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Understanding the CGTMSE Scheme for Small Exim Business

As an Export Import Guru, I have spent my fair share of time exploring various finance options available for small and medium enterprises (SMEs). One of the most noteworthy schemes is the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This scheme can be a game-changer for many businesses, providing them with the necessary funds to grow and expand their operations without requiring collateral.

What is the CGTMSE Scheme?

The CGTMSE is a unique initiative by the Government of India to provide collateral-free credit to the country's SME sector. Launched by the Ministry of Micro, Small, and Medium Enterprises (MSME), it's designed to assist new and existing businesses, including service enterprises, that might not have sufficient collateral to secure a loan.

Why the CGTMSE Scheme Matters

Access to finance is a critical challenge for many small businesses. The problem often lies in their inability to provide adequate security or collateral, as required by financial institutions. That's where the CGTMSE comes into play.

By offering a credit guarantee cover to the lending institutions, the CGTMSE encourages these institutions to lend to small businesses. It's a significant step toward addressing the 'collateral' problem and enabling credit flow to the SME sector, which is the backbone of our economy.

Key Features of the CGTMSE Scheme

  1. Collateral-Free Loans: The scheme provides a guarantee cover for collateral-free credit facilities extended by eligible lending institutions to new and existing micro and small enterprises.

  2. Broad Coverage: CGTMSE covers both term loans and/or working capital facilities up to ?200 lakhs per borrowing unit, extended without any collateral security or third-party guarantees.

  3. Wide Range of Lenders: The scheme covers credit granted by all scheduled commercial banks and specified Regional Rural Banks (RRBs).

Lodging and Settlement of Claims

The scheme's operational guidelines detail the process of lodging and settlement of claims. Lending institutions must lodge their claims online with the Trust within a specified period. A claim lodged beyond this period may be considered by the Trust upon payment of penal interest.

Lending institutions are responsible for the conduct of the account and can update, allocate, and remit the recoveries/OTS amount received post-settlement of the first installment of the claim. The MLIs can submit the Declaration & Undertaking (D&U) electronically along with the checklist displayed in the system while lodging the first claim.

For the second or final installment, the settlement will be considered upon the conclusion of recovery, irrespective of the sanction date of the credit facility.

Subrogation of Rights and Recoveries on Account of Claims Paid

Once the Trust settles a claim, the lending institution holds the lien on assets created out of the credit facility on behalf of the Trust. However, the responsibility for the recovery of dues, including the takeover or sale of assets, rests with the lending institution. Any recoveries are required to be remitted to the Trust after netting off legal expenses.

What it Means for SMEs

SMEs now have a better chance of obtaining financing, even if they don't have collateral. This significantly improves their ability to invest in new technologies, expand operations, hire more employees, and contribute more significantly to India's economic growth.

Understanding The Ins and Outs of Export Import Guarantees

If you are involved in the import and export business, chances are you have crossed paths with the concept of guarantees, which is a pivotal part of credit facilities. As an expert in the field, I have dealt with several questions related to guarantees. Today, I'm going to provide you with an insightful perspective on frequently asked questions around the same topic.

1. The Beginning of Guarantee Cover

The guarantee cover will kickstart from the day when the guarantee fee proceeds are credited to the Trust's bank account.

2. Duration of Guarantee Cover

The guarantee begins from the start date and goes on for the entire tenure of the term loan or composite loans. In instances where only working capital facilities are offered to eligible borrowers, the guarantee period would be 5 years or block of 5 years, assuming the MLI pays the Annual Service Fee on time.

3. Guarantee of Interest and Other Charges

In the event of a borrower's default, the Trust's liability for the credit facility will include the defaulted amount (inclusive of 1 Quarter interest) for term loans and outstanding working capital advance (inclusive of interest up to the date of NPA) for working capital facilities. However, other charges like penal interest, commitment charge, service charge, or any other levies/expenses are not covered under the guarantee.

4. Tenure of Working Capital Cover

The coverage duration for working capital facilities stands at 5 years, with the possibility of renewal beyond this term subject to the payment of the applicable guarantee fee. This tenure coincides with the usual repayment period if both term credit and working capital are covered under the scheme.

