For micro and small enterprises (MSEs), gaining access to a business loan has always been a challenge. The lack of proper funding options has severely limited the growth of several small businesses. However, in a bid to make SME loans more accessible, the Government of India introduced the CGTMSE scheme.
If you are an entrepreneur looking to secure a business loan without pledging collateral, the CGTMSE scheme could be the perfect solution. In this article, we will explore the scheme in detail, its various benefits and eligibility criteria, among others.
What is the CGTMSE Scheme?
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is a joint initiative by the Ministry of Micro, Small & Medium Enterprises (MSME) of the Government of India and the Small Industries Development Bank of India (SIDBI).
The primary objective of this scheme is to enable micro and small enterprises to obtain SME loans without any security or collateral from participating banks and non-banking financial companies (NBFCs). Small businesses, especially those that struggle to secure funding, can leverage CGTMSE loans to grow and expand their ventures effectively.
Through the CGTMSE scheme, eligible businesses can obtain fund-based and non-fund-based credit facilities from participating financial institutions. Fund-based credit facilities are those where actual funds are disbursed to the borrower. Term loans, working capital loans, overdraft facilities and lines of credit are some common examples of fund-based credit facilities. Meanwhile, non-fund-based credit facilities do not involve direct disbursement of funds and instead offer financial guarantees or obligations on behalf of the borrower to their clients. Some examples of non-fund-based credit facilities include bank guarantees and letters of credit.
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How does the CGTMSE Scheme Work?
If you are a small business owner, understanding how the CGTMSE scheme works is crucial. Here is a quick overview of this unique initiative.
- Step 1: A micro or small enterprise in need of funds must approach a participating bank or NBFC for a fund-based or non-fund-based credit facility and submit an application.
- Step 2: The participating financial institution will thoroughly assess the loan application, the proposed business plan and the borrower’s eligibility.
- Step 3: Once the appraisal is done, the financial institution will approve the loan and obtain a guarantee cover from CGTMSE by paying a fee. The guarantee fee percentage varies depending on the amount of the loan and the borrower.
- Step 4: The loan is then disbursed to the borrower.
If the borrowing MSME defaults at any point during the loan tenure, the lending institution can invoke the guarantee cover and claim the guaranteed loan amount from CGTMSE. This way, the lender can protect themselves from losses due to the borrower defaulting on the loan payments.
CGTMSE Scheme Guarantee Coverage Details
According to the CGTMSE scheme, the guarantee coverage provided to the lending institutions varies depending on the loan amount and the borrower category. Here is a table outlining the coverage details for business loans disbursed under the initiative.
| Borrower Category | Maximum Credit Guarantee Coverage | ||
| For credit facilities up to ₹5 lakh | For credit facilities more than ₹5 lakh and up to ₹50 lakh | For credit facilities more than ₹50 lakh and up to ₹5 crore | |
| Micro Enterprises | 85% | 75% | 75% |
| Micro and Small Enterprises in the Northeast Region and Union Territories of Ladakh and Jammu and Kashmir | 80% | 80% | 75% |
| Micro and Small Enterprises Promoted by Women and Agniveers | 90% | 90% | 90% |
| Micro and Small Enterprises promoted by SC/ST Entrepreneurs and Persons with Disability (PwD) | 85% | 85% | 85% |
| Micro and Small Enterprises in Aspirational Districts and ZDE-certified MSEs | 85% | 85% | 85% |
| All Other Borrower Categories | 75% | 75% | 75% |
Note: MSEs in Identified Credit Deficient Districts (ICDD) will get an additional credit guarantee coverage of 5% over and above the maximum limit specified above.
Benefits of the CGTMSE Scheme
The CGTMSE scheme offers several advantages to small businesses. Here is an in-depth look at some of the key benefits of this initiative.
Collateral-Free Business Loans
Small businesses often lack valuable assets that can be pledged as collateral to avail of SME loans. This has been a major hurdle that has prevented several micro and small enterprises from gaining access to funding.
