Credit Guarantee Scheme
Credit Guarantee Scheme for Stand Up India (CGSSI)
The Credit Guarantee Scheme was launched to strengthen the credit delivery system and to facilitate flow of credit to the MSE sector, create access to finance for unserved, underserved and underprivileged, making availability of finance from conventional lenders to new generation entrepreneurs.
Credit Guarantee under CGTMSE Scheme
Credit Guarantee refers to a situation where the loan to the applicant is backed by a party without any collateral or third-party guarantee. Here, the loan sanctioned by the member lending institution is backed by the scheme which provides the guarantee cover for a large portion of the loan amount. Under the CGTMSE scheme, both new and existing enterprises, including manufacturing and service enterprises are eligible for a credit facility of up to Rs 5 crores.
Table of Contents
Benefits of Credit Guarantee Scheme
The Credit Guarantee Scheme provides you with the following benefits:
- No Collateral or third-party guarantee required: Most of the startups bootstrap their way towards success. The initial journey is filled with various challenges they face in arranging finance due to insufficient or non-credible collateral. The collateral-free Credit Guarantee Scheme opens up an easy source of finance for startups.
- Nominal Guarantee Fee: The credit guarantee cover is provided against an annual guarantee fee of 2% per annum on the disbursed or outstanding amount. In the case of working capital facilities, it is charged on the sanction amount. For female entrepreneurs and units from North-East India the fee is 1.5%. The MLI may or may not pass on this fee to the borrowing startup.
- Flexibility in credit facilities: Loans under Credit Guarantee Scheme can be availed to meet various business needs, whether to purchase or upgrade plant and machinery or business expansion. The loans can be in the form of venture debt, term loan, working capital loan, subordinated debt/mezzanine debt, debentures, optionally convertible debt obligation. Further, the credit guarantee may be transaction-based or umbrella-based.
- MI Support: The Member Institution applies for the credit guarantee cover against the loan applied by the startup. The eligibility and project feasibility are ensured by the MI. The startup doesn’t need to coordinate between NCGTC and MI for the Credit Guarantee Scheme loan approval.
Also Read: MSME Advantages and Disadvantages
Eligibility Criteria for Credit Guarantee Scheme
There are two categories in Credit Guarantee Scheme, Credit Guarantee Scheme for Stand up India (CGSSI) and Credit Guarantee Scheme for Startups (CGSS).
1. Credit Guarantee Scheme for Stand up India (CGSSI)
The scheme allows an individual to apply for bank loans ranging from Rs 10 lakh to Rs 1 crore at minimum to at least one SC/ST borrower per bank for setting up their enterprises. It can be manufacturing services, or even in the trading sector. In the case of a group handling an enterprise, at least 51% of shares must belong to either SC/ST or must be a women entrepreneur.
Eligibility
- The applicant must be an SC/ST and Women Entrepreneur and must be above 18 years.
- The loan is only applicable for unfinished/underdevelopment/green-field projects either in the manufacturing, trading or service sectors.
- It is mandatory for non-individual enterprises to have a minimum of 51%of the shares to be owned by SC/ST or Women entrepreneurs.
- The applicant should not be a defaulter in any Bank or NBFC.
2. Credit Guarantee Scheme for Startups (CGSS)
The Credit Guarantee Scheme for Startups is aimed at providing credit guarantee up to a specified limit against loans extended by Member Institutions (MIs) to finance eligible borrowers. The Government of India established the scheme with a fixed corpus for providing credit guarantees to loans extended to DPIIT recognized startups by Scheduled Commercial Banks, Non-Banking Financial Companies (NBFCs) and Venture Debt Funds (VDFs) under SEBI registered Alternative Investment Funds.
Eligibility
Borrower:
- Startups as recognized by DPIIT as per Gazette Notifications issued from time to time.
- Startups that have reached the stage of stable revenue stream, as assessed from audited monthly statements over a 12 month period, amenable to debt financing.
- Startup not in default to any lending/investing institution and not classified as Non-performing asset as per RBI guidelines.
- Startup whose eligibility is certified by the member institution for the purpose of guarantee cover.
