CGTMSE – A Tool to Boost MSE

When the lending by banks were primarily concentrated towards the amount of collateral available in the proposal, there were many applicants and aspirants who, despite having enough experience and expertise in their area of working, were not able to avail finance from banks only because they were not able to provide any collateral security to the banks and thus were not able to expand their business. Many perished in the stiff competitive era as they didn’t have financial support to expand or further improvise on their products and services both quantitatively and qualitatively. The finances available outside the banking system were too costly for them to avail and survive.

Most of these entities were very small enterprises which were many in number and employing huge workforce of the nation aiming to be a well off entrepreneur one day.

The government of India came to the rescue of these entities and established a trust in collaboration with SIDBI, in August 2000 and established a trust called Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) which is administered by a board of trustees. Govt of India and SIDBI contributed in the ration of 4:1 to set-up the fund.

 Objective:

The broad objective of the establishment of CGTMSE was to:

• Source of support to 1^st generation entrepreneur to set-up a business and realise there their dreams by making bank credit available without collateral and 3^rd party guarantee.
• Enable employment generation as the MSME sector employs largest number people only after agriculture.
• To address growth constraint in MSE sector and facilitate institutional credit flows.

As on 31.03.2017, CGTMSE approved over 27.72 lakh accounts with an cumulative outstanding of more than Rs. 1.28 lakh crores. In view of the positive impact CGTMSE has on credit flow to MSE sector the corpus of the trust has been enhanced to Rs. 7500 crores fully contributed by the Govt of India.

CGTMSE operates through Member Lending Institutions (MLIs). Presently more than 110 institutions viz PSBs, Private Banks, RRBs and Foreign Banks are member to it. Recently it has also permitted select NBFCs and Small Finance Banks to be the MLI.

With the rapidly changing banking scenario in present day, CGTMSE also needed to refine and redefine its offerings and guidelines which it did indeed and in the last 8-9 months, many of the guidelines of CGTMSE have been redefined and circulated. The offering and guidelines discussed here are updated as on 28.02.2019.

Eligibility:

• As the name CGTMSE itself suggests, Micro & Small enterprises in manufacturing and service industry as per MSME Act 2006 are eligible for guarantee coverage.
• With effect from 01.04.2018 Retail Traders coming under MSE sector are eligible for guarantee coverage.
• Accounts where collateral security is taken, unsecured part of the loan upto Rs. 200 lakh is also eligible for guarantee coverage. This is called Hybrid Security where CGTMSE has second charge on the collateral.

Not eligible:

• Accounts where the type of activity is not manufacturing, service or retail trade shall be disqualified for coverage under the scheme.
• Self Help Group (SHG) and Joint Liability Group (JLG) may come under MSE, but not eligible for guarantee coverage.
• Educational and Training Institutes may come under MSE, but not eligible for guarantee coverage.
• Any account where third party guarantee is taken is not eligible for guarantee coverage under CGTMSE.

Features:

• Facility upto Rs. 200 lakh (Fund Based + Non Fund Based) can be covered under CGTMSE. Facility of more than Rs. 200 lakh can also be covered however, the guarantee will be limited to Rs. 200 lakh.
• For Retail Trade activity, maximum coverage is to the extent to Rs. 100 lakhs.
• All types of constitutions are eligible for guarantee coverage.
• Existing Working Capital loans can be covered under CGTMSE at the time of renewal if it satisfies all the criteria for coverage.
• Existing Term Loan can’t be covered under CGTMSE at the time of review/renewal even if it satisfies all the criteria for coverage.
• Entities must have Udyog Aadhar Number (UAN) which is mandatory to obtain coverage. UAN can be generated on website http://em.msme.gov.in.
• Additional Term Loan limit can also be covered subject to limit of Rs. 200 lakh.
• As the guarantee coverage is unit-wise and not borrower-wise, coverage of upto Rs. 200 lakh per unit may be extended to multiple units of the same borrower.
• Separate limits sanctioned to the same unit can also be covered upto the ceiling of Rs. 200 lakh.
• Account must not have become irregular/bad/overdue/sub-standard/SMA at the time of application or payment of Annual Guarantee Fee (AGF).
• A unit availing total limit of Rs. 200 lakh and on subsequent adjustment of any loan, can’t get coverage for the additional loan to the extent of the gap.

Guarantee Coverage:

Guarantee coverage under CGTMSE would be to the extent as depicted below:

   * Maximum coverage is upto Rs. 100 lacs.

All percentages above are of Amount in Default.

Amount In Default: Outstanding in the account at the time of account turning NPA or lodgement of claim whichever is less.

Guarantee Fee:

Since all MLIs are having different portfolios under guarantee coverage of CGTMSE and have different amount of NPA and claims lodged, with effect from 01.04.2016 the trust has decided that the guarantee fee shall be different for different MLIs depending upon their NPA Ratio and Claim Payout Ratio.

NPA Ratio =         Guaranteed Amount of the corresponding NPA Accounts

                                            Cumulative Guarantees issued by trust to that MLI

Claim Payout Ratio =          Cumulative Claim Settled by trust for MLI

                                         Cumulative receipts by the trust from that MLI

Risk Premium is calculated as above and Annual Guarantee Fee (AGF) is calculated as Base Rate + Risk Premium. AGF is charged as  under:

• Risk Rating is calculated as on 30^th September and premium is fixed for the next year.
• AGF to be paid in advance and valid for 1 year.
• First time fee to be paid within 30 days from CGPAN or first disbursement of account whichever is later.
• AGF is calculated as under:
  • For Term Loan : For 1^st year, AGF is calculated on guarantee amount.
    • For subsequent years, AGF is calculated on outstanding amount as on 31^st
  • For Working Capital: AGF would be calculated on maximum amount of WC limit availed by the borrower in the previous calendar year.
• Every year data has to be fed in online portal of CGTMSE by 15^th January of every year. In case the data is not fed/uploaded in time, AGF will be charged on the guaranteed amount.
• Demand for AGF will be generated by 2^nd week of February which must be paid by 15^th April each year.
• If any guaranteed account gets closed due to non-payment of AGF, revival request may be considered with additional 15% risk premium charged on standard rate in addition to the existing differential pricing structure and penal interest, if any.
• Revival request have to be submitted within next financial year. CGTMSE reserves the right to reject the claim if account turns NPA within 180 days from the date of revival of account.
• For first year and last year of the loan, AGF is calculated on pro-rata basis.
• Guarantee starts from the date on which AGF is credited in CGTMSE’s account.

