Have you ever heard of Hybrid CGTMSE Scheme? If not, then this article will give you an ultimate guide on the Hybrid CGTMSE scheme, we will discuss with few cases study and industry best practices to overcome challenges.
What is CGTMSE Scheme?
In 2000, Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) was established by the Government of India, under the Ministry of Micro, Small and Medium Enterprise (MoMSME) and Small Industries Development Bank of India (SIDBI).
This scheme provides credit guarantees to financial institutions that offer loans to micro and small enterprises (MSEs). CGTMSE scheme offers credit guarantees from 75% to 85% to MSEs across India.
What is Hybrid CGTMSE Scheme?
The scheme CGTMSE has introduced a new "Hybrid Security" product allowing guarantee cover for the portion of credit facility not covered by collateral security. Up to a maximum of 200 lakh can be covered under the Credit Guarantee Scheme of CGTMSE.
The objective of the Hybrid CGTMSE Scheme is to provide credit without the hassles of collateral or third-party guarantees. Collateral free loans would be a major source of support to the young generation entrepreneurs to realise their dream of setting up a unit of their own micro and small enterprises (MSEs).
Considering this objective in view, the Ministry of Micro, Small and Medium Enterprises (MSME), Government of India launched Credit Guarantee Scheme (CGS) to boost the credit delivery system and facilitate the flow of credit to the MSE sector. In order to operationalize the scheme, the Government of India and SIDBI set up the CGTMSE.
CGTMSE Guarantee
You can get a maximum guarantee coverage limit of up to Rs. 200 lakh per borrower based on the outstanding credit facilities and borrowers can avail of incremental credit facilities (I.e., to the extent of reduction in the outstanding exposure limit) under the Credit Guarantee Scheme of CGTMSE, subject to the maximum cap of Rs. 200 lakh.
Eligible Borrowers
Under the Hybrid scheme, new or existing micro and small enterprises can avail of such benefits. However, a “Hybrid / Partial Collateral Security” allows guarantee cover on credit facilities having collateral security, for the portion of credit facility not covered by collateral security (unsecured portion), has also been introduced by CGTMSE.
In the partial collateral security model, the MLIs will be allowed to obtain collateral security for a part of the credit facility. In contrast, the remaining part of the credit facility can be covered under the Credit Guarantee Scheme of CGTMSE.
CGTMSE Coverage Criteria:
a) The trust guarantees up to 75% of the defaulted principal amount and up to 85% of the defaulted principal amount for a select category of borrowers.
b) The term credit includes interest on the principal that is covered for a period of one-quarter and/or outstanding capital advances including the interest, as on the date of the account becoming a Non-Performing Asset (NPA) or as on the date of filing the suit (whichever is lower).
c) The penal interest, commitment charge, service charge, or any other levy/expenses that do not qualify for the guarantee cover are the other charges.
Refer to the diagram below for details on the coverage limit under CGTMSE:
| Category | Maximum extent of the guarantee where the credit facility is | ||
| upto Rs. 5 lakhs | above Rs. 5 lakh upto Rs. 50 lakhs | Above Rs. 50 lakhs upto Rs. 200lakhs | |
| Micro enterprises | 85% of the amount in default subject to a maximum of Rs. 4.25 lakhs | 75% of the amount in default subject to a maximum of Rs. 37.50 lakhs | 75% of the amount in default subject to a maximum of Rs. 40 lakhs |
woman entrepreneurs/ units located in the northeast region (inclu. sikkim) (other than credit facility upto Rs. 5 lakh to micro enterprise)micro-enterprise | 80% of the amount in default subject to a maximum of Rs. 40 lakhs | ||
All other category of borrowers | 75% of the amount in default subject to a maximum of Rs. 37.50 lakhs | ||
| Activity | from Rs. 10 lakh upto Rs. 100 lakh | ||
| MSME retail trade | 50% of the amount in default subject to a maximum of Rs. 50 lakhs | ||
Source: www.cgtmse.in
Case Study
The fact of the Case:
Let’s assume a private limited company is having collateral security value of Rs. 300 lakh and looking for working capital as well as a term loan of Rs. 500 lakhs. At present, the company is approaching a bank loan of Rs. 500 lakhs. But unfortunately, the new banker responded that they will not grant a loan of Rs. 500 lakhs against the collateral security of Rs. 300 lakhs.
Whereas the company needs more collateral security of Rs. 200 lakhs. However, the client does not have any other collateral security to submit to the banker.
Suggestions
Under the above situation, the borrower can ask a banker to cover the excess loan of Rs. 200 lakhs to cover the collateral value of Rs. 300 under the Hybrid CGTMSE Scheme.
Benefits of using this scheme:
The borrower has to pay CGTMSE fees only on the loan amount which is covered under the CGTMSE Hybrid scheme
Since part of the loan amount is covered by collateral security. Typically, bankers are ready to take a call and give sanctions for the entire loan probability of getting a loan is increased.
Steps to avail Loan under the Hybrid CGTMSE Scheme
The objective of the Hybrid CGTMSE Scheme is to allow the banks to look at the micro and small businesses and give more importance to the viability of the project and business model validation.
In order to cover a loan under the credit guarantee fund scheme, the borrower has to pay an interest rate charged by the bank and pay an additional guarantee fee and other service charges. At present, the CGTMSE fee is payable at the rate of 1.5% but 0.75% for the North–Eastern region including the state of Sikkim.
The procedure for getting a loan under Hybrid CGTMSE Scheme is as follows:
Step 1. Establishment of the Business Entity
This is the very initial step even before beginning the procedure for loan approval under the CGTMSE, the borrower has to establish a private limited company, limited liability partnership, proprietorship, or a one-person company according to the nature of the business and shall obtain all the necessary approvals and tax registrations for executing the project.
Step 2. Prepare a Project Report/ Business Plan
Once you have completed the basic establishment of a business entity, the next step is to conduct a detailed market analysis and prepare a project report/business plan that should contain all relevant information such as the business model, the profile of the promoter, product or service offering, project financials and so on.
The project report should be given keen attention, as the report is then submitted to the lenders for credit facility purposes. However, businesses should consider that such project reports must be prepared by experienced financial professionals. This will enhance the chances of loan approval.
Step 3. Sanctioning of Loan from the Bank
The CGTMSE loan application form can be downloaded from its official website. After the submission of the application and business plan, banks deeply analyze the viability of the business model and process the loan application, and accord sanctions, as per the bank’s policy.
Step 4. Obtaining the Guarantee Cover
Once the loan is sanctioned, the bank applies to CGTMSE authority and obtains the required guarantee cover. If the loan gets approved by CGTMSE, then the borrower has to pay the guarantee fee and service charges.
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