Introduction
The Micro and Small Enterprises (MSE) sector plays an important role in India’s economy, contributing about 45% to the manufacturing output and 40% to the nation’s exports, while employing over 60 million people across 26 million enterprises. Despite its importance, this sector struggles to access timely and adequate credit due to high-risk perception among banks and the demand for collateral, which many small units cannot provide, especially the micro enterprises and first-generation entrepreneurs.
To address this critical issue, Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by the Government of India: Ministry of Micro, Small & Medium Enterprises (MSME). This landmark initiative ensures collateral-free credit to both existing and new MSEs.
Objectives of the CGMSE Scheme
- To make collateral-free credit available to MSEs:
- “Collateral-free credit” means that small business owners (MSEs) can get loans from banks without having to pledge any property, land, gold, or other valuable assets as security.
- Usually, banks ask for such security (called collateral) because they want to be sure they’ll get their money back. But many small or new businesses don’t have anything to offer as collateral. So, the Credit Guarantee Scheme steps in like a safety net. If a small business can’t repay the loan, the government-backed trust (CGTMSE) promises to pay most of it to the bank. This makes banks feel safer about giving loans to small businesses, even without collateral.
- In short:
- No need to mortgage anything
- Easier for small businesses to get loans
- Government guarantees most of the repayment if needed
- To facilitate growth and employment generation in the sector:
- Helping small businesses grow so they can become more successful, and
- Creating more jobs for people by supporting these businesses.
- In other words, when the government or banks support micro and small enterprises (MSEs) — like giving them easy loans; these businesses can expand, open new branches, buy equipment, or hire more people. That’s how both the business and the people benefit.
- To support first-time entrepreneurs and micro-enterprises:
- Helping people who are starting a business for the first time — those who may not have business experience, money, or assets to offer as security.
- Backing very small businesses (micro-enterprises) that often struggle to get loans or help from banks.
- In simple terms, it’s about giving a fair chance to newcomers and small business owners so they can start and grow their businesses without worrying too much about paperwork, collateral, or rejection from banks.
- To reduce the credit risk for lending institutions:
- Making banks and lenders feel safer when they give loans to small businesses.
- If a small business can’t repay the loan, a part of the loss is covered by the government-backed scheme.
- In simple words, it’s like giving banks a safety net so they don’t lose too much money if something goes wrong — this encourages them to lend more easily to small businesses without demanding collateral.
Implementation of CGMSE
The scheme is implemented by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), jointly set up by the Ministry of MSME and the Small Industries Development Bank of India (SIDBI). The scheme was formally launched on August 30, 2000, and is operational from January 1, 2000.
The corpus of the Trust is funded in a 4:1 ratio by the Government of India and SIDBI respectively. As of March 31, 2010, a total of Rs.1906.55 crore was contributed, with a target to raise the corpus to Rs.2500 crore by the end of the 11th Plan.
Eligible Lending Institutions
As of March 31, 2010, 112 financial institutions were registered as Member Lending Institutions (MLIs), including:
- 27 Public Sector Banks
- 16 Private Sector Banks
- 61 Regional Rural Banks
- 2 Foreign Banks
- Other Institutions: SIDBI, NSIC, NEDFi, TNIIC
Eligible Credit Facilities
- Term loans and working capital up to Rs.100 lakh per borrower
- Collateral-free and no third-party guarantees required
- Rehabilitation assistance for sick units (due to external factors) is also covered
- Guarantee limited to Rs.50 lakh, even if the sanctioned loan is higher
- Credit should be from a single lending institution
Guarantee Cover Details
- 75% of the sanctioned loan amount
- 80% cover for:
- Loans up to Rs.5 lakh for micro enterprises
- Loans to women entrepreneurs
- Loans in the North-East Region
In the event of default, CGTMSE settles the claim up to the applicable coverage percentage on the outstanding principal and interest as of the date when the account becomes a Non-Performing Asset (NPA).
