The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has upped the coverage ceiling under its Credit Guarantee Fund Scheme from ₹2 crore to ₹5 crore per borrower for credit facilities extended by lending institutions to Micro and Small Enterprises (MSEs).

CGTMSE, set up by the Government of India and SIDBI provide guarantee to enable MSEs access credit, reduction in guarantee fee for loans up to ₹1 crore to bring down the cost of credit and doubled the threshold limit for waiver of legal action by lenders while invoking guarantee to ₹10 lakh per claim.

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The changes are effective April 1, comes when the loan growth to the MSE segment slowed to 13.2 per cent year-on-year as on February 24, 2023 against 24 per cent y-o-y as on February 25, 2022, as per RBI data.

This move is expected to encourage the public and private sector banks, Member Financial Institutions and foreign banks to step up loans to MSEs.

As on February 24, 2023, the scheduled commercial banks’ credit to MSEs stood at ₹5,87,494 crore compared with ₹5,18,873 crore as on February 25, 2022.

The annual guarantee fee (AGF), which is generally passed on to the borrowers for loans upto ₹10 lakh has been reduced to 0.37 per ceent (from 0.75 per cent) and for loans above ₹10 lakh up to ₹50 lakh to 0.55 per cent (from 1.10 per cent).

The AGF for loans above ₹50 lakh up to ₹1 crore is 0.60 per cent; above ₹1 crore up to ₹2 crore (1.20 per cent); and for loans above ₹2 crore up to ₹5 crore (1.35 per cent).

Earlier, there was a single slab of ₹50 lakh up to ₹2 crore for which the AGF was 1.20 per cent.

Banking expert V Viswanathan observed that the increase in guarantee coverage ceiling up to ₹5 crore for Micro & Small Enterprises is a welcome change and will be a big booster to these enterprises as they can avail loan without collateral obligations.

“A unit which has exhausted its collateral can apply for enhancement without bringing in surety by agreeing to join the guarantee scheme for the enhanced amount,” he said.

Referring to the enhanced threshold for waiver of legal action to ₹10 lakhs from the existing ₹5 lakhs, Viswanathan said: ‘This means lenders can invoke the guarantee even if they consider waiving legal action in respect of a MSE account if the aggregate outstanding is equal to or less than ₹10 lakhs. Incidentally, the maximum loan granted under MUDRA is ₹10 lakhs.”

The credit guarantee scheme (CGS) assures a lender that if an MSE unit that has availed itself of collateral-free credit facilities (fund-based and/or non-fund based) fails to discharge its liabilities, then the trust would make good the loss to the tune of 75-85 per cent of the credit facility.