Credit Guarantee Fund Scheme for Micro and Small Enterprises - Indian Economy Notes
The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) is undertaken by the Government of India to ensure the availability of collateral-free credit to the micro and small enterprise sector. The eligibility criteria are open for both existing and new enterprises. In FY2020 the CGMSE has approved guarantees of more than Rs 45000 crores. This article discusses the Credit Guarantee Fund Scheme for Micro and Small Enterprises which is essential for UPSC aspirants to understand.
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What is the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE)?
- It was initiated in the year 2000. The corpus for the scheme is contributed by the Government and SIDBI in the ratio of 4:1.
- This corpus is to be raised to Rs.2500 crore by the end of the 11th Plan.
- A trust was established by the Ministry of Micro, Small and Medium Enterprises and Small Industries Development Bank of India (SIDBI) so as to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises.
The extent of coverage provided by the scheme includes up to 80% for –
- Micro and small enterprises that are operated and owned by women entrepreneurs.
- All credits or loans were given to the Northeastern states in India including the state of Sikkim.
Criteria for Eligible Lending Institutions
- Eligible institutions under the scheme include scheduled commercial banks (Public Sector Banks/Private Sector Banks/Foreign Banks) and select Regional Rural Banks (which have been classified under the 'Sustainable Viable' category by NABARD).
- Other eligible institutions include National Small Industries Corporation Ltd. (NSIC), North Eastern Development Finance Corporation Ltd. (NEDFi) and SIDBI.
Eligible Credit Facility Under the Scheme
- Eligible credit facilities under the scheme include those which are both term loans and working capital facilities up to Rs.100 lakh per borrowing unit, extended without any collateral security or third party guarantee, to a new or existing micro and small enterprise.
- For such units that become sick owing to factors beyond the control of management, rehabilitation assistance extended by the lender could also be covered under this scheme.
- It is noteworthy that if the credit facility exceeds Rs.50 lakh, it may still be covered under the scheme but the guarantee cover will be extended for credit assistance of Rs.50 lakh only.
- It is essential that a credit facility is availed by the borrowing unit from a single lending institution.
The Guarantee Cover
- Under the scheme, the guarantee cover available is extended to 75 percent of the sanctioned amount of the credit facility.
- The guarantee cover is 80 per cent for micro-enterprises for loans up to Rs.5 lakh; for MSEs operated and/or owned by women, and for all loans in the North-East Region.
- In case of default, the claims upto 75% (or 80% wherever applicable) of the amount in default of the credit facility extended by the lending institution are settled by the trust.
Other Eligibility Conditions
- Under the scheme, the guarantee cover is for the agreed tenure of the term loan/composite credit.
- In the case of working capital, the guarantee cover is of 5 years or a block of 5 years.
- Under this scheme, the fee payable is a one-time guarantee fee of 1.5% and an annual service fee of 0.75% on the credit facilities sanctioned.
Various Awareness Programmes of The Scheme
- This scheme involves the use of a multi-channel approach for awareness generation such banks, MSE associations, entrepreneurs, etc. through print and electronic media, by conducting workshops/seminars, attending meetings convened at various district/state/national fora, etc.
Conclusion
The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was undertaken by the Government to make easy availability of collateral-free credit facilities to the micro and small enterprise sector. Both the existing and the new enterprises are eligible to be covered under the scheme. Micro and small enterprises form the backbone of the rural economy, therefore this scheme ensured that credit to such enterprises does not dry up.
FAQs
Question: What is the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS-MSE)?
Answer: The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS-MSE) was launched by the Government of India in 2000 to provide financial support to micro and small enterprises (MSEs) by facilitating collateral-free credit. Under this scheme, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was established. The scheme aims to promote lending to MSEs, especially for those that do not have sufficient collateral to secure loans. The scheme covers both term loans and working capital loans for the eligible MSEs, helping them expand their businesses, increase their productivity, and enhance their competitiveness.
Question: How does the Credit Guarantee Fund Scheme benefit micro and small enterprises?
Answer: The CGS-MSE scheme benefits micro and small enterprises by providing them with access to collateral-free credit, which is often difficult for them to obtain through traditional means due to the lack of physical assets or collateral. The scheme reduces the financial risk for lenders, encouraging them to extend loans to a wider segment of MSEs. This, in turn, enables MSEs to fund their working capital, invest in infrastructure, and undertake growth-oriented initiatives. The scheme plays a significant role in strengthening the financial inclusion of MSEs, especially those in rural and underserved areas.
Question: What types of loans are covered under the Credit Guarantee Fund Scheme?
Answer: The Credit Guarantee Fund Scheme for MSEs covers both term loans and working capital loans. Term loans are typically used for purchasing machinery, equipment, or establishing infrastructure, while working capital loans help businesses manage their day-to-day operations, such as inventory management, paying wages, and managing cash flow. The scheme covers loans up to a certain limit, and the amount covered is typically up to 75% of the loan amount, depending on the circumstances and the nature of the enterprise.
Question: What are the eligibility criteria for micro and small enterprises under the Credit Guarantee Fund Scheme?
Answer: The eligibility criteria for micro and small enterprises under the CGS-MSE scheme are as follows:
- The enterprise must be a micro or small enterprise as defined by the Micro, Small, and Medium Enterprises Development (MSMED) Act.
- The enterprise should be engaged in manufacturing, processing, or service activities.
- The borrower must be a registered entity with a valid bank account.
- The enterprise should not have access to other forms of credit guarantee schemes or collaterals.
- The loan amount must be used for business purposes like working capital or term loan needs, not for speculative activities.
Question: How does the Credit Guarantee Fund Scheme contribute to the overall growth of the Indian economy?
