CGTMSE: Loan, Scheme Highlights, Eligibility, Documents required and How to Apply

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme is a government initiative aimed at providing collateral-free loans to micro and small businesses. Designed to support the MSME sector, the CGTMSE loan offers financial backing to businesses that may not meet the stringent traditional credit requirements. The scheme allows lending institutions to extend credit facilities to eligible businesses with the assurance of a credit guarantee, ensuring a safety net for both the borrower and the lender.

In this article, we’ll understand the scheme in more detail, including its benefits, the CGTMSE eligibility criteria, and the application process.

What Is the CGTMSE scheme?

The CGTMSE scheme was introduced to promote entrepreneurship by enabling small businesses to access loans without the need for collateral. The CGTMSE loan for MSMEs provides a credit guarantee to lending institutions, encouraging them to extend financial support to eligible enterprises. The scheme offers coverage for a percentage of the defaulted amount, reducing the risk for lenders.

CGTMSE Scheme – Highlights

The following table highlights the key features of the CGTMSE scheme for small businesses:

Schemes Under CGTMSE for Startups

GSTMSE implements various initiatives to enhance credit accessibility for MSEs across India. These schemes are designed to promote entrepreneurship by offering collateral-free loans and encouraging financial institutions to extend credit to potentially higher-risk sectors. Given below are some key schemes:

How Does the CGTMSE Scheme Work?

Here’s how the facility for a CGTMSE loan without collateral works:

• Loan Assessment: Upon application, the lending institution first evaluates the Micro and Small Enterprise's (MSE's) eligibility based on the criteria set by CGTMSE.
• Loan Disbursement: Once approved, the loan is disbursed to the MSE without the need for collateral or third-party guarantees.
• Credit Guarantee: CGTMSE then provides a guarantee that covers 75% to 85% of the loan amount, depending on the loan size and borrower category.
• Risk Mitigation: If the borrower defaults, CGTMSE compensates the lending institution for the guaranteed portion, minimising financial risk for the lender.

Types of Credit Facilities Available Under the CGTMSE Scheme

The CGTMSE scheme offers a range of credit facilities specifically designed to meet the financial needs of MSEs in India. These facilities include:

1. Term Loans: For long-term investments such as purchasing machinery, equipment, or fixed assets.
2. Working Capital Loans: Provides necessary funds to support day-to-day operations and maintain healthy cash flow, ensuring business continuity.
3. Composite Loans: A combination of term loans and working capital loans, allowing MSEs to address both operational and investment needs through a single loan.
4. Fund-Based Facilities: Direct loans or advances to the business for operational and growth requirements, including overdrafts and cash credits.
5. Non-Fund-Based Facilities: Guarantees or letters of credit to facilitate business transactions without requiring an immediate cash outflow.

All these credit facilities are available without the need for collateral or third-party guarantees, making it easier for MSEs to secure the funding they need.

Credit Facilities Not Covered Under the CGTMSE Schemes

Credit facilities excluded from coverage under the CGTMSE scheme include:

1. Businesses or activities that do not meet the eligibility criteria outlined by CGTMSE.
2. Loan facilities already covered by other government-backed schemes or agencies such as the Deposit Insurance and Credit Guarantee Corporation.
3. Credit facilities that are insured or guaranteed by general insurers, or any other external entities.
4. Facilities that have been approved with collateral or backed by third-party guarantees.
5. Loans not compliant with legal provisions or directives from the Central Government or the RBI.
6. Borrowers who have previously defaulted on loans that were covered under the CGTMSE scheme.
7. These exclusions help ensure that the scheme supports only eligible businesses, avoiding overlaps with other forms of financial protection and adhering to compliance guidelines.

Credit Guarantee Under the CGTMSE Scheme

Under the CGTMSE scheme, lenders can extend loans to MSEs without requiring collateral or third-party guarantees. This structure enables financial institutions, including banks and Non-Banking Financial Companies (NBFCs), to offer credit to businesses that may not have sufficient assets to secure traditional loans. MSEs, both new and established, can obtain credit facilities of up to INR 5 crore under the scheme, encouraging growth across diverse sectors such as manufacturing and services.

The process starts with the MSE applying for a loan from a participating financial institution. After assessing the applicant's creditworthiness, the lender submits a guarantee application to CGTMSE. Upon approval, the scheme covers 75% to 85% of the loan, depending on the loan size and borrower category. In case of default, CGTMSE compensates the lender for the guaranteed portion, reducing their financial risk and facilitating broader access to credit for MSEs, supporting entrepreneurship and economic development.

Features and Benefits of the CGTMSE Scheme

The most significant CGTMSE loan benefits are highlighted below:

1. Collateral-Free Loans: The lack of collateral eases the credit process for small businesses.
2. Increased Loan Ceiling: Credit facilities of up to INR 5 crore provide significant financial support.
3. Credit Guarantee: This reduces the lender's risk and promotes credit expansion.
4. Nominal Guarantee Fee: A nominal fee depending on loan size makes the scheme cost-effective for borrowers, especially women-led businesses and aspirational districts.
5. Flexible Loan Tenure: Repayment terms are tailored to meet the specific needs of each business.
6. Enhanced Support: Special provisions, such as increased coverage for SC/STs, women entrepreneurs, and ZED Certified Units, promote inclusivity in entrepreneurship.

