CGTMSE, a collateral-free loan scheme for SMEs

BANGALORE, INDIA: Fundraising has always been a huge challenge for small and medium enterprises (SMEs) in India. The SMEs in the country have limited owned capital available to start a business and sustain it during initial years. They find it extremely difficult to find money when they need it most.

Though there are a number of banks, angel investors and venture capitalists being operational in the country to provide financial aid to small units in the country, their operations are not praiseworthy. They ask for collateral before deciding to fund SME business. It is quite clear that no lender will be ready to risk their money by providing loans to the small enterprises for fear of defaults. However, we cannot put the entire blame on these lenders, as defaults on loans as well as non-performing assets (NPAs) have become a common scene these days.

As a boon to the sector, the government and a few public sector banks, such as the State bank of India (SBI), have already announced collateral-free loans. The CGTMSE (Credit Guarantee Fund Trust for Small and Medium Enterprises) is one such scheme.

Launched in 2000 by the Ministry of MSMEs, the CGTMSE scheme is aimed at providing collateral-free loans to small businesses. Loans under this scheme are available to SMEs in both the start-up as well as existent phases.

The loans are given through Member Lending Institutions (MLIs). All leading banks offer loans under the scheme. The list of MLIs is available on the website of CGTMSE. Loans given by MLIs under the scheme are guaranteed by CGTMSE subject to limits.

Under the scheme, loans offered to SMEs are collateral-free. Small enterprises are not required to bring in their own collateral to avail loan. The credit given to them becomes prime security for the banks. Loan up to 100 lakhs is available under CGTMSE. Loans can be obtained for working capital requirements, purchase of machines, expansion plans, etc.

Loans given by MLIs

It is to be noted that small businesses involved in retail trade are not eligible for this scheme. The loan under the scheme is disbursed through MLIs. Guarantee fee and annual service fee need to be paid by the borrower, who avails loan under the scheme. Guarantee fee can be up to 1.5 per cent of the loan amount and annual service fee can be 0.75 per cent. This depends on the MLIs. Loans up to Rs 100 lakh can be obtained simultaneously from more than one MLI.