Answer: The Credit Guarantee Fund Scheme plays a pivotal role in the overall growth of the Indian economy by facilitating the growth of micro and small enterprises, which are the backbone of the Indian economy. By improving access to finance, the scheme promotes entrepreneurship and job creation, especially in rural areas. It encourages the establishment and growth of small businesses, which are key drivers of innovation and employment. In the long run, the increased competitiveness of MSEs contributes to the diversification of industries and helps reduce regional economic disparities.
MCQs
1. What is the main objective of the Credit Guarantee Fund Scheme for Micro and Small Enterprises?
A) To provide subsidies to small businesses
B) To facilitate collateral-free credit
C) To provide grants to large enterprises
D) To offer tax incentives to micro enterprises
Answer: (B) See the Explanation
Explanation: The main objective of the Credit Guarantee Fund Scheme for MSEs is to provide collateral-free credit to micro and small enterprises, enabling them to access financial resources for growth and expansion.
2. Which of the following is NOT covered under the Credit Guarantee Fund Scheme for Micro and Small Enterprises?
A) Term loans
B) Working capital loans
C) Loans for personal use
D) Loans for business expansion
Answer: (C) See the Explanation
Explanation: Loans for personal use are not covered under the CGS-MSE scheme. The scheme only covers loans that are used for business purposes, such as working capital and term loans.
3. Who administers the Credit Guarantee Fund Scheme for Micro and Small Enterprises?
A) Reserve Bank of India
B) Ministry of Finance
C) SIDBI
D) CGTMSE
Answer: (D) See the Explanation
Explanation: The Credit Guarantee Fund Scheme for MSEs is administered by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which was established by the Government of India in partnership with SIDBI.
4. What is the maximum coverage percentage provided by the Credit Guarantee Fund Scheme?
A) 50%
B) 75%
C) 100%
D) 90%
Answer: (B) See the Explanation
Explanation: The Credit Guarantee Fund Scheme covers up to 75% of the loan amount for micro and small enterprises, depending on the size of the loan and other factors.
5. Which of the following is eligible for the Credit Guarantee Fund Scheme for Micro and Small Enterprises?
A) Large Corporations
B) Micro and small enterprises as per MSMED Act
C) Non-profit organizations
D) Foreign enterprises
Answer: (B) See the Explanation
Explanation: The Credit Guarantee Fund Scheme is specifically designed for micro and small enterprises as defined under the MSMED Act of India.
GS Mains Questions and Model Answers
Q1: Analyze the role of the Credit Guarantee Fund Scheme for Micro and Small Enterprises in promoting financial inclusion in India.
Answer: The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS-MSE) plays a significant role in promoting financial inclusion in India. By providing collateral-free loans to micro and small enterprises, the scheme helps overcome the major barrier to credit access for these businesses, which often lack physical assets to offer as security. This accessibility to finance promotes entrepreneurship and encourages the establishment of small businesses across the country, especially in rural and underserved areas. The scheme has a direct impact on job creation, poverty alleviation, and regional economic development. It helps integrate these enterprises into the formal financial system, ensuring they can grow and compete in the market.
Q2: Discuss the challenges faced by micro and small enterprises in accessing credit and how the Credit Guarantee Fund Scheme addresses these challenges.
Answer: Micro and small enterprises (MSEs) face several challenges in accessing credit, primarily due to the lack of collateral, poor credit histories, and high perceived risk by financial institutions. These enterprises often struggle to secure loans from traditional banking channels, limiting their ability to grow. The Credit Guarantee Fund Scheme for MSEs addresses these challenges by providing collateral-free credit guarantees to banks and financial institutions. This reduces the risk for lenders and encourages them to extend loans to smaller businesses. Additionally, the scheme simplifies the loan process for MSEs, making it more accessible and fostering financial inclusion.
Q3: Evaluate the effectiveness of the Credit Guarantee Fund Scheme for Micro and Small Enterprises in promoting the growth of small businesses in India.
Answer: The Credit Guarantee Fund Scheme has been effective in promoting the growth of small businesses in India by enabling access to credit, which is critical for their survival and growth. The scheme has helped thousands of small businesses access loans that they would otherwise not be able to obtain due to the lack of collateral. With easier access to finance, small enterprises can invest in their business infrastructure, increase production, and hire more employees. However, challenges such as awareness among smaller businesses, the need for more streamlined processes, and improving the speed of loan disbursements remain. Despite these challenges, the scheme has made a significant impact on the Indian economy by supporting the growth of small businesses, enhancing job creation, and contributing to economic development.
Previous Year Questions on Credit Guarantee Fund Scheme
1. UPSC CSE Prelims 2020:
Question: The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS-MSE) is aimed at providing financial support for which of the following?
A) Large enterprises
B) Public sector undertakings
C) Micro and small enterprises
D) Government institutions
Answer: (C)
Explanation: The Credit Guarantee Fund Scheme is designed specifically for micro and small enterprises to facilitate access to collateral-free loans.
2. UPSC CSE Mains 2019 (GS Paper 2):
Question: "Examine the role of the Credit Guarantee Fund Scheme for Micro and Small Enterprises in fostering economic growth and financial inclusion in India."
Answer: The Credit Guarantee Fund Scheme plays a vital role in fostering economic growth and financial inclusion in India. By facilitating access to collateral-free loans for micro and small enterprises, the scheme ensures that these businesses can access credit and contribute to the economy. It promotes entrepreneurship, job creation, and regional economic development, especially in rural areas. The scheme also contributes to financial inclusion by integrating MSEs into the formal financial sector, allowing them to grow, innovate, and compete in the global market.
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