CGTMSE Scheme – An opportunity for Young Entrepreneurs in MSE sector
Posted in Finance Articles, Total Reads: 8196
, Published on 18 August 2013
The Indian economy has been growing at a significant pace since India adopted liberal and free-market principles and liberalized its economy to foreign market. Today, the economy of India is the third largest in the world by GDP (PPP), behind only US and China. Micro and Small Enterprises form the essential part of the economic growth of the Indian economy. It provides employment opportunities to a large number of its population and thus plays a vital role for the growth of the Indian economy. They produce many quality products for the Indian as well as foreign markets and thus make a significant contribution to total output, exports, and thus foreign exchange reserve. There are more than 2.6 Crores MSMEs (Micro, Small and Medium Enterprises) according to the Ministry of Micro, Small and Medium Enterprises (MSME) database. The sector accounts for 45 per cent of manufactured output and 8 per cent of the Gross Domestic Product (GDP). Approximately, 4o% of the export from our country is contributed by this sector. It created employment opportunities for more than 6 Crore people which is next only to the agriculture which employs majority of our population.
However, they face numerous challenges in accessing capital requirements for their business due to their inability to provide collateral /third party guarantees, a relatively high interest rate on the credit facility and intense competition due to globalization.
To overcome a few of these hurdles in the growth of MSE sector, the Credit Guarantee Fund Trust for Micro and Small Enterprises was set up by the Ministry of MSME, Government of India and SIDBI (Small Industries Development Bank of India). It was started in the year 2000 and came into force on August 1, 2000. The key objectives of the scheme are: To provide collateral free loans to small businesses, to give more importance to the viability and sustainability of the project rather than its ability to provide collaterals / third party guarantees, and to give composite credit to the borrowers so that the borrowers obtain both term loan and working capital facilities from a single agency.
This scheme ensures that no eligible proposal is deprived of guarantee cover. Entrepreneurs having viable business plans are encouraged to make use of this scheme. Thus, it facilitates the flow of credit to MSE sector and is a major step towards financial inclusion. Since its inception in 2000, CGTMSE has been quite successful in its purpose and has increased its outreach considerably. A total of 7,92,229 accounts have been accorded guarantee approval for Rs. 37,139.31 Crore as of March, 2012. There are more than 100 MLIs under this scheme. More than 10 Lacks units have availed the services of CGTMSE. Thus, since inception it has been playing a major role in boosting MSE sector. However, CGTMSE hasn’t been as success as expected. Though, there has been a steady growth in guarantee cover, the total coverage is still low.
CGTMSE has created awareness among various stakeholders such as banks, MSE associations, entrepreneurs, etc. of credit guarantee scheme through all possible means. It has adopted various approaches such as conducting workshops / seminars, meetings, exhibitions, promotion through online media, posters, electronic and print advertisements to reach out to beneficiary of its guarantee scheme.
Despite CGTMSE commendable work in spreading and popularising scheme among the MSE units especially first generation entrepreneurs it is a well known fact that awareness among the customers about the scheme is still critically low. This has been a major factor in depriving many MSE units of collateral free credit facility under this scheme.
There are a few shortcomings in the scheme such as:
Some of the branch managers of the bank are not aware of the scheme. As a result they do not provide required information to the customers regarding the scheme.
Collateral free loan of only up to 100 Lakhs is available under the scheme.
Turnaround time for sanctioning of loan is little high. It takes on an average 1 month for the entire process.
Loan for only manufacturing and services is available under the scheme; trade is not covered under CGTMSE scheme.
Most of the customers who availed facility under the scheme speak favourably about it barring a few who felt it could be improved further. According to them, existing procedures and requirements for obtaining loan under the scheme could be further simplified. Thus, the current turnaround time of around one month can be reduced which seems long for those who seek urgent credit for running there day to day operations.
However, despite these lacunae the CGTMSE scheme is a very good scheme for the young entrepreneurs who are dreaming of setting up their own units but don’t have access to adequate credit facility required. If their plan is viable and commercially sustainable in the long term, they can avail collateral free / without third party guarantee loan amount up to 100 Lakhs. The procedure for loan is quite simple. Customers can apply online through MLIs website or approach any of their branches and submit loan application.
In specialized branches, checklist is provided to the customer when they approach the bank for the credit facility under the scheme. As soon as all the requirements are full filled by the customer, loan application is processed by the bank.
CGTMSE trust and MLIs can further improve the scheme by taking certain steps to benefit this important section of our society:
Simplify existing procedures and requirements for obtaining credit under the scheme
Reduce the current turnaround time of on an average 30 days for loan under this facility.
Based on the changing times, increase the credit limit under the scheme currently 100 Lakhs.
Increase the awareness level of the different services offered by the bank among customers. This can be done by arranging workshops or taking part in trade exhibitions and fairs. Mainly, advertising efforts can be increased.
Encourage the communication and transaction between customers, bank officials and other branches through an email account. This will reduce the lead time considerably as well as hassles of unnecessary bank visits.
Extend the scheme to other sectors such as trade after doing feasibility study.
In conclusion, for MSE units / entrepreneurs, availing credit facility under the CGTMSE scheme is beneficial due to many MLI (member lending institutions) initiatives such as bringing all the MSE loans up to 100 Lakhs under CGTMSE scheme and also, not passing on its guarantee and service fees payable to CGTMSE trust to MSE units; thereby, reducing the cost of borrowing from the bank. On the other hand, bank can benefit from the increase in the loan portfolio in this segment. Besides, helping this socially important sector which provides employment opportunities to vast sections of our society and making significant contribution to the growth and development of the Indian economy.
A Review of Credit Guarantee Schemes in the Middle East and North Africa Region (Policy Research Working Paper 5612) – Youssef Saadani, Zsofa Arvai, Roberto Rocha-published by The World Bank, Middle East and North Africa Region, Financial and Private Sector Development Unit, March 2011
http://www.rbi.org.in – RBI notifications and reports
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