Finance Minister Nirmala Sitharaman announced the government will provide a contribution of Rs 4,000 crore to Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE) along with providing partial credit guarantee support to the banks.
CGTMSE was set up by the government and the Small Industries Development Bank of India (SIDBI) to ensure availability of bank credit without the hassle of collateral or third-party guarantee to MSMEs.
Under CGTMSE, collateral-free loans up to Rs 2 crore are given by banks and NBFCs to MSMEs. The corpus of this fund was enhanced from Rs 2,500 crore to Rs 7,500 crore under the Union Budget 2020-21, aimed at helping stressed MSMEs.
Experts pointed out that since it is only a partial guarantee where some risk still needs to be borne by the bank, there is some reluctance to lend under the scheme.
"The scheme has helped MSMEs to take a loan from banks without collateral, but the cost (interest plus guarantee charges) remains a challenge as it is a partial guarantee and hence, to that extent, the risk will be priced by the bank, said Sanjay Doshi, Partner and Head - Financial Services Advisory, KPMG in India
Recovery of loans becomes difficult for banks due to lack of collateral. The government provides reimbursement in case of bad loans and full cover is not available in most categories. The cover ranges from 65-75 percent of the loan with the balance turning into losses for banks, according to an industry source.
While the government provides a guarantee, it is assessed whether there was any lapse and attempts to identify accountability. If lapses are identified, the government does not reimburse banks. Thus, banks have become reluctant to lend under the CGTMSE scheme.
The scheme is key to aiding stressed MSMEs struggling with working capital issues due to the COVID-19 induced lockdown.
Since the aim of the CGTMSE scheme is to encourage MSMEs, it should not be profit-oriented. The assessment should be on the basis of guarantees invoked and honoured.
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