5. Guarantee Coverage after Management Changes

In case of a change in management of a borrower during the period the guarantee is in force, the guarantee can still continue if the new management meets the required norms. However, if the new management fails to satisfy the norms, the guarantee will be terminated from the date of the transfer or assignment.

6. Lapsing of Guarantee Cover

The guarantee cover can lapse under several circumstances including obtaining collateral/third-party guarantee from the borrower, advancing second/subsequent credit facility with collateral/third-party guarantee, not paying the annual service charge to the Trust within the stipulated period, or upon expiry of the guarantee cover tenure.

7. Invocation of Guarantee

The lender can invoke the guarantee after the lock-in period of 18 months either from the date of last disbursement of credit or from the date the guarantee cover came into force, whichever is later.

8. Claim Settlement

Upon claim lodgement, the Trust will honour 75% of the guaranteed portion of the amount in default. The remaining 25% shall be paid after the completion of the recovery proceedings.

9. Guarantee Cover for Second Term Loans

Guarantee cover is available for the second term loan provided the aggregate credit doesn't surpass 500 lakh. The guarantee cover for working capital can be renewed upon repayment of the term loan.

10. Recovery of Defaulted Credit

Even after the initial settlement of the claim by the Trust, the lender continues to bear the responsibility of recovering the defaulted credit.

11. ECGC Coverage

Credit facilities already covered by Government, a general insurer, or any other person or association carrying the business of insurance, guarantee, or indemnity, are not eligible for credit guarantee cover of the Trust.

12. Notice under Lok Adalat

For the purpose of the scheme, issue of notice under Lok Adalat is sufficient to prove the initiation of legal proceedings.

13. SARFAESI Act 2002 Notices

Issuing recall notices under the SARFAESI Act isn't considered as the initiation of legal proceedings for the purpose of invoking guarantee under the scheme.

14. Grounds for Claims Rejection

Claims are often rejected due to reasons such as non-initiation of legal proceedings, non-payment of service fee, applying for guarantee cover when the asset was already stressed, late submission of claim application, and late initiation of legal action against the borrower/default unit.

15. Fraud / Willful Defaulters

Accounts classified as fraud or willful defaulter are not eligible for claim settlement.

16. Hybrid Model/Partial Collateral Security

Guarantee coverage under the hybrid model is available for the portion of the credit facility that is not backed by collateral security, up to a maximum of ? 5 crore.

17. Claim Settlement under Hybrid Model

Claim settlement under the hybrid model will be based on the outstanding amount after deducting the value of the collateral security and the unsecured portion from the outstanding amount as on the NPA date, up to a maximum of ? 5 crore.

Guarantee covers and credit facilities play a critical role in export-import businesses, serving as a cushion to fall back on in case of unforeseen circumstances. Understanding how these guarantees work can empower businesses to make informed decisions and strategically navigate the intricate landscape of international trade.

Let's clarify the roles and responsibilities of the lending institutions under the CGTMSE scheme.

(i) Evaluation of credit applications: Lending institutions are required to use their best banking judgment and due diligence when evaluating credit applications. They need to select commercially viable proposals and conduct borrowers' accounts with normal banking prudence. This means they must make sure that the borrower has the ability to pay back the loan.

(ii) Monitoring of borrower account: It is the duty of the lending institution to monitor the borrower's account closely. Regular monitoring helps in identifying any potential issues early on and take corrective action.

(iii) Safeguarding primary securities: The lending institution is responsible for maintaining and safeguarding the primary securities provided by the borrower. This includes ensuring the securities are in good condition and are enforceable.

(iv) Lodging the guarantee claim: The lending institution has to lodge the guarantee claim in the manner and within the time specified by the Trust. Any delay in notifying the Trust about a default in the borrower's account could lead to higher guarantee claims.

(v) Recovery of outstanding amount: The payment of the guarantee claim by the Trust does not absolve the lending institution from its duty to recover the outstanding amount from the borrower. The lending institution needs to take all necessary actions for the recovery of the outstanding amount, even after the payment of the guarantee claim by the Trust.

