How MSEs can get loans with government support


By Richa Chakravarty

The non-availability of timely and adequate credit at reasonable interest rates is one of the challenges encountered by micro and small enterprises (MSEs). Banks also hesitate to lend to MSEs due to the high risk perception and the unavailability of collateral to attach against these loans. Therefore, to support MSEs in getting loans easily, the Ministry of Micro, Small and Medium Enterprises (MSME) and the Small Industries Development Bank of India (SIDBI) have established a trust called the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which acts as a guarantor for the MSEs when they seek loans from banks.

This government scheme has been very popular with the MSEs ever since it came into operation in 2000, and in the first year itself, a total amount of Rs 60.6 million was approved as guarantees for the MSEs. In the FY 2011-12, the total amount of guarantees approved by the trust stood at Rs 137,839.8 million.

How the trust can help you


The Credit Guarantee Fund Trust helps you to get loans from banks without collateral or the need for a third party guarantee. The trust acts as the guarantor. However, this is possible only with those financial institutions that are attached to the trust and are called member lending institutions (MLI). Presently, there are 109 such MLIs.

An MSE can take up to Rs 10 million by way of a term loan or as working capital. Even small enterprises can avail the benefits of this scheme, as the minimum limit of credit guarantee is Rs 500,000. However, the companies opting for credit will have to pay 0.5-1.5 per cent (depending on the loan amount) of the loan as a fee for the guarantee covered by the trust.

The trust extends its guarantee cover up to 75 per cent of the sanctioned amount of the loan. In the following cases, this guarantee cover extends to 85 per cent:

  • In cases where a micro enterprise seeks a loan of up to Rs 0.5 million
  • An MSE operated and/or owned by a woman
  • All loans in the northeast region

Here are the details of the guarantee cover for different loan amounts:

  • Up to Rs 0.5 million, maximum extent of guarantee cover will be 85 per cent
  • Above Rs 0.5 million and up to Rs 5 million, the maximum extent of guarantee cover will be 75 per cent
  • Above Rs 5 million and up to Rs 10 million, the maximum extent of guarantee cover is 75 per cent plus 50 per cent of every incremental amount

In case a firm defaults, an MLI recovers the amount by attaching the assets of the firm and by other usual means undertaken by banks. In some cases, they also approach and recover the default amount from the trust, which settles the claim up to 75 per cent (or 85 per cent, wherever applicable) of the default amount.

Those eligible to avail this scheme

A new, existing or even a sick company can apply for a loan from banks under this government guarantee scheme. The companies are then chosen for loans on the basis of their credibility and viability. MLIs also check the history of these companies to confirm their bankability and offer credit based on their discretion. However, if a company is already covered under any other scheme which involves a government body standing as a guarantor against financial risks, it will not be eligible for loans under this particular scheme.


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