Micro, Small, and Medium Enterprises (MSMEs) form the cornerstone of India's economy, generating much employment and GDP. But obtaining finance in the absence of collateral is a significant challenge for most MSMEs, especially new startups and small businesses with little assets. The CGTMSE scheme (Credit Guarantee Fund Trust for Micro and Small Enterprises) acts as a lifeline for these enterprises through its credit guarantee scheme for MSMEs. Introduced in 2000 by the Government of India and the Small Industries Development Bank of India (SIDBI), it offers a MSME loan guarantee, facilitating collateral-free loans in India up to ₹5 crore. Being an integral part of government initiatives for MSMEs, the CGTMSE scheme finances startup funding in India and small business loans in India, providing a crucial financial lifeline to entrepreneurs. This blog discusses the CGTMSE scheme, its charges, the process of CGTMSE loan, how to apply for CGTMSE, and its role together with MSME subsidy initiatives.

The CGTMSE scheme is a pillar of government schemes for MSMEs that aims to enable access to credit for micro and small businesses. Through the guarantee of a MSME loan, the scheme invites Member Lending Institutions (MLIs) like banks and finance institutions to provide collateral-free loans in India, covering 75-85% of the loan value in default. This MSME credit guarantee scheme facilitates up to ₹5 crore (boosted from ₹2 crore in April 2023) loans for manufacturing, trading, and services business enterprises, excluding agriculture, educational institutions, and self-help groups. For small businesses and startups, the scheme is a sine qua non for startup funding in India and small business financing in India, enabling entrepreneurs to raise funds without mortgaging assets or taking third-party guarantees.

The capability to secure collateral-free loans in India is a game-changer for MSMEs, especially those who are low on resources. With 141 MLIs, including big banks such as SBI, HDFC Bank, and Punjab National Bank, the CGTMSE scheme provides countrywide reachability. A hybrid security product launched in 2018 also adds to its versatility as banks can finance a portion of a loan against collateral and avail the unsecured amount under the scheme. This renders the credit guarantee scheme for MSMEs a very useful facility for companies in need of startup capital in India or Indian small business loans, allowing them to address needs such as working capital, purchase of equipment, or growth without the burden of money.

The charges incurred by the CGTMSE scheme are a vital factor for MSMEs. The main expense is the Annual Guarantee Fee (AGF), as a percentage of the loan value depending on loan size and borrower profile. The AGF is approximately 0.37% annually for loans not exceeding ₹10 lakh and up to 1.35% for loans between ₹2-5 crore, with discounts for women entrepreneurs, North East Region-based businesses, or ZED (Zero Defect Zero Effect) certified ones. There is also an annual service charge to keep the guarantee cover active after the first year, paid by March 31 with a grace period of 60 days. All these charges are relatively low against the advantages of collateral-free loans in India, and hence the CGTMSE scheme proves to be an inexpensive lifeline for MSMEs.

The CGTMSE lending process is kept simple, and it is important for MSMEs to know how to apply for CGTMSE. Eligible enterprises, as Micro or Small Enterprises as per the MSMED Act, 2006, in terms of investment and turnover, are proprietary firms, partnerships, LLPs, and companies. To avail a loan, enterprises need to visit an MLI appearing in the list on the CGTMSE website (www.cgtmse.in) and make a loan application with business registration, financial accounts, and a business plan. After sanctioning the loan by the MLI, it approaches CGTMSE for guarantee cover. On sanction, the loan is disbursed and the borrower pays the service charges and guarantee fee. The guarantee coverage starts with the credit of the fee and extends throughout the loan term or for five years for working capital facilities. Companies should exercise care, as the CGTMSE scheme has no direct lending or MSME subsidy schemes and must stay away from fraudulent agents that claim to facilitate loans.

Although the CGTMSE scheme is not an MSME subsidy scheme, it supplements other government schemes for MSMEs by enhancing credit availability. In contrast to subsidy schemes such as the Credit Linked Capital Subsidy Scheme (CLCSS), which provide direct financial assistance, the CGTMSE scheme lowers the lender's risk, benefiting MSME indirectly by making small business loans in India more readily available. Some qualifications are applicable: activities against other guarantees, i.e., RBI or Deposit Insurance and Credit Guarantee Corporation, are not covered by CGTMSE. An 18-month lock-in period for priority claims implies that default claims can only be considered after this period. The guarantee charges are variable, so one should contact MLIs or look at the website of CGTMSE to find the current rates. For hybrid credit security model loans, the unsecured portion alone is eligible for coverage, while it affects fee calculations.

In summary, the CGTMSE scheme is a revolutionary credit guarantee scheme for MSMEs, acting as a life line for small businesses and startups in the form of collateral-free loans in India. With its MSME loan guarantee program, it facilitates startup capital in India and small business financing in India, providing access to up to ₹5 crore collateral-free. MSMEs can use this scheme to power growth and innovation by knowing the CGTMSE loan process and how to get CGTMSE. Though charges such as the Annual Guarantee Fee and service charges are involved, their advantages far exceed the costs, rendering the CGTMSE scheme an indispensable aspect of government schemes for MSMEs. Companies can log on to www.cgtmse.in or approach an MLI to initiate their loan process and make a first step towards financial empowerment.


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