A Complete Guide to CGTMSE Government Loan Scheme for MSMEs

India's Micro, Small, and Medium Enterprises (MSME) sector is the dynamic engine of the economy, contributing significantly to employment, innovation, and GDP growth. With over 63 million MSMEs contributing roughly 30% to the nation's GDP and employing over 110 million individuals, their role is undeniable. However, access to finance remains a major hurdle for many aspiring entrepreneurs.

Imagine a scenario where a brilliant business idea falters simply due to the lack of collateral for a loan. This is where the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) steps in, acting as a powerful catalyst for MSME growth. Reports suggest that a substantial percentage of MSMEs, estimated to be around 40%, struggle with access to adequate credit, hindering their expansion plans. CGTMSE aims to bridge this gap. This blog deep dives into how CGTMSE works, who benefits, and how you can leverage its potential.

What is CGTMSE?

CGTMSE stands for Credit Guarantee Fund Trust for Micro and Small Enterprises. CGTMSE is a scheme launched by the Government of India to provide collateral-free loans to MSMEs. It's a joint initiative by the Ministry of MSME and SIDBI (Small Industries Development Bank of India). The trust provides a guarantee cover to lending institutions (banks, NBFCs, and other eligible financial institutions) against loans extended to MSMEs. This guarantee acts as an incentive for lenders to provide credit to MSMEs without insisting on tangible security or collateral.

How Does CGTMSE Work?

The CGTMSE operates on a simple yet effective mechanism:

1. MSME Approach: An MSME approaches a participating bank for a loan.
2. Loan Appraisal: The bank assesses the loan application based on the viability of the business proposal.
3. CGTMSE Cover: If the loan is approved, the lender obtains a guarantee cover from CGTMSE by paying a guarantee fee.
4. Loan Disbursement: The loan is disbursed to the MSME.
5. Default (if any): In case the MSME defaults on the loan, the lender can invoke the guarantee and claim a pre-defined percentage of the loan amount from CGTMSE.

CGTMSE Term Loan and Overdraft Details – Interest Rate, Loan Amount and Tenure

If you’re applying for CGTMSE Term Loan or Overdraft facility from Ujjivan, here are the loan details

Please note that the final loan amount and interest rate may differ from the advertised amount and rate and is at the sole discretion of the bank.

Who is Eligible for Coverage under CGTMSE?

The Scheme applies to both new and existing Micro and Small Enterprises (MSEs) that are engaged in manufacturing or service-related activities. However, it specifically excludes entities involved in agriculture, Self-Help Groups (SHGs), and Joint Liability Groups (JLGs).

Is Obtaining an Income Tax Permanent Account Number (IT-PAN) Mandatory for Borrowers?

As per the Scheme guidelines, borrowers must obtain an IT-PAN before securing credit from an eligible lending institution. Additionally, as per Section 139A(5) read with Section 272(C) of the Income Tax Act, 1961, an IT-PAN must be mentioned on all tax-related documents, including returns, challans, and appeals. 

However, for loans up to ₹5 lakh, CGTMSE does not currently mandate the borrower to have an IT-PAN at the time of availing of the guarantee cover. For credit facilities exceeding ₹5 lakh, the IT-PAN must be provided. Lending institutions are encouraged to inform borrowers about the importance of obtaining an IT-PAN. Furthermore, it is compulsory for every borrower to obtain a Udyam Registration Number and ensure it is recorded in the system when submitting a new application.

Can an Existing Unit Avail of the Guarantee Benefit if its Lending Institution Becomes an MLI of CGTMSE?

Yes, existing credit facilities may be covered under the Scheme, provided they were not restructured or classified under SMA-2 (Special Mention Account – 2) status in the preceding year from the date of application submission. If collateral security has been provided, the unsecured portion of the credit facility can be covered under the "Hybrid Security" option. Under this arrangement, a portion of the loan can be secured with collateral, while the remaining amount, up to ₹5 crore, can be covered under CGTMSE’s Credit Guarantee Scheme.

Is There a Mandate to Obtain All Required Credit Facilities from a Single Lending Institution?

No, eligible borrowers can secure credit facilities from multiple banks or financial institutions, either jointly or independently. However, the total borrowing must not exceed ₹5 crore per borrower, subject to individual lending institution limits or any amount specified by the Trust. It is important to note that security sharing among multiple lenders is not permitted.

Are Self-Help Groups (SHGs) Covered under this CGTMSE?

No, as per the current guidelines of the Scheme, credit facilities extended to Self-Help Groups (SHGs) do not qualify for coverage.

Benefits of CGTMSE for MSMEs

• Collateral-Free Loans: The biggest advantage is access to credit without the need to pledge assets as security. This is especially crucial for startups and early-stage businesses with limited assets.
• Reduced Risk for Banks: The guarantee cover reduces the risk for lending institutions, encouraging them to lend more freely to MSMEs, which are often perceived as riskier borrowers.
• Easier Access to Finance: This scheme makes it easier for MSMEs, especially startups and smaller businesses, to access much-needed funding. This can be the difference between survival and growth.
• Boost to Growth and Expansion: With easier access to finance, MSMEs can invest in expansion, technology upgrades, modernization, research and development, and job creation. This fuels innovation and strengthens the overall economy.

How to Apply for a Loan under CGTMSE

Step 1: Identify a Participating Lender

Approach a bank, NBFC, or other financial institution participating in the CGTMSE scheme. It's advisable to check with multiple lenders to compare loan terms and interest rates.

Step 2: Submit Loan Application

Submit a detailed loan application along with the necessary documents, including business plans, financial statements (if available), project reports (if applicable), and KYC documents.

Step 3: Lender Appraisal

The bank will evaluate the loan application, assess the business viability, and decide on the loan amount.

Step 4: CGTMSE Application (by Lender)

The lender will then apply for the guarantee cover under CGTMSE after approving the loan. The MSME typically doesn't interact directly with CGTMSE.

Step 5: Loan Disbursement

Once the guarantee is approved, the loan will be disbursed to the MSME.

Disclaimer: This a generic information pertaining to CGTMSE loan application and may vary across banks and financial institutions. Please contact Ujjivan at 1800 208 2121 for more details.

Guarantee Coverage and Fees of CGTMSE

CGTMSE covers a significant portion of the loan amount, with the coverage percentage varying based on the type of MSME, loan amount, and the lender category. The MSME pays a guarantee fee to the lending institution, which in turn pays it to CGTMSE. The guarantee fee is typically a one-time fee, or an annual fee depending on the loan tenure. The fee structure is available on the CGTMSE website.