Credit Guarantee Fund Trust for Micro and Small Enterprises

(CGTMSE)
Presentation on Credit Guarantee Scheme
by B S Bisht

Micro, Small & Medium Enterprises New Nomenclature & Classification Enterprises
Manufacturing
(Ceiling on investment in Plant & Machinery)

Service
(Ceiling on investment in Equipment)

Rs.25 lakh Rs.5 crore Rs.10 crore

Micro Small Medium

Rs. 10 lakh Rs.2 crore Rs.5 crore

Micro & Small Enterprises - Importance

 Provide employment to more than 40 Million persons  Largest employment generating sector after agriculture  Employment potential at low capital cost  Constitute 95% of industrial units  Total of 13 Million registered / unregistered MSEs  Key contributors to national economy
 45% of manufacturing output 45%  40% of total exports 40%  9% of Gross Domestic Product

Facilitating Collateral-free Credit to Micro & Small Enterprises

Guarantee Framework - Need

Policy makers world over
 Strive for equitable wealth distribution  Desire to direct credit flow to specific sectors  Seek to evolve mechanisms developmental objectives to achieve

 Aspire for financial inclusion / overall economic development  Govern Banks for social empowerment Facilitating Collateral-free Credit to Micro & Small Enterprises

Guarantee Framework - Need

 Banks exposed to various risks while lending  Default Risk factor - deterrent in MSE lending  Collateral - conventional risk mitigation tool  Lack of Collateral commonly stated obstacle  Micro & Small Enterprises adversely affected  Need for alternate risk mitigation mechanism Facilitating Collateral-free Credit to Micro & Small Enterprises

Credit Guarantee Global scenario

 Advocated as effective credit supplementation tool  Largely promoted / sponsored by Government  Dates back to 1936 in Japan  Gained acceptance in Europe 1950s 1950s  Well evolved in most developed economies  Multiple agencies operate in some countries Facilitating Collateral-free Credit to Micro & Small Enterprises

Credit Guarantee in India

  Export Credit Guarantee Corporation of India Ltd established in 1957 to cover risk of exporting on credit Credit Guarantee Scheme for Small Scale Industries introduced in July, 1960 with Reserve Bank of India (RBI) as Administrator. RBI Administrator. operated the scheme up to March, 1981 Credit Guarantee Corporation of India Ltd established in 1971 to guarantee loans under priority sector Merged with Deposit Insurance Corporation in 1978 to form Deposit Insurance and Credit Guarantee Corporation (DICGC) Credit guarantee schemes of the Corporation discontinued as the credit institutions gradually opted out of the scheme

  

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGTMSE - Establishment
 Set up as a Trust in August, 2000 and administered by a Board of Trustees  Government of India and Small Industries Development Bank of India (SIDBI) the settlors Contribution ratio 4 :1  Initial Corpus Rs.125 crore ; Present Rs. Corpus Rs.1907 crore ; Committed Corpus Rs. Rs. Rs.2500 crore
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGTMSE - Objectives
 Shift from collateral to merit based lending  Act as mechanism of entrepreneurship promotion  Facilitate institutional credit flow to MSE sector  Address growth constraints of MSE sector  Enable financial inclusion / employment generation  Revive confidence in credit guarantee mechanism

Facilitating Collateral-free Credit to Micro & Small Enterprises

Credit Guarantee Scheme (CGS)

 Operated through Banks / Lending Institutions registered as Member Lending Institutions (MLIs)  Scheduled Commercial Banks / select Regional Rural Banks (RRBs) / other lending institutions as approved by Ministry of MSME eligible to register as MLIs  97 Banks / RRBs / other lending institutions registered as MLIs with CGTMSE  Operations done through web-based B2B EwebBusiness software
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS - Definitions
 Collateral Security Security provided in addition to the primary security, in connection with the credit facility extended to the borrower  Primary Security Assets created out of the credit facility extended and / or existing unencumbered assets which are directly associated with the project or business for which the credit facility has been extended
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Cardinal Principles

 Lender should extend credit without obtaining any Collateral Security / Third Party Guarantee  Interest Rate levied should be in accordance with Government / Reserve Bank of India guidelines / not more than 3% of lending Banks PLR
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Eligible Credit facilities

