Credit Guarantee Scheme for Micro and Small Enterprises (CGSME)
Introduction
For any business to grow, especially Micro and Small Enterprises (MSEs), finance is the oxygen. But often these small entrepreneurs face the biggest hurdle: banks ask for collateral (property, land, assets) or third-party guarantees before sanctioning loans. Many first-generation or underprivileged entrepreneurs don’t have such security to offer.
To solve this, the government launched the Credit Guarantee Scheme for Micro and Small Enterprises (CGSME) in the year 2000. Its main goal is simple: make credit available to MSEs without collateral and thus encourage entrepreneurship.
Quick Facts
- Purpose: To catalyse the flow of institutional credit to MSEs.
- Lending Institutions: Commercial banks, Regional Rural Banks, Urban Cooperative Banks (scheduled and non-scheduled).
- Eligible Enterprises: Both new and existing enterprises.
- Implementing Authority: Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
Objectives
- Strengthen the credit delivery system for MSEs.
- Provide bank credit without collateral or third-party guarantees.
- Enable access to finance for unserved, underserved, and underprivileged entrepreneurs.
👉 In short, the scheme bridges the gap between banks and small entrepreneurs who otherwise get excluded from formal credit.
Salient Features
- Launch: Formally started in 2000.
- Eligible Activities: Manufacturing and services, including Trading (retail/wholesale) and educational/training institutions.
- Exclusions: Self-Help Groups (SHGs) and agriculture activities are not covered.
- Credit Facility Covered:
- Both fund-based (like term loans, working capital) and non-fund-based (like Letters of Credit, Bank Guarantees).
- Limit: Up to ₹500 lakh per borrower.
Annual Guarantee Fee (AGF)
- Charged on the guaranteed amount in the first year, and on the outstanding loan amount in subsequent years.
- Recent update: For loans up to ₹1 crore, fees have been reduced by 50%, minimum fee now 0.37% per annum.
Claim Settlement (NPA case)
- If the loan account turns into an NPA, the lending institution can invoke the guarantee.
- Earlier, banks had to initiate legal proceedings first. Now, for loans up to ₹10 lakh (earlier ₹5 lakh), this requirement is waived → making it easier and faster for banks to recover.
Tenure of Guarantee
- For term loans/composite credit → guarantee is valid for the entire loan tenure.
- For working capital loans → guarantee cover is given for 5 years (block period).
CGTMSE – The Implementing Authority
- Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) manages the scheme.
- Established by:
- Ministry of MSME
- Small Industries Development Bank of India (SIDBI)
- Corpus Contribution: GoI and SIDBI in the ratio 4:1.
Importance
- Removes the biggest barrier to entrepreneurship: lack of collateral.
- Encourages risk-taking by small business owners.
- Supports inclusive growth by empowering women, first-generation entrepreneurs, and underserved communities.
- Strengthens the trust between banks and small borrowers by assuring repayment through guarantee coverage.
Conclusion
The CGSME is not just a financial scheme; it is a confidence-building mechanism for both banks and entrepreneurs. Banks feel secure because their loans are guaranteed, and entrepreneurs feel empowered because they don’t need to pledge property or seek third-party support.
In a way, this scheme is the backbone of financial inclusion for MSMEs, which in turn drives job creation, innovation, and regional development.