(vi) Compliance with the Trust's directions: The lending institution must comply with all directions issued by the Trust. These could be directions for facilitating recoveries in the guaranteed account or for safeguarding the interest of the Trust.

(vii) Safeguarding the Trust's interest: The lending institution should exercise the same diligence in safeguarding the interest of the Trust as it would have in the absence of a guarantee by the Trust. They need to refrain from any action or inaction that could adversely affect the interest of the Trust.

Furthermore, the lending institution should notify the Trust when entering into any arrangement or compromise that might impact the Trust's interests. For example, any agreement that leads to the discharge or waiver of a personal guarantee or security should be communicated to the Trust.

In addition, the lending institution must not create any charge on the security held in the account covered by the guarantee for the benefit of any other account without informing the Trust.

The lending institution also has to secure the right for the Trust to list the names and particulars of defaulted borrowers on the Trust's website. This can be achieved by incorporating a clause in the agreement with the borrower.

Remember, the goal of the CGTMSE is to make financing accessible to SMEs that might not have sufficient collateral, and the lending institutions play a pivotal role in achieving this goal. Their responsibilities are defined to ensure that the system works effectively and the interests of all stakeholders are protected.

Let's clarify the details related to the Annual Guarantee Fee (AGF) under the CGTMSE scheme.

Under the modified AGF structure, the AGF is charged on the guaranteed amount for the first year and on the outstanding amount for the remaining tenure of the credit facilities. The rates for AGF vary depending on the credit facility and the category of the borrower:

  1. Up to ?5 Lakhs:

    • Women, Micro Enterprises, and Units covered in North East Region: 1.00% + Risk Premium
    • Others: 1.35% + Risk Premium

  2. Above ?5 Lakhs and up to ?50 Lakhs:

    • Women, Micro Enterprises, and Units covered in North East Region: 1.35% + Risk Premium
    • Others: 1.50% + Risk Premium

  3. Above ?50 Lakhs and up to ?200 Lakhs:

    • Women, Micro Enterprises, and Units covered in North East Region: 1.80% + Risk Premium

  4. Retail Trade/Wholesale Trade (up to ?100 lakh): 2.00% + Risk Premium

It's important to note that the AGF is charged annually, and the rates mentioned above are in percentage per annum.

For term loans, the AGF is calculated on the outstanding amount as of December 31st of each year. For working capital, the AGF is calculated based on the present or expected outstanding amount provided by the Member Lending Institution (MLI).

The AGF rates mentioned above are applicable for credit facilities sanctioned or renewed on or after April 1, 2018. For credit facilities sanctioned prior to that date, different rates may apply as per the details mentioned in the circular.

In cases where the MLIs exceed the payout threshold limit of 2 times more than thrice in the last 5 years, an additional risk premium of 15% is charged on the applicable AGF rate.

The payment of AGF should be made by the lending institution to the Trust within 30 days from the date of first disbursement of the credit facility or 30 days from the date of Demand Advice (CGDAN) of the guarantee fee, whichever is later.

The AGF payment process has been introduced online, and MLIs can remit the fee through NEFT/RTGS. The payment is inclusive of applicable GST.

If the AGF is not paid within the stipulated time, the Trust's liability to guarantee the credit facility may lapse, and the Trust may consider renewal of guarantee cover upon specific terms and conditions.

Refunds of AGF are generally not provided, except in cases of excess remittance, remittance made more than once for the same credit application, AGF paid in advance but application not approved, etc. However, for pre-closure cases, a proportionate refund of AGF may be allowed if the closure request is made within 3 months from the date of receipt of the fee by CGTMSE.

In case of closure due to non-payment of AGF, the request for revival of the account can be considered in the next financial year, subject to certain conditions, including payment of any due fees along with penal interest and additional risk premium for the period of delay.

It's essential for lending institutions and borrowers to understand and comply with the AGF payment requirements to maintain the guarantee cover provided by the CGTMSE scheme.

Let's clarify the Annual Guarantee Fee (AGF) rates with an example for better understanding.