 Credit facility upto Rs.100 lakh sanctioned to MSEs (both Rs. manufacturing and service sector including small road and water transport operators, small business, professionals, selfself-employed persons and all other service enterprises under the ambit of MSEs as per RBI guidelines on Lending to Priority Sector but excluding retail trade) trade)  Both Fund & Non-fund based Credit facilities viz., term loan, Nonviz. working capital, composite credit, LCs, Guarantees, etc. can etc. be covered. Credit proposals above Rs.50 lakh will have to covered. Rs. be rated internally and should be of investment grade  Credit Facility of above Rs.100 lakh can also be covered, but Rs. Guarantee Cover will be limited to Rs.62.50 lakh. No Rs.62. lakh. collateral security / third party guarantee shall be obtained by the MLI for credit facility above Rs.100 lakh Rs.

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Special inclusions

 Certain activities under Agri-Clinics and AgriAgriAgriBusiness Centres (ACABCs) like Tissue Culture, Feed Processing & Testing Units, Honey & Bee product processing units, Seed Processing Units, Setting up of Information Kiosks / Cool Chain, etc. made eligible for etc. guarantee cover under the scheme  Borrower may be sanctioned distinct / separate credit facilities, but only credit facility not backed by collateral security / third party guarantee can be covered under the Scheme
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Extent of Guarantee

Credit facilities extended by more than one bank and / or financial institution jointly and / or separately to eligible borrower upto a maximum of Rs.100 Rs. lakh per borrower subject to ceiling amount of individual MLI or such amount as may be specified by the Trust, in the order in which the application for guarantee cover has been lodged
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Extent of Guarantee

Borrower Category Maximum Guarantee Cover, where credit facility is Upto Rs.5 lakh
85% of Amount in Default / Rs.4.25 lakh

Above Rs.5 lakh upto Rs.50 lakh

75% of Amount in Default / Rs.37.50 lakh

Above Rs.50 lakh upto Rs.100 lakh

Rs.37.50 lakh plus 50% of amount in default above Rs.50 lakh / Rs.62.50 lakh Rs.40 lakh plus 50% of amount in default above Rs.50 lakh / Rs.65 lakh Rs.37.50 lakh plus 50% of amount in default above Rs.50 lakh / Rs.62.50 lakh

Micro Enterprises

Women Entrepreneurs / Units located in North East Region (incl. Sikkim) All other category of borrowers

80% of Amount in Default / Rs.40 lakh

75% of Amount in Default / Rs.37.50 lakh

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Extent of Guarantee

(Rs. / Lakh)
Quantum of Credit Facility 50 60 70 80 90 100 Guaranteed Effective Max. Guarantee amount @ 50% Total Guarantee amount @ 75% on incremental Guaranteed Coverage upto Rs.50 lakh credit facility Amount (%) above Rs.50 lakh 37.50 37.50 37.50 37.50 37.50 37.50 0.00 5.00 10.00 15.00 20.00 25.00 37.50 42.50 47.50 52.50 57.50 62.50 75.00 70.83 67.85 65.62 63.88 62.50

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Tenure of Guarantee

 Tenure of Guarantee Cover for Term Credit, Combined Working Capital & Term Credit and Composite Credit is tenure of Term Credit / Composite Credit or loan termination date, whichever is earlier Where Working Capital facility alone is covered, the tenure is for a block of five years or loan termination date, whichever is earlier. Thereafter, earlier. MLI should apply for renewal of Guarantee Cover If tenure of Term Loan is 3 years, tenure of working capital will also be 3 years. After 3 years, years. if guarantee cover is to be continued for working capital, application for renewal to be lodged online
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Application Lodgement

  For credit facility sanctioned in a particular quarter, application for Guarantee Cover should be lodged by the end of the next quarter To illustrate, for credit sanctioned during Jul-Sep quarter, Julapplication for Guarantee Cover can be lodged upto December 31 (last date of next quarter). Thus maximum time of 6 months and quarter). minimum time of 3 months is available for lodging of application In case of Working Capital Credit, date of renewal / review / enhancement can be taken as date of sanction In case of credit facility secured by collateral, application can be lodged after release of collateral, subject to time limits specified for application lodgement Account should not have become overdue / bad / doubtful of recovery / adjusted for debts deemed bad or doubtful of recovery as on date of application / payment of guarantee fee

