Micro and Small Enterprises (MSME) are often termed as the “engine of growth” for an economy in terms of creating employment, giving a boost to industries, leading to inclusivity in growth, among others. Of all the hurdles faced by MSME in running their businesses successfully, the non-availability of credit at reasonable interest rates is the most important. Be it working capital, new equipment, marketing expenditure or labour cost, MSMEs require funds for a variety of needs that cannot be funded by savings alone. 

One of the major factors responsible for credit shortage is the higher perceived risk amongst banks in lending to this sector. The problem gets even worse when the loan amount is small or the businesses are newly started by first-generation entrepreneurs. Business loans are an option, but they are especially difficult when the business is at a nascent stage. To assist these businesses, the government of India launched a Credit Guarantee Scheme on 30th August 2000 intending to help these businesses in tackling financial hurdles.

What is the Credit Guarantee Scheme?

Credit guarantee offers unsecured term loans or working capital loans to MSMEs. The salient features of the scheme include:

  • The loans are collateral-free with no requirement for security or third-party guarantee
  • In case the borrower falls sick during the loan period, the lender offers rehabilitation facilities to the party. This falls under the guarantee scheme
  • Individual loans up to Rs. 100 lakhs are lent 
  • Covers both existing and new enterprises excluding educational institutions, agricultural loans, self-help groups, training institutions, etc. 
  • Maximum guarantee cover is 85% of the sanctioned loan amount
  • The corpus for the scheme was planned to be around Rs. 2500 crores by the 11th Plan

Who Runs the Scheme?

The Ministry of Micro, Small and Medium Enterprises, along with the Government of India (GoI) and the Small Industries Development Bank of India (SIDBI) jointly run the Credit Guarantee Scheme. They established a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for the implementation of the scheme. The government and SIDBI plan to contribute in the ratio of 4:1 for the corpus of the fund. 

Eligibility of the Scheme?

Both new and existing MSMEs can avail credit under this scheme with a guarantee cover up to 75% of the sanctioned amount up to Rs. 50 lakhs (85% for loans up to Rs. 5 lakhs and 80% for loans to women entrepreneurs and Sikkim residents).

In terms of lenders, 133 banks/financial institutions are eligible lending institutions registered with CGTMSE including scheduled commercial banks (Public, Private and Foreign banks) and select rural banks (‘Sustainable Viable’ under NABAD).

Conclusion

The government has taken numerous efforts to increase awareness about this initiative through print, press, seminars, workshops, etc. With increased awareness, MSMEs looking for credit for their businesses will approach eligible lenders to avail loans under the Credit Guarantee Scheme and tackle any financial shortcomings that may come in the way of their business.  Looking for a convenient alternative option of loan for your business? Tata Capital offers business loans with flexible business loan eligibility, easy EMI options, attractive interest rates, and other benefits.

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