CGTMSE – The Benefits and Drawbacks
Providing collateral is the most significant handicap for a business. It is a Catch-22 situation. You need to do business to earn profits and purchase property, whereas the banks need collateral in the form of property to finance your business. Start-up enterprises do not have any collateral to spare. Does this entail that they cannot apply for Business Loans?
The Government of India (GOI) has the responsibility of providing adequate opportunities for the start-up enterprises to flourish. As the banks insist on collateral, these enterprises find it difficult to Apply for a Business Loan. Hence, the Government has come up with the concept of the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE).
The concept of the CGTMSE
The lack of adequate finance is the principal reason for the failure of businesses, especially in the small and micro industries sector. Hence, the GOI has constituted a Credit Guarantee Trust in collaboration with Small Industries Development Bank of India (SIDBI) on August 30, 2000. The GOI and SIDBI contribute towards the corpus in the ratio 4:1. The principal objective of this trust is to encourage small and micro industries to avail collateral-free Business Loans from banks and financial institutions.
The role of CGTMSE
The primary role of the CGTMSE is to ensure that start-up enterprises in the small and micro industries sector get adequate Business Loans without furnishing collateral. The CGTMSE guarantees these loans up to a maximum extent of 85% of the sanctioned amount of the credit facility. The guaranteed coverage is as follows:
- Loans up to Rs. 50 Lakhs – 75% of the sanctioned amount (85% in case of loans sanctioned up to Rs. 5 Lakhs to the Micro-enterprises and 80% for Medium-sector enterprises, owned/operated by women entrepreneurs).
- Loans over Rs. 50 Lakhs and up to Rs. 100 Lakhs – 75% of the amount up to Rs. 50 Lakhs and 50% of the amount exceeding Rs. 50 lakhs.
The guaranteed coverage is applicable only in case of default by the business entity due to business reasons alone. The CGTMSE guarantee provides the cushioning for the banks in case of defaults by the business enterprises. The guaranteed coverage is applicable only if the loan does not have any collateral or third-party guarantee. It is purely to encourage banks to provide loans without collateral to small and micro enterprises.
The CGTMSE Premium
The borrowers have to pay the CGTMSE premium for the guarantee coverage. The premium is as follows:
- Loans up to Rs. 5 Lakhs – 1% plus Risk Premium
- Loans above 5 Lakhs up to Rs. 50 Lakhs – 1.50% plus Risk Premium (1.35% plus a Risk premium for women entrepreneurs, micro-enterprises, and those situated in the North East Region).
- Above Rs. 50 Lakhs – 1.80% plus Risk Premium
- In addition to the guarantee fee, there is an annual service fee of 1% for loans up to 1 Crore (0.75% up to Rs. 5 Lakhs and 0.85% over Rs. 5 Lakhs in case of women entrepreneurs, micro-enterprises, and those situated in the North East Region).
- The onus of paying the premium is on the lending institution. It can take an internal decision of passing on the burden to the borrower.
- The standard tenure for the guarantee is 7 years in case of term loans and 5 years in case of working capital finance.
- From July 2017, these premiums attract GST @ 18%
The CGTMSE Coverage
In case of default by the borrower purely because of business reasons, the CGTMSE settles the claim up to 75% (80% or 85% or 50% as the case may be) of the balance outstanding. In case of term loans, it is the principal outstanding as on the date of the account becoming a Non-Performing Asset (NPA). In case of working capital finance, it is the amount outstanding including interest as on the date of NPA.
The Advantages of CGTMSE Coverage
- Business enterprises in the small and micro industries sector get Business Loans up to Rs. 100 Lakhs without furnishing collateral.
- These loans attract a concessional rate of interest (depending on the Base Rate of the bank). The rates do not exceed the banks Base rate plus 3% in any case.
The Drawbacks of the CGTMSE Coverage
- The CGTMSE premium and annual service fee add up to a considerable amount.
- Most of the banks pass on the additional burden to the borrower. In case the borrower opts to go for Business Loans with collateral, they would not have to spend such a considerable amount.
- The banks have to share any recovery after the receipt of the guarantee cover with CGTMSE in the same proportion.
- The CGTMSE cover is not available in case the account runs without any default, and the borrower closes it in the usual manner. The premiums and service fees are not refundable.
Thus, one can say that the CGTMSE scheme is more beneficial to the banks than to the borrower, especially if the borrower has to bear the cost of the guarantee fee and annual service charges.
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