 

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Guarantee Fee

 On approval of Guarantee Cover, Demand Advice for Guarantee Fee is generated by the system and is to be paid upfront for commencement of Guarantee Cover  In enhancement cases, Guarantee Fee is calculated on pro-rata probasis for residual tenure of guarantee  In case of working capital, payment is to be made within one month from Demand Advice date and in case of term credit, one month from date of first disbursement / demand advice date, whichever is later  Present Guarantee Fee rate is 1% of credit facility sanctioned for loans upto Rs.5 lakh and 1.5% of credit facility sanctioned for Rs. loans above Rs.5 lakh Rs.  For units located in NER (incl. Sikkim), the Guarantee Fee rate is (incl. 0.75% of credit facility sanctioned for loans upto Rs.50 lakh and 75% Rs. 1.5% of credit facility sanctioned for loans above Rs.50 lakh Rs.

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Annual Service Fee

 Annual Service Fee (ASF) is to be paid for all accounts for which Guarantee Cover has been availed / is in force in a financial year, at the beginning of the next financial year i.e., ASF is collected in arrears and is calculated pro-rata profor the first and last years. years.  To illustrate for guarantee cover availed during FY2009, FY2009, payment of ASF is to be made within 60 days from the end of the financial year i.e., May 31, 2009 31,  If payment is not received within stipulated period, Guarantee Cover lapses and account is liable to be closed. closed. Annual Service Fee is to be paid till disbursement of first installment of claim  Present Service Fee rate is 0.50% of credit facility 50% sanctioned for loans upto Rs.5 lakh and 0.75% of credit Rs. 75% facility sanctioned for loans above Rs.5 lakh Rs.

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Cost of Guarantee

Upfront Guarantee Fee Credit Facility North East Region (incl. Sikkim) 0.75% 0.75% 1.50% Others 1.00% 1.50% 1.50% Annual Service Fee 0.50% 0.75% 0.75%

Upto Rs.5 lakh Above Rs.5 lakh to Rs.50 lakh Above Rs.50 lakh to Rs.100 lakh

MLIs at their discretion may pass on the cost of Guarantee Cover to the borrowers. borrowers. However, responsibility of payment of Guarantee / Service Fee to the Trust will be on MLIs

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Time limits

Lodgement of Application (linked to Sanction Date) Payment of Guarantee Fee (linked to Disbursement / Demand Date) Payment of Annual Service Fee (linked to close of financial year) End of next quarter (For credit facility sanctioned during the quarter, Jul-Sep, 2009, application for Jul2009, Guarantee Cover can be lodged upto December 31, 31, 2009) 2009) 30 days from date of Demand / first disbursement, whichever is later (Eg. if demand advice date is (Eg. June 10, 2009 and first disbursement is on June 10, 28, 2009, 28, 2009, guarantee fee should be paid within 30 days from June 28, 2009) 28, 2009) May 31 of next Financial Year (For guarantee cover availed during FY2009, ASF was to be paid by May FY2009, 31, 2009) 31, 2009). Annual Service Fee is to be paid till disbursement of first installment of claim

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Lodging of claims

 Claim to be lodged by within a maximum period of one year from date of NPA, if NPA is after lock-in period or lockwithin one year of expiry of lock-in period, if NPA is lockwithin lock-in period lock Pre-requisites for lodging claims are Pre Guarantee Cover is in force

 Account classified as NPA  Recall Notice issued  Lock-in period expired Lock Recovery proceedings initiated Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Lodging of claims

 Guarantee Cover is in Force
 Guarantee Cover in respect of the facility was in force at the time of account turning NPA and there are no arrears in payment of ASF. ASF.