Suppose there is a lending institution that provides a credit facility to a borrower for ?3 lakhs under the CGTMSE scheme. The borrower is a woman-owned micro enterprise located in the North East region.

According to the AGF rates provided, for credit facilities up to ?5 lakhs, the AGF rate is 1.00% + Risk Premium for women, micro enterprises, and units covered in the North East region. In this case, the AGF calculation would be as follows:

AGF = ?3,00,000 * 1.00% = ?3,000

Additionally, the risk premium would be added to the AGF rate based on the risk profile of the borrower and other factors determined by the Trust.

Now, let's consider another scenario where the credit facility is for ?10 lakhs, and the borrower is a retail trade business.

For credit facilities above ?5 lakhs and up to ?50 lakhs, the AGF rate is 1.50% + Risk Premium for others (non-women, non-micro enterprises, and units not covered in the North East region). Therefore, the AGF calculation in this case would be:

AGF = ?10,00,000 * 1.50% = ?15,000

Again, the risk premium would be added to the AGF rate based on the specific risk factors associated with the borrower and the business.

It's important to note that the AGF rates are subject to the specific terms and guidelines set by the Trust, and the risk premium may vary depending on the risk assessment of the lending institution.

These examples demonstrate how the AGF rates are applied based on the credit facility amount and the borrower's category (women, micro enterprises, North East region, or retail trade). The actual AGF calculation will involve considering the applicable rates and any additional risk premiums based on the lending institution's evaluation and the Trust's guidelines.

Lending institutions should consult the official circulars and guidelines provided by the CGTMSE for accurate and up-to-date information on AGF rates and calculations.

Now Let's clarify the extent of guarantee coverage under the CGTMSE scheme based on the provided information.

For cases sanctioned on or after April 01, 2018, the extent of guarantee coverage is as follows:

  1. Micro Enterprises:

    • Up to ?5 lakh: 85% of the amount in default, subject to a maximum of ?4.25 lakh.
    • Above ?5 lakh and up to ?50 lakh: 75% of the amount in default, subject to a maximum of ?37.50 lakh.
    • Above ?50 lakh and up to ?200 lakh: 75% of the amount in default, subject to a maximum of ?150 lakh.

  2. Women Entrepreneurs/Units located in the North East Region (except for credit facilities up to ?5 lakh for micro enterprises):

    • Up to ?5 lakh: 80% of the amount in default, subject to a maximum of ?40 lakh.

  3. MSE Retail Trade/Wholesale Trade (up to ?100 lakh): 50% of the amount in default, subject to a maximum of ?50 lakh.

  4. All other eligible categories of borrowers:

    • Up to ?5 lakh: 75% of the amount in default, subject to a maximum of ?37.50 lakh.
    • Above ?5 lakh and up to ?200 lakh: 75% of the amount in default, subject to a maximum of ?150 lakh.

It's important to note that the maximum extent of guarantee coverage is subject to the specific category of the borrower and the amount of credit facility. The guarantee coverage provided by the Trust aims to mitigate the risk associated with default on the credit facility.

For cases sanctioned prior to April 01, 2018, different extent of guarantee coverage applied. The maximum extent of guarantee coverage for these cases is as follows:

  1. Micro Enterprises:

    • Up to ?5 lakh: 85% of the amount in default, subject to a maximum of ?4.25 lakh.
    • Above ?5 lakh and up to ?50 lakh: 75% of the amount in default, subject to a maximum of ?37.50 lakh.
    • Above ?50 lakh and up to ?200 lakh: 50% of the amount in default, subject to an overall ceiling of ?62.50 lakh.

  2. Women Entrepreneurs/Units located in the North East Region (except for credit facilities up to ?5 lakh for micro enterprises):

    • Up to ?5 lakh: 80% of the amount in default, subject to a maximum of ?40 lakh.
    • Above ?5 lakh: 50% of the amount in default, subject to an overall ceiling of ?65 lakh.

  3. All other eligible categories of borrowers:

    • Up to ?5 lakh: 75% of the amount in default, subject to a maximum of ?37.50 lakh.
    • Above ?5 lakh and up to ?200 lakh: 75% of the amount in default, subject to an overall ceiling of ?62.50 lakh.