Guarantee Tenure and Fees
- Term Loans: Tenure of the loan
- Working Capital: 5 years or a block of 5 years
Fee Structure:
| Loan Amount | One-Time Fee | Annual Service Fee |
|---|---|---|
| Up to Rs.5 lakh | 1% | 0.5% |
| Above Rs.5 lakh | 1.5% | 0.75% |
| North-East Region | 0.75% | As applicable |
Creating Awareness: Multi-Channel Campaign
To promote the scheme, CGTMSE conducts:
- Workshops and seminars (over 1080 till March 2010)
- Participation in exhibitions and meetings with banks and government offices
- Print and electronic advertisements, including a campaign across 194 newspapers
- Training tools like multimedia CD-ROMs for MLIs’ staff colleges
Official website: www.cgtsi.org.in
Operational Highlights (As of March 31, 2010)
| Financial Year | Active MLIs | Proposals Approved | Credit Guaranteed (₹ in Lakh) |
|---|---|---|---|
| 2000–01 | 9 | 951 | 606 |
| 2001–02 | 16 | 2,296 | 2,952 |
| 2002–03 | 22 | 4,955 | 5,867 |
| 2003–04 | 29 | 6,603 | 11,760 |
| 2004–05 | 32 | 9,516 | 32,677 |
| 2005–06 | 36 | 16,284 | 46,191 |
| 2006–07 | 40 | 27,457 | 70,453 |
| 2007–08 | 47 | 30,825 | 1,05,584 |
| 2008–09 | 57 | 53,708 | 2,19,940 |
| 2009–10 | 85 | 1,51,387 | 6,87,511 |
Total Credit Covered: Rs.11,550.61 crore
Total Proposals Approved: 3,00,105
Micro Finance Programme
Launched in 2003–04, the Micro Finance Programme is operated in underserved States and districts, in partnership with SIDBI. Under this scheme:
- Government provides funds to SIDBI in the form of Portfolio Risk Fund (PRF)
- SIDBI requires a fixed deposit of 10% of loan amount from MFIs/NGOs
- Share of:
- MFIs/NGOs: 2.5%
- Government of India (via PRF): 7.5%
As on March 31, 2010:
- Total fund released: Rs.80 crore
- Total loan disbursed: Rs.1299.68 crore
- Total beneficiaries: 20.21 lakh (80% women)
Other Initiatives Related to MSME Credit
Apart from the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE), the Government of India and various financial institutions have introduced several other initiatives to improve credit access and financial inclusion for the MSME (Micro, Small & Medium Enterprises) sector. Here are some key initiatives:
Prime Minister’s Employment Generation Programme (PMEGP)
- Implemented by: KVIC (Khadi and Village Industries Commission)
- Objective: Provide financial assistance to individuals for setting up new enterprises in non-farm sectors.
- Subsidy: 15% to 35% depending on area (urban/rural) and category (general/SC/ST/women).
- Max Project Cost: ₹25 lakh for manufacturing and ₹10 lakh for service sector.
MUDRA Yojana (Micro Units Development and Refinance Agency)
- Launched: 2015 under Pradhan Mantri MUDRA Yojana (PMMY)
- Categories:
- Shishu: Loans up to ₹50,000
- Kishor: Loans between ₹50,000 – ₹5 lakh
- Tarun: Loans between ₹5 lakh – ₹10 lakh
- Purpose: Provide easy and collateral-free micro-credit to micro enterprises.
Stand-Up India Scheme
- Objective: Promote entrepreneurship among SC/ST and women entrepreneurs.
- Loan Amount: ₹10 lakh to ₹1 crore
- Sector: Only for greenfield enterprises in manufacturing, services, or trading.
- Minimum Requirement: At least one SC/ST or one woman per bank branch.
Emergency Credit Line Guarantee Scheme (ECLGS)
- Launched: During COVID-19 pandemic
- Objective: Provide collateral-free loans to MSMEs and MUDRA borrowers to overcome liquidity issues.
- Guarantee: 100% by National Credit Guarantee Trustee Company (NCGTC).
- Extended in phases; benefitted lakhs of businesses.
Credit Linked Capital Subsidy Scheme (CLCSS)
- Implemented by: Ministry of MSME
- Objective: Facilitate technology upgradation by providing 15% subsidy for additional investment up to ₹1 crore for technology upgradation.
TReDS (Trade Receivables Discounting System)
- A digital platform for MSMEs to auction their receivables to financiers for early payments.
- Regulated by: RBI
- Major platforms: RXIL, Invoicemart, M1xchange
PSB Loans in 59 Minutes
- Online portal (www.psbloansin59minutes.com)
- Objective: Sanction MSME loans between ₹1 lakh to ₹5 crore within 59 minutes.
- Linked with GST, IT returns, and bank statements for easy processing.
Interest Subvention Scheme
- Offers 2% interest rebate on fresh or incremental loans up to ₹1 crore for registered MSMEs.
- Aimed at reducing the cost of credit for the sector.
Challenges
- Lack of Awareness among Entrepreneurs
- Most micro and small units, particularly those in rural locations, are not aware that the scheme exists or don’t know how to take advantage of it.
- Banks’ Reluctance
- Even after the scheme, banks remain shy of lending because of apprehension of NPAs (non-performing assets), time-consuming claim procedures, and limited confidence in the repayment ability of small borrowers.
- Delay in Claim Settlement
- In event of default in loan, filing and settling claims with CGTMSE is a time-consuming and cumbersome process, which keeps the banks away from utilizing the scheme effectively.
- Complex Documentation
- Entrepreneurs experience trouble preparing and submitting necessary documents, particularly those with poor education or lack of digital access.
- Limited Guarantee Coverage
- While loans up to ₹1 crore are eligible, only up to ₹50 lakh is effectively guaranteed, and not the full credit exposure in certain instances.
- Regional Disparities
- The scheme’s coverage is uneven between states — some Union Territories and states are more covered, while others are less covered because of institutional shortcomings or ignorance.
- Monitoring & Evaluation
- There is limited monitoring of performance and impact of the credit extended under CGMSE, which limits improvements in design and delivery.
Conclusion
The Credit Guarantee Fund Scheme for MSEs has significantly improved access to institutional credit for small and micro enterprises, especially for those lacking collateral. With a growing number of beneficiaries, increasing participation from banks, and consistent government support, the scheme continues to play a pivotal role in India’s mission of empowering entrepreneurs and boosting inclusive economic growth.