CGTMSE Scheme Eligibility

To qualify for the CGTMSE scheme, businesses must meet the following criteria:

1. The enterprise must be classified as a Micro or Small Enterprise (MSE) as per the guidelines in the MSMED Act.
2. The proposed business must operate within the manufacturing or service activities, excluding Self-Help Groups (SHGs), agriculture, etc.
3. The enterprise must meet all statutory and regulatory requirements applicable to its operations.
4. Credit must be secured from a lending institution that is enlisted under the CGTMSE scheme.
5. It is advisable for applicants to verify the specific eligibility criteria of the participating financial institutions, as they may have additional requirements or conditions.

Documents Required for CGTMSE Loan Application

When applying for a loan under the CGTMSE scheme, businesses need to submit the following documents:

1. Completed CGTMSE loan application form including recent passport-sized photographs.
2. Proof of business registration such as a Certificate of Incorporation.
3. Income tax returns and bank statements.
4. A comprehensive report detailing the business model, objectives, and projected financials.
5. Documentation that confirms the loan's coverage under the CGTMSE scheme.
6. A copy of the loan approval from the financial institution.
7. Any extra documents as required by the lender, depending on their internal processes.

How to Apply for the CGTMSE Scheme

The CGTMSE loan application process involves the following steps:

1. Select a Lending Institution: Choose a participating financial institution (PFI), such as a traditional lending institution or NBFC, that provides loans under the CGTMSE scheme.
2. Ensure Business Registration: Verify that your business is registered as a Micro or Small Enterprise (MSE) and holds the necessary tax registrations and approvals.
3. Gather Required Documents: Prepare essential documentation, including a completed CGTMSE application form, your business incorporation certificate, a detailed project report, and any other documents specified by the lending institution.
4. Submit Loan Application: Present your loan application along with the required documents to the selected PFI. Ensure all eligibility criteria are met and all documents are complete to avoid delays.
5. Loan Evaluation: The financial institution will evaluate your application based on its internal credit assessment criteria. If approved, they will submit a request to CGTMSE for guarantee cover.
6. Receive Guarantee Cover: Upon approval from CGTMSE, you may be required to pay a nominal guarantee fee, which is typically a percentage of the guaranteed amount.
7. Loan Disbursement: Once all conditions are met, including the payment of the guarantee fee, the loan will be disbursed to your business account.

Limitations of the CGTMSE Scheme

While the CGTMSE scheme offers valuable support to MSEs, it comes with certain limitations. The scheme places a cap on the maximum loan amount eligible for a guarantee, which may fall short of the financial needs of rapidly growing enterprises. Moreover, some sectors and activities are excluded from the scheme, restricting access for specific MSEs. The claims process can also experience bureaucratic delays, affecting the timely reimbursement of lenders in cases of defaults. 

Additionally, lenders may still demonstrate caution when lending to high-risk borrowers, as residual risks remain, which could limit the scheme’s full potential in expanding credit access.

CGTMSE Coverage Criteria

The CGTMSE scheme provides a credit guarantee covering up to 75% of the defaulted principal amount for most borrowers. Certain groups, such as women entrepreneurs and businesses in designated regions, may benefit from a higher coverage of 85%. The maximum guarantee limit is INR 37.50 lakhs for credit facilities up to INR 50 lakhs.

The coverage includes term loans and outstanding capital advances, along with interest, but it does not apply to additional charges such as penal interest or service fees. The guarantee remains effective until the account is classified as a Non-Performing Asset (NPA) or until legal proceedings commence, whichever comes first.

Steps to Avail of Business/MSME Loan Under the CGTMSE Scheme

Follow these steps to secure a business/MSME loan under the CGTMSE scheme:

1. Form Your Business Entity
   Create a legal business structure, such as a Private Limited Company, Limited Liability Partnership (LLP), or Proprietorship. Ensure all tax registrations and necessary approvals are in place.
2. Develop a Comprehensive Business Plan
   Prepare a detailed business plan outlining your business model, financial forecasts, and promoter profiles. 
3. Identify a Participating Financial Institution (PFI)
   Research and approach lenders that provide loans under the CGTMSE scheme.
4. Complete and Submit Your Application
   Fill out the CGTMSE loan application form and submit it alongside your business plan and any other required documents to your chosen PFI.
5. Evaluation Process
   The PFI will assess your application based on their internal guidelines and the feasibility of your business plan.
6. Apply for Guarantee Cover
   Once the loan is approved, the PFI will request a guarantee cover from CGTMSE on your behalf.
7. Disbursement of Loan
   After receiving approval from CGTMSE, settle any applicable guarantee fees, and the PFI will disburse the loan amount to your business.
8. Repayment
   Make repayments according to the agreed-upon terms. If you default, the PFI can claim coverage for the guaranteed portion from CGTMSE.

Conclusion

By providing collateral-free loans and credit guarantees, the CGTMSE scheme encourages entrepreneurship and supports the growth of the MSE sector. However, it's essential to carefully consider the scheme's eligibility criteria, limitations, and coverage before applying

Exploring financing options for your small business? Consider a business loan from SMFG India Credit, offering collateral-free amounts of up to INR 75 lakhs* at attractive interest rates. Check our eligibility criteria and apply online today or contact us for more details.