These provisions define the maximum extent of guarantee coverage based on the category of the borrower and the credit facility amount. Lending institutions should refer to the specific circulars and guidelines provided by the CGTMSE for accurate and up-to-date information on the extent of guarantee coverage.

Please note that the guarantee coverage may be subject to certain terms and conditions set by the Trust and may require adherence to specific guidelines.

Example 1: Micro Enterprise with a credit facility of ?3 lakh (sanctioned on or after April 01, 2018) In this case, since the credit facility is up to ?5 lakh, the guarantee coverage will be 85% of the amount in default. So, if the borrower defaults on ?2 lakh of the credit facility, the Trust will provide a guarantee of 85% of ?2 lakh, which amounts to ?1.7 lakh.

Example 2: Micro Enterprise with a credit facility of ?20 lakh (sanctioned on or after April 01, 2018) For a credit facility above ?5 lakh and up to ?50 lakh, the guarantee coverage is 75% of the amount in default. Let's say the borrower defaults on ?10 lakh of the credit facility. The Trust will provide a guarantee of 75% of ?10 lakh, which amounts to ?7.5 lakh.

Example 3: Women Entrepreneur/Unit located in the North East Region with a credit facility of ?15 lakh (sanctioned on or after April 01, 2018) In this case, since the credit facility is not up to ?5 lakh, the guarantee coverage for women entrepreneurs/units in the North East Region is 80% of the amount in default. If the borrower defaults on ?8 lakh of the credit facility, the Trust will provide a guarantee of 80% of ?8 lakh, which amounts to ?6.4 lakh.

Example 4: MSE Retail Trade/Wholesale Trade with a credit facility of ?80 lakh (sanctioned on or after April 01, 2018) For MSE Retail Trade/Wholesale Trade with a credit facility up to ?100 lakh, the guarantee coverage is 50% of the amount in default. Let's say the borrower defaults on ?60 lakh of the credit facility. The Trust will provide a guarantee of 50% of ?60 lakh, which amounts to ?30 lakh.

Example 5: Eligible borrower with a credit facility of ?120 lakh (sanctioned on or after April 01, 2018) For all other eligible categories of borrowers with a credit facility above ?5 lakh and up to ?200 lakh, the guarantee coverage is 75% of the amount in default. If the borrower defaults on ?80 lakh of the credit facility, the Trust will provide a guarantee of 75% of ?80 lakh, which amounts to ?60 lakh.

These examples demonstrate the extent of guarantee coverage for different categories of borrowers and credit facility amounts as per the CGTMSE guidelines. The actual guarantee coverage will depend on the specific terms and conditions set by the Trust and the individual assessment of each case by the lending institution.

Lets finally clarify the process of invoking the guarantee and the settlement of claims as per the CGTMSE guidelines.

