There is an urgent need to revamp the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) so that it metamorphoses into an umbrella organisation ensuring a robust ecosystem for growth and development of SMEs, according to State Bank of India’s economic research department.

The ERD suggested reduction or phase-out of the Annual Guarantee / Service fees to 0.50 per cent of the loan amount across all the slabs and making CGTMSE coverage mandatory of for all SME loans up to ₹2 crore.

It recommended abolishing the tiered risk premium being charged to individual member lending institutions (Banks/NBFCs) based on specific portfolio delinquency levels (but borne by enterprises) which might have been a major deterrent in sufficient penetration of scheme in two decades.

Annual targets

The ERD said financial institutions should be given annual targets to mandatorily cover a sufficient percentage of new loans under CGTMSE scheme.

SBI’s ERD wants the maximum loan amount for coverage under CGTMSE to be increased from ₹2 crore to ₹5 crore for all activities under manufacturing, services and trade sector

Further, guarantee coverage for the units having women promoters needs to be increased to 100 per cent to give fillip to women entrepreneurship

Presently, the claims are settled by CGTMSE to the extent of 2x of the guarantee fee paid by the bank including the recovery remitted during the previous financial year.

“We recommend for increase of the claims settlement to the extent of 10x of the guarantee fee paid by the banks.

“In the event of phaseout of the guarantee fee, the claim settlement for a particular year may be specified at a certain percentage (say 15 per cent) of the CGTMSE covered portfolio,” ERD said.

Further, there is a need to reduce the lock-in period to 12 months from the current stipulation of 18 months, to instill confidence at sanctioning levels.

End-to-end digital platform

The ERD also emphasised that complete end-to-end digital platform is needed to ensure real time sanction, disbursement and claim settlement for the guaranteed portfolio.

With the increased thrust on cash flow-based lending, CGTMSE should develop a suitable model for covering such loans based on cash flows, and not based on mere ratios as per balance sheet method, heavy on past performance.

The revamped CGTMSE needs to connect the dots across multiple pivots like access to capital, ease of securing adequate lending through aggregation of network of lenders, pass-through of multiple sovereign guarantee schemes’ benefits, end-to-end solutions from procurement to marketing / realisation and adoption of best risk management practices while aligning with global supply chain management competitively.