Home / News / India /  MSMEs to reap gains of revamped credit guarantee scheme

MUMBAI : The government will introduce the revamped version of the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme from 1 April, infusing 9,000 crore to aid collateral-free lending to small businesses, finance minister Nirmala Sitharaman said on Wednesday.

Launched in August 2000, the CGTMSE scheme provides guarantees to help small businesses access loans. Guarantees provided by the scheme ranges from 75-85% of the loan. Such guarantee schemes are beneficial to banks as well as they do not have to set aside provisions for the guaranteed portion if it turns bad.

A MSME sector expert said requesting anonymity that the infusion of funds into the scheme would allow more leverage and that is likely being termed as a revamp, although more details might be soon available.

“I am happy to announce that the revamped scheme will take effect from 1 April 2023 through infusion of 9,000 crore in the corpus. This will enable additional collateral-free guaranteed credit of 2 trillion," Sitharaman said in her budget speech, adding the cost of the credit will reduce by about 100 basis points (bps) due to the scheme.

Bankers said they would have to wait for the details of the revamp to assess the impact. “The exact detail of the scheme is awaited and hence the exact impact of the scheme can be evaluated once the fine print has been studied," said Manish Kothari, president and head, commercial banking, Kotak Mahindra Bank.

The availability of 2 trillion worth of credit to small businesses would aid the sector, just emerging from two years of pandemic-related stress. Along with retail borrowers, small businesses were perhaps the worst hit during this period, crimping their ability to repay existing debt. While the government has in the past announced measures like the Emergency Credit Line Guarantee Scheme (ECLGS) during covid-19, experts have been seeking a revamp of the CGTMSE scheme.

“The demand of NBFCs from the finance minister was to advance hassle-free credit access and the government has given a much-needed boost to the MSME sector. An allocation of 9,000 crore for credit guarantee revamp scheme starting 1 April will give a big relief to MSMEs in the current inflationary conditions," said Shachindra Nath, vice chairman and managing director, UGRO Capital, a non-bank lender to small businesses.

According to Jiji Mammen, executive director and chief executive of microfinance institutions’ industry body Sa-Dhan, the budget has addressed the need for credit to the MSME sector by augmenting the credit guarantee fund.

Data from RBI showed that bank loans to MSMEs, under priority sector, stood at 19.12 trillion as on 30 December, up 11.6% from a year earlier. The small business sector, with an estimated workforce of 110 million, has also gained importance owing to its status as one of the largest employment providers. A report by consulting firm KPMG and industry body CII said in November that these entities account for 30% of India’s gross domestic product and 45% of exports.

A SBI Research report on 23 January had said there is an urgent need to revamp the credit guarantee scheme, including enhancing of maximum extent of guarantee coverage especially for women, vulnerable groups and aspirational districts. It had said that the US Small Business Administration (US-SBA) could be the template for evolving CGTMSE. “The maximum loan amount for coverage under CGTMSE may be increased from 2 crore to 5 crore for all activities under manufacturing, services and trade sectors," it said.

Shayan Ghosh
Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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