  1. NPA Marking and Invocation of Guarantee:
  • The lending institution (MLI) must inform the Trust about the date on which the borrower's account was classified as Non-Performing Asset (NPA) in a specific calendar quarter.
  • The guarantee can be invoked by the lending institution within a maximum period of 3 years from the NPA date or the lock-in period, whichever is later (applicable for NPAs on or after 15/03/2018).
  • For NPAs prior to 15/03/2018, the time period for claim lodgment is 1 year for cases sanctioned before 01/01/2013 and 2 years for cases sanctioned after 01/01/2013.
  • The guarantee must have been in force at the time of the account turning NPA.
  • The lock-in period of 18 months from the date of last disbursement or the guarantee start date, whichever is later, must have lapsed.
  • The amount due to the lending institution must remain unpaid, and the dues must be classified as Non-Performing Assets.
  • Recovery proceedings must have been initiated through legal actions or under applicable laws.
  • In some cases, the initiation of legal proceedings may be waived for credit facilities with a lower aggregate outstanding amount, subject to the decision of a Committee within the lending institution.
  1. Claim Process and Settlement:
  • The lending institution must prefer the claim in the specified manner and within the specified time as directed by the Trust.
  • The Trust will pay 75% of the guaranteed amount within 30 days of the eligible claim being preferred, subject to the claim being found in order and complete.
  • The Trust will pay interest on the eligible claim amount at the prevailing Bank Rate if there is any delay beyond 30 days.
  • The remaining 25% of the guaranteed amount will be paid upon the conclusion of recovery proceedings or until the decree gets time-barred.
  • Once the claim is paid, the Trust will be discharged from all its liabilities regarding the guarantee for the concerned borrower.
  • The lending institution must refund any amount received from the borrower after the full guaranteed amount has been paid by CGTMSE.
  • The lending institution must exercise its rights to take over the borrower's assets in the event of default, and any amount realized from the sale of assets must be credited in full to the Trust before claiming the remaining 25% of the guaranteed amount.
  • If serious deficiencies are found in the lending institution's appraisal, renewal, follow-up, or conduct of the credit facility, the lending institution may be required to refund the claim amount with penal interest.
  1. Subrogation of Rights and Recoveries:
  • The lending institution must provide details of recovery efforts, realizations, and other demanded information to the Trust.
  • The lending institution holds a lien on the assets created from the credit facility, on its own behalf and on behalf of the Trust.
  • Payments made by the borrower towards any debts, whether covered by the guarantee or not, will be deemed to be appropriated towards the debt covered by the guarantee.
  • Any amount due to the Trust must be paid without delay, and if it remains unpaid for more than 30 days, the lending institution will be liable to pay interest at a specified rate.
  • MLIs must obtain a recovery certificate from their Statutory Auditors, confirming the remittance of recoveries made post-settlement of claims. The certificate must be submitted to CGTMSE by September 30th of the succeeding year.

It's important to note that the specific process and timelines for invoking the guarantee and settling claims may be subject to updates or revisions by CGTMSE. It is advisable for lenders and borrowers to refer to the latest circulars and guidelines issued by CGTMSE for accurate and up-to-date information.

Regarding CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises), Barai Overseas can be helpful to MSMEs in the following ways:

  1. Understanding the Scheme: Barai Overseas can provide guidance on the CGTMSE scheme, its eligibility criteria, and the process of availing credit guarantees. They can help MSMEs understand the benefits and limitations of the scheme and how it can support their financial requirements.

  2. Application Assistance: Barai Overseas can assist MSMEs in preparing and submitting the required documents and application for availing CGTMSE credit guarantees. They can ensure that the application is complete, accurate, and meets the necessary criteria, increasing the chances of approval.

  3. Compliance and Documentation: CGTMSE has specific compliance and documentation requirements for availing credit guarantees. Barai Overseas can help MSMEs understand and fulfill these requirements, ensuring that the necessary paperwork is in order and submitted within the specified timelines.

  4. Risk Assessment and Mitigation: Barai Overseas can assess the creditworthiness and risk profile of an MSME and provide recommendations on improving their chances of obtaining CGTMSE credit guarantees. They can assist in analyzing financial statements, cash flow projections, and other relevant factors to present a strong case to the lending institutions.

  5. Access to Lending Institutions: As an experienced consultancy, Barai Overseas may have established connections and relationships with various lending institutions that participate in the CGTMSE scheme. They can leverage these connections to help MSMEs connect with the right lenders and negotiate favorable terms for credit facilities.

  6. Trade Finance Support: In addition to CGTMSE credit guarantees, Barai Overseas can also provide guidance on trade finance options that are available to MSMEs. They can assist in arranging suitable financing solutions, such as letters of credit, bank guarantees, or working capital funding, to support their export-import activities.

  7. Overall Business Advisory: Apart from CGTMSE-specific support, Barai Overseas can offer comprehensive business advisory services to MSMEs. They can provide insights on export-import strategies, market entry, product selection, pricing, and other relevant aspects, helping MSMEs optimize their international trade operations.

By engaging the services of Barai Overseas Export Import Consultation, MSMEs can benefit from their expertise in navigating the CGTMSE scheme and obtaining credit guarantees. They can receive personalized assistance, improve their chances of obtaining credit facilities, and ensure compliance with relevant regulations, ultimately supporting their growth and success in the export-import sector.

 

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