Refund of Guarantee Fee:

Refund of guarantee fee can only be considered in the following circumstances:

• Excess remittance.
• Remittance made more than once for the same account.
• Fee paid where AGF not due.
• Fee paid in advance but application not approved for guarantee cover.
• In case of pre-closure, refund of proportionate AGF only when closure is marked in CGTMSE portal within 3 months from the date of receipt of fee by CGTMSE.

Extra Rate of Interest:

Extra rate of interest, over and above the applicable rate, will be charged on the accounts covered under CGTMSE as under applicable from 01.09.2018:

• Loan > Rs. 2 lakh to Rs. 5 lakh : 0.50% extra
• Loan > Rs. 5 lakh to Rs. 50 lakh : 0.75% extra
• Loan > Rs. 50 lakh to Rs. 200 lakh : 0.90 % extra
• Retail Trade : 1.00 % extra

Various Time Lines:

Various time lines have been stipulated by CGTMSE within which certain action has to be completed.

• Request for cover: Application for guarantee coverage should be made within end of next quarter of sanctioning of the loan.
• Payment of AGF : First time AGF to be paid within 30 days from CGPAN or first disbursement of account whichever is later. Subsequent AGF payment by 15^th April of every year.
• Account Turning NPA: When an account turns NPA, information must be sent to CGTMSE within end of next quarter of account turning NPA.
• Lock-in Period: There is a lock-in period of 18 months from date of start of guarantee cover or last disbursement date whichever is later. During the lock-in period, claim can’t be lodged.
• Lodgement of claim : when an account turns NPA, claim must be lodged in order to receive payment from the trust. Lodgement must be done as under:
  • When A/c turns NPA during lock-in period – Claim must be lodged within 3 years from date of end of lock-in period.
  • When A/c turns NPA after lock-in period – Claim must be lodged within 3 years from date of A/c turning NPA.
• Closure of account: When a covered account is closed by the borrower, information must be sent to CGTMSE in the same quarter.

Lodgement of Claim:

For NPA accounts, eligibility and process for lodgement of claim entails the following:

• Claim must be lodged within 3 years from end of lock-in period or date of account turning NPA whichever is later.
• The guarantee should be in force at the time of account turning NPA.
• Recovery proceeding must be initiated in the account including filling of suit in DRT/Civil Court/Lok Adalat/ SARFAESI Act.
• In case of DRT/Civil Suit, filing of case is sufficient.
• In case of SARFAESIA, process till serving of possession notice is to be completed.
• Back ended subsidy, if any, should be adjusted.
• For aggregate outstanding amount eligible for claim settlement does not exceed Rs. 50,000/-, initiation of legal proceedings as a pre-conditions for invoking of guarantee is waived. Aggregate outstanding amount means the total outstanding of all credit facilities of particular borrower as on NPA date.
• The above is to be approved by an executive committee of GMs on case to case basis.
• All the claims are to be submitted online only. Soft copy of document is to be submitted confirming legal action initiation and copy of possession notice under SARFAESIA.
• Declaration and undertaking must be signed by an officer not below the rank of AGM.
• For claims below Rs. 20 lacs, only declaration and undertaking is sufficient. For claims of Rs. 20 lakh and above, checklist is also to be submitted.
• All the online system have maker and checker concept.

Settlement of claim:

Settlement of claim takes place in 2 stages.

• 1^st instalment of 75% of amount in default is paid within 30 days of receipt of all the information.
• 2^nd instalment is paid on conclusion of recovery proceeding. Where decree is obtained, 2^nd instalment is released after 3 years of the date of decree.

• Credit the amount in account when complete 1^st instalment is received. Amount received on Ad-hoc basis to be kept in sundry until full 1^st instalment is received.
• Any recovery made after receiving 1^st instalment must be remitted to CGTMSE, after deducting legal expenses.
• However, any recovery made through the sale of collateral security may be retained by the MLI for appropriation of dues.
• CGTMSE has now introduced a cap on total claim settlement. Claims of the respective MLI will be settled to the extent of 2 times of the fee including recovery remitted during the previous financial year. Any claim lodged exceeding 2 times of the total fee including recovery remitted by MLI will be suspended till such time the position is remedied i.e., payout is brought well within the payout cap limit.
• All the above mentioned guidelines are applicable for new sanctions.

Other benefits:

There are various other benefits to banks some of which is enumerated as under:

• Loan covered under CGTMSE carry zero risk weight for guaranteed portion.
• No provisioning for NPA account to the extent of guarantee coverage.
• Saving of time, energy and cost of bank.
• Helps in better risk management and faster recovery of dues.

However, it must be kept in mind that CGTMSE pays the amount from the corpus created out of taxpayers money. Coverage of NPA account under CGTMSE does not absolve the borrower from his obligation to pay the entire dues to the bank. All efforts must be taken to recover the amount from the borrower even after settlement of the claim by CGTMSE.