 Lock-in Period Lock 18 months from guarantee start date or last date of disbursement, which ever is later

 Recovery proceedings initiated

 Suit for recovery of primary security should be filed with Lok Adalat / RRA / Civil Court / DRT / SARFAESI Act Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Lodging of claims

 If recovery proceedings are initiated under SARFAESI Act, action as per Section 13(4) of the Act, has to be taken 13(  Backended Subsidy, if any, should be Back indicated  Declaration and Undertaking is to be signed by an officer not below the rank of Assistant General Manager
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement

 Two stage claim settlement process  First installment of 75% of guaranteed portion of 75% Amount in Default will be paid within 30 days of receipt of complete information  Interest at prevailing Bank Rate will be paid in case of delay beyond 30 days  Second installment shall be paid on conclusion of recovery proceedings  On conclusion of recovery proceedings, final loss is shared by CGTMSE and MLI, in the ratio ranging from 85 : 15 to 62.5 : 37.5, as the case may be 62. 37.
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement

 Amount in Default - Outstanding in the account, both principal & interest, as on date of NPA or the date of lodgement of the claim application, whichever is lower, subject to maximum of amount guaranteed  Recoveries made after NPA date / payment of first installment of claim should be remitted to CGTMSE after deducting legal expenses, if any  MLIs may use OTS / Compromise settlement route for recovery. CGTMSE has to be recovery. informed if such settlement is negotiated
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement

ScenarioScenario-I
Amount in Default on NPA Date CGTMSEs Liability (75%) 75% Rs.8 lakh Rs.6 lakh

First installment paid by CGTMSE (75% of liability) Rs.4.5 lakh 75% Recovery from Primary Security remitted to Rs.1 lakh CGTMSE, after adjusting legal expenses Net Amount in Default (Final Loss) Second installment payable by CGTMSE (Rs. (Rs.5.25 lakh minus Rs.4.50 lakh) Rs. Rs.7 lakh Rs.75,000

Final payout to MLI (Recovery from Primary Rs.1.75 lakh nd Installment) Security remitted + 2 Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement

ScenarioScenario-II
Amount in Default on NPA Date CGTMSEs Liability (75%) 75% Rs.8 lakh Rs.6 lakh

First installment paid by CGTMSE (75% of liability) Rs.4.5 lakh 75% Recovery from Primary Security remitted to Rs.2 lakh CGTMSE, after adjusting legal expenses Net Amount in Default (Final Loss) Second installment payable by CGTMSE (Rs. (Rs.4.50 lakh minus Rs.4.50 lakh) Rs. Rs.6 lakh NIL

Final payout to MLI (Recovery from Primary Rs.2 lakh nd Installment) Security remitted + 2 Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement

ScenarioScenario-III
Amount in Default on NPA Date CGTMSEs Liability (75%) 75% Rs.8 lakh Rs.6 lakh

First installment paid by CGTMSE (75% of liability) Rs.4.5 lakh 75% Recovery from Primary Security remitted to Rs.4 lakh CGTMSE, after adjusting legal expenses Net Amount in Default (Final Loss) Second installment payable by CGTMSE (Rs. (Rs.3 lakh minus Rs.4.50 lakh) Rs. Rs.4 lakh (-)Rs.1.5 lakh

Final payout to MLI (Recovery from Primary Rs.2.5 lakh nd Installment) Security remitted + 2 Facilitating Collateral-free Credit to Micro & Small Enterprises

Performance
Approvals 1st 50,000 2nd 50,000 3rd 50,000 4th 50,000 Time 6 years 1 month 1 year 7 months 9 months 6 months Period (Aug. 2000 to Sep. 2006) (Oct. 2006 to Jun. 2008) (Jul. 2008 to Mar. 2009) (Apr. 2009 to Sep. 2009)

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS - Yearwise Performance

(as on October 31, 2009)

Period
FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

MLIs availing Guarantees guarantee cover approved

9 16 22 29 32 36 40 47 57 70 Total 951 2296 4955 6603 8451 16284 27457 30285 53708 65110 216100

Amount (Rs. Crore)

6.06 29.52 58.67 117.60 267.46 461.91 704.53 1055.84 2199.40 3066.80 7967.82

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Top 10 MLIs - Cumulative

(As on October 31, 2009)

SNo 1 2 3 4 5 6 7 8 9 10

MLI State Bank of India Canara Bank Punjab National Bank Bank of India Allahabad Bank Union Bank of India State Bank of Bikaner & Jaipur Central Bank of India Syndicate Bank State Bank of Travancore

