28 November, 2023
Micro and small enterprises (MSMEs) are the economic drivers of growth for a country. They create employment opportunities, boost industry, and contribute to the overall advancement of the economy. Businesses need funds to start or run a business; however, for many Micro, Small and Medium Enterprises (MSMEs), getting credit at reasonable rates is one of the biggest barriers they face. To support these businesses, the Ministry of Micro, Small and Medium Enterprise (MoMSME) and the Small Industries Development Bank of India (SIDBI) set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) on 30 August 2000 to help MSEs get credit to finance their business operations.
What is the credit guarantee under the CGTMSE?
A credit guarantee is an unsecured loan given to an applicant backed by a third party. The loan is sanctioned by a member lending institution and backed by the CGTMSE scheme, which offers a guaranteed cover for a major portion of the loan amount. Both new and existing MSEs are eligible for collateral-free or unsecured loans of up to Rs 2 crore under the CGTMSE scheme.
Salient features and benefits of the CGTMSE
Most lenders are often reluctant to give credit to smaller businesses as there is a higher perceived risk with this sector. This problem is exacerbated if the business is a start-up or if the loan amount is small. The CGTMSE scheme, which gives credit guarantee to financial institutions, is a huge boost for MSEs looking for credit at reasonable rates to fund their business processes:
There is guaranteed coverage for the member-lending institution of 75% of the loan amount not backed by collateral
There is a guaranteed cover of 80% for MSEs owned by women and for the North-East region
For micro-enterprises for loans up to Rs 5 lakh, the guaranteed cover is 85%
MSEs involved in manufacturing and services are eligible under this scheme up to Rs 2 crore, while retail trade is covered up to Rs 1 crore
If the credit facility is above Rs 50 lakh, the guarantee cover is extended for credit assistance up to the amount of Rs 50 lakh
The interest rate is dependent on the applicant’s profile, project costs, and business requirements. The interest rates offered are lower compared to other direct loan schemes
Under the CGTMSE, loans can be procured from selected
Scheduled Commercial Banks (either PSU, Private or Foreign Banks)
Regional rural banks
Small Finance Banks (SFBs)
Non-banking Financial Companies (NBFCs)
Small Industries Development Bank of India (SIDBI)
National Small Industries Corporation (NSIC)
North Eastern Development Finance Corporation Ltd (NEDFCL)
The process to get a loan under CGTMSE
For a business entity (a private limited company, limited liability partnership, etc.) as per the nature of the business and obtain the approvals and tax registrations for the same
Prepare a comprehensive business plan stating the business model, projected financials, promoter profile, and so on
Approach the member lending institution for the loan. The lending institution will analyse the business plan for its viability, and if approved, the loan will be sanctioned
Once the loan is sanctioned, the member lending institution applies to the CGTMSE for the guaranteed cover. If approval is given by the CGTMSE, guarantee fees and charges have to be paid
The CGTMSE scheme was set up to offer financial support for start-ups and MSEs. In 2021, India had the third-largest start-up ecosystem in the world. MSEs contribute significantly to the Indian economy. To encourage and support this sector, HDFC Bank offers collateral-free Working Capital Loan up to Rs 10 lakh, with minimal documentation, quick disbursal, competitive interest rates, and many other benefits. For further details, reach out to your Relationship Manager or visit the closest branch to know more.
If you are a micro or small business owner seeking additional financing, HDFC Bank has numerous customised solutions to help you. You can also apply for a Working Capital Loan to get started. For further details, reach out to your Relationship Manager or visit the closest branch to know more.
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Want to know how Emergency Credit Line Guarantee Schemes are a boon to MSMEs? Click here to read more!
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. All loans for MSMEs, at the sole discretion of HDFC Bank limited. Loan disbursal is subject to documentation and verification as per Banks requirement.