Lending Institutions:
- Scheduled Commercial Banks and Financial Institutions.
- RBI registered Non-Banking Financial Companies (NBFCs) having a rating of BBB and above as rated by external credit rating agencies accredited by RBI and having minimum net worth of Rs 100 crore. However, it may be noted that in case an NBFC subsequently becomes ineligible, due to a downgrade in the credit rating below BBB, the NBFC shall not be eligible category.
- SEBI registered Alternative Investment Funds (AIFs).
Also Read: Business Loan eligibility criteria in India
Documentation required for a loan under the Credit Guarantee Scheme
- Proof of Identity which includes Voter’s ID card, Valid Passport, Driving License, PAN Card
- Address Proof/Business Address Proof: Telephone bill, Electricity bill, Property Tax Receipt
- Partnership Deed
- Rent Agreement, if the business location is on rent.
- SSI/MSME registration
- Projected Balance sheet for 2 years.
- Photocopy of all deeds of the property being offered as collateral is required
- Documents required to prove that the applicant belongs to SC/ST, if applicable.
- Certificate of Incorporation from Registrar of Companies (ROC).
- Project reports, including all the details of assets, resources, production, sale, etc.
- Manufacturing process, if applicable.
Steps to apply for Business/MSME Loan under Credit Guarantee Scheme
Here’s how to apply for loans under Credit Guarantee Scheme:
- Business Set up: Before applying for a Credit Guarantee Scheme loan, set up a business entity like a private limited company. LLP, one-person company or proprietorship.
- Business Report Analysis: Conduct market research and analysis to create a business plan with details like the business model, promoter profile and financial projections. Professional help in preparing these reports can improve approval chances.
- Loan sanction approval from Bank: Submit the business plan to the bank for loan approval. The bank evaluates the business model’s viability before sanctioning the loan as per its policies.
- Obtain Guarantee Cover: Once sanctioned, the bank applies for guarantee cover from Credit Guarantee. Borrowers must pay guarantee fee and service charges over and above the bank interest.
- Disbursal: Once the guarantee is obtained, the financial institution will disburse the amount, after which the repayment will continue as per the institution’s terms and conditions.
- Documentation: Certain documents can change depending on the nature of your business.
Some documents that are required Include:
- Business plan in detail
- Project report in detail
- Business owner’s KYC documents
- Financial statements or projections
- Registration and licence details of the business
- Income tax returns of the business and business owner
- Bank Statements
FAQs
CGSSI Stands for Credit Guarantee Scheme for Stand Up India.
No, the MUDRA loan is not covered under the Credit Guarantee Scheme.
Under the CGTMSE scheme, new and existing Micro and Small Enterprises engaged in manufacturing or service activity excluding Agriculture, Self Help Groups (SHGs), etc.
As of September 12, 2023, there were 25 registered Member Institutions (MIs) for the Credit Guarantee Scheme for Startups (CGSS).
The lock-in period in CGTMSE is for 18 months.
Yes, the annual guarantee fee can be paid after the claim is lodged, but it must be paid before the first instalment of 75% of the guaranteed amount is disbursed. However, no claims can be lodged during the initial lock-in period and after the guarantee cover tenure expires.
It guarantees education loans for economically disadvantaged students per the Model Education Loan Scheme of the Indian Bank’s Association (IBA). The scheme supports student borrowers who cannot offer collateral or a third-party guarantee. Under this initiative, eligible students can secure a collateral-free loan of up to Rs 7.5 lakhs.
Banks and Financial institutions are provided funding assistance under this scheme so that they can in turn lend collateral free credit to MSMEs. Funding support to banks and financial institutions for lending collateral-free credit to MSMEs.
In case of pre-closure/ request for refund, refund of proportionate annual guarantee fee will be allowed only where closure is marked in CGTMSE system/refund request is within 3 months from the date of receipt of fee by CGTMSE.
Yes, Annual General Fee/AGF is required to pay after the lodgement of claim till settlement of first instalment of 75% of the guaranteed amount.
All scheduled MLIs, including PSUs, private and foreign banks in addition to selected regional and rural banks and any other bank directed by the Government of India can avail the guarantee cover under the scheme.
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