However, the CGTMSE scheme eliminates this hurdle by providing collateral-free business loans. By removing the collateral requirement, the scheme promotes financial inclusion and encourages entrepreneurship across various industries. The initiative is particularly beneficial for startups and small enterprises with limited resources or assets to get funding.
Financial Support for SMEs
Micro and small enterprises often struggle to get financing due to their limited credit history. Since CGTMSE loans are specifically designed to cater to these businesses, they have relaxed eligibility criteria to ensure that entrepreneurs receive the financial support they need. Whether it is for meeting working capital requirements, purchasing equipment or for business expansion, the CGTMSE scheme provides access to easy financing.
High Loan Coverage
Unlike many traditional business loan schemes that have restrictive limits, the CGTMSE scheme offers financial assistance of up to ₹5 crore. Such a high loan limit allows businesses to undertake substantial projects, expand operations and invest in new technologies.
Affordable Interest Rates
Another key benefit of the CGTMSE loan scheme is the interest rate, which is highly competitive. This has been made possible primarily due to the guaranteed coverage for the loan, which makes the financial institutions more willing to offer lower rates compared to traditional unsecured credit facilities. The affordable interest rates reduce the financial burden and make repayment more manageable, allowing businesses to focus on growing rather than worrying about high interest costs.
Note: The interest rate on CGTMSE loans and credit facilities is decided by the lending financial institution.
Nominal Guarantee Fee
The fee financial institutions pay to obtain a guarantee cover from the CGTMSE is often passed on to the borrower. Fortunately, the guarantee fee structure is quite affordable and is levied as a percentage of the total loan amount for the first year and on the outstanding loan amounts for the subsequent years.
Additionally, CGTMSE offers a discount of 10% on the guarantee fee for certain categories of borrowers, such as women, PwD, Agniveers and SC/ST entrepreneurs. Since the fee is nominal, CGTMSE loans are among the most cost-effective funding options available for startups and micro enterprises.
Easy and Simple Application Process
Applying for a business loan under the CGTMSE scheme is straightforward and hassle-free. Unlike traditional loan applications that involve extensive paperwork and lengthy approval processes, the CGTMSE loan follows a streamlined approach.
Most banks and NBFCs participating in the scheme provide clear guidelines, making it easier for entrepreneurs to submit their applications. The loan is often approved within a few days as long as the business meets the CGTMSE eligibility criteria and provides the necessary documentation.
Eligibility Criteria for Availing of the CGTMSE Scheme
If you are planning to apply for a business loan under the CGTMSE scheme, you must first check whether you meet the eligibility requirements. Here is a quick overview of the criteria you must satisfy to apply for a credit facility under this initiative.
- New and existing micro or small enterprises in the trading, manufacturing or service business. However, enterprises in the agriculture or fisheries business, self-help groups, joint liability groups and educational institutions are excluded.
- The business must be viable or profitable with a strong track record of performance.
- The applicant must not have defaulted on any loan or credit facility obtained from a bank or any other financial institution.
Documents Required for Applying for the CGTMSE Scheme
When applying for an SME loan under the CGTMSE scheme, you must submit the following documents to the lending financial institution.
- A filled and signed CGTMSE loan application form
- Proof of business registration
- A detailed business plan, including revenue projections and loan utilisation details (in the case of a new business)
- Financial statements and tax returns (in the case of an existing business)
- Passport-size photos and KYC documents of the borrower, directors or partners (as the case may be)
- Udyam registration certificate
Note: The list of documents mentioned above is only illustrative and not exhaustive. The lending institution may request you submit additional documents.
Conclusion
The CGTMSE scheme is a revolutionary initiative for micro and small businesses looking for cost-effective funding options. Thanks to the scheme, eligible businesses can obtain business loans without collateral quickly and use them to grow and expand their ventures.
If you plan to start a business shortly, a CGTMSE loan could be one of the best ways to fund your venture. That said, remember to first check whether you meet the eligibility criteria before proceeding to apply.