No. 43171 33519 29069 25325 7697 7278 6284 4792 4729 4689

Amount (Rs. Crore) 1253.61 785.67 800.05 1302.01 197.19 262.13 65.10 277.12 255.27 103.62

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Top 10 MLIs FY2010

( As on October 31, 2009)

S.No 1 2 3 4 5 6 7 8 9 10

MLI State Bank of India Punjab National Bank Bank of India Canara Bank Allahabad Bank State Bank of Bikaner & Jaipur Syndicate Bank Bank of Baroda Indian Overseas Bank Union Bank of India

No. 11793 11693 9394 4056 3719 2957 2098 2067 1690 1660

Amount (Rs. Crore) 435.95 470.60 604.24 161.53 101.73 29.57 102.57 148.78 51.86 93.14

Facilitating Collateral-free Credit to Micro & Small Enterprises

BOBBOB- CGS Top 10 Regions FY2010

(Based on Cumulative guarantee approval on November 15, 2009)

S.No

MLI

No.

Amount (Rs. Lakhs)

1 2 3 4 5 6 7 8 9 10

Ajmer Jaipur Udaipur Ahmedabad Pune Kanpur Jodhpur Lucknow Mumbai Metro North Kerla

476 473 452 309 247 242 239 215 207 181

663.80 1787.71 433.51 4880.31 1821.45 2387.23 1480.61 1522.37 735.39 1355.94

Facilitating Collateral-free Credit to Micro & Small Enterprises

BOBBOB- CGS Top 10 Regions FY2010

(Based on approvals for FY2010 as on November 15, 2009)

S.No

MLI

No.

Amount (Rs. Lakhs)

1 2 3 4 5 6 7 8 9 10

Jaipur Ajmer Udaipur Mumbai Metro North Ahmedabad Jodhpur Mumbai Metro East Varanasi Pune Allahabad

267 234 194 187 136 132 101 89 78 78

1012.79 565.80 223.19 473.89 2142.34 672.51 390.80 486.80 444.26 294.19

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Benefits
 Credit facilities guaranteed under the Scheme carry Zero per cent Risk Weight / Provisioning for guaranteed portion (RBI Circular DBOD No.BP.BC.128/21.04.048/00-01 dated June 07, No.BP.BC.128/21.04.048/0007, 2001) 2001)  Reduction in waiting period for recovery through legal process, realising the time value of money with hassle free & quick recovery of major portion of defaulted amount  Quicker dispensation of credit due to time saved on security creation / Title related issues of collaterals  In case of collateral, it is Banks responsibility to insure / secure the property when asset is taken over  Overall significant saving in Time & Energy cost of Banks Human Resources

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS - Benefits
Credit Guarantee Scheme - A tool for     Widening of credit portfolio Better management of risk Faster recovery of dues Enhancement of profitability

Facilitating Collateral-free Credit to Micro & Small Enterprises

Role of Credit Guarantee

 A weak project cannot be turned into a viable one with guarantee cover and is only an additional comfort to the lender, as is collateral security  Banks should evaluate credit applications by using prudent banking judgement / due diligence / business discretion in supporting only viable projects under the Credit Guarantee Scheme and conduct the account(s) of the borrowers with normal banking prudence
Facilitating Collateral-free Credit to Micro & Small Enterprises

Help us serve you better

 Please furnish the following details while communicating with us
 Your Member ID  Full address & telephone number  Name and designation of officer  CGPAN and Name of Unit  Demand Advice Number, while making payments

 Keep record of your Member ID, User ID and Password in a safe place
Facilitating Collateral-free Credit to Micro & Small Enterprises

We welcome suggestions, advice and other inputs to improve our services

Contact us at :
Credit Guarantee Fund Trust for Micro and Small Enterprises

7th Floor, SME Development Centre Plot No.C-11, G Block No.CBandra Kurla Complex MumbaiMumbai-400051 Phone : 022-26541803-07, 61437800 (24 lines) 022-26541803Fax : 022-26541821 022Website : www.cgtmse.in Facilitating Collateral-free Credit to Micro & Small Enterprises

THANK YOU
bishtbob@gmail .com
Facilitating Collateral-free Credit to Micro & Small Enterprises