by CGTMSE. 129 borrowers sought guarantee coverage for a loan amount of USD 200,700. In total, these 129 borrowers obtained guarantee coverage worth USD 143.9 million from the trust. Guarantee coverage is only provided for loans less than USD 200,700. The guarantee rangers from 75 percent to 80 percent of the loan, with a maximum guarantee amount of USD 126,000 to USD 130,000. The 80 percent figure is only applicable to MSEs owned by women or loans in the Northeast of India. As mentioned, coverage is now 85 percent for loans up to USD 10,000. The fee for the guarantee is charged to the lending institution and stands at 1.5 percent of the loan amount, except in the Northeast, where the fee is 0.75 percent. For loans up to USD 10,000, the fee is 1 percent.
CGTMSE provides guarantees to a single lending institution for a single borrower and thus encourages borrowers to seek term loan and working capital from a single lender. As long as the loan is under the limit guaranteed by CGTMSE, the borrower may obtain further loans from the same lender under the same guarantee coverage. Borrowers are required to obtain Income Tax Permanent Account Number before seeking their loan. It takes 24 hours or less to approve an application forwarded from a lending institutions. Lending institutions eligible to seek a guarantee are commercial banks, select Regional Rural Banks, or institutions designated by the Indian government. Private or foreign banks must be commercial banks and must be listed in the II Schedule to the Reserve Bank of India Act of 1934. Regional Rural Banks much be listed by National Bank for Agriculture and Rural Development (NABARD) as ‘Sustainable Viable’, with positive net worth. Guarantees are not available to Self Help Groups. A list of member lending institutions considered eligible for guarantees is available. There is an 18 month gap between the date of last disbursement of loan to the borrower and the date of the guarantee payment being made available.75 percent of the guarantee amount is paid immediately in case of a default while 25 percent is paid later.
SIDBI was established in 1990 to support small scale industries with physical capital valued at less than USD 201,000. In a balance sheet for the year 2008, SIDBI reports an annual income of USD 329.75 million, USD 260.1 million in expenses, and total profit before taxes of USD 67.64 million. MicroCapital recently reported SIDBI’s May 2009 investment in BSFL, a microfinance institution in the BASIX group.
Additional Resources:
“Credit Flows Into MSEs To Increase This Year”, by Ratna Ganguli, Published by Economic Times, May 2009
“Featured Investor: OS Vinod, CGTMSE”, Published by DARE, August 2008
“Credit Guarantee Scheme”, Published by CGTMSE, 2006
By Goda Thangada, Research Assistant
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