SME (Small and Medium Enterprises) business houses largely depend on banking institutions only for their capital. However, when they approach the banks for loan, the first question they are asked is whether they have any property as collateral security. How many enterprise owners may possess? Definitely not all! This is really discouraging.
In reality, the Central Government has created a set-up called, ‘Credit Guarantee Fund Trust’ in order to extend loan up to Rs.1 cr. to SMEs without any pre-condition of collateral security. There are many features of this scheme which are clearly explained by the Financial Advisor of Capital Market Services Mr.Sivakumar, as under:-
Credit Guarantee Fund Trust (CGTMSE) was exclusively created by the Central Government in the year 2000 in order to help the SMEs and micro business houses to start and develop their business. After 6 years, the same was changed as a Trust body under the direct control of the Central Government by means of an Act.
Through this Act a new provision was included to provide loan facility of Rs.1 cr.to any SME without any collateral security solely with the main objective of helping them grow their business financially without any legal hiccup.
This Trust compensates the lending banks where the SMEs are not able to settle the loans with their bankers either on account of their inability or loss in business. The Trust acts as a guarantor to the banks and compensates 75/80/85% of the loan amount on behalf of the failing SMEs.
The Trust provides details of the names and branches of 131 banks and other related financial institutions which offer this loan facility, vide their website (http://www.cgtmse.in/List of MLIsaspx. Please visit the website for complete details. Companies that require loan facility may approach these banks with the Project Feasibility Report.
Another point worth noting is that this Trust does not have any direct link with the SMEs. Rather this Trust has a link only with the concerned bank, standing as a guarantor on behalf of the concerned SMEs.
In relation to the loan thus extended by the bank to the SME, the lending bank is required to give all the details of such loan to the Trust within 90 days from the date of issue of the loan and seek coverage of the risk as per norms. The banks are required to ensure collection of interest for the loan and this interest rate is expected to be 3% more than the base lending rate.
What is the Guarantee fee?
Answer: The Trust has two classifications for guarantee fees as under:-
• a) 1% up to 5 Lacs of loan amount
b) 1.5% of loan amount if it exceeds 5 Lacs
For North East part of India – 0.75%
• Annual Service Payment:-
• 0.5% of loan amount up to 5 Lacs
• 0.75% of loan amount for more than 5 Lacs
The above amounts are paid to the Trust by some banks direct while some banks recover it from the SMEs and pay to the trust.
Exemptions from the Trust:-
• This Trust will not stand guarantee for the loan if it is already guaranteed by either Deposit Insurance & Credit Guarantee Corporation (DICGC) or RBI.
• If the bank has already obtained guarantee from any third party or collateral from the borrower the CGF&T will not offer any guarantee.
• For any claim to be preferred by the bank, the concerned bank should have had consistent transaction with the company for at least 18 months from the start.
• In case the bank has forcibly got any guarantee from the company after getting the coverage from CGFT, no claim will be entertained.
What is the bank’s entitlement to a claim?
• Up to 5 Lacs 85%
• 5L to 50Lacs 75%
• 50L to 1Cr. 62.5%
For women & SMEs falling under North East Region:-
• Up to 50Lacs 80%
• 50L to 1Cr. 65%
SMEs Financial Advisor, Sivakumar finally gives a very encouraging tip to the enterprising entrepreneurs of SME companies to approach bank without any fear or favour and in case the bank refuses to help and extend the loan facility, necessary complaint can certainly be lodged against such bank.
What more is needed? Loans are easily available for SMEs up to 1 Cr., devoid of any collateral security.
Make hay while the sun shines.
(This article originally appeared in Nanayam Vikatan issue dt 13 July 2014 now reproduced in English by P S Ramamurthy.)