MICROCAPITAL STORY: Indian Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) Likely to Extend Credit Guarantee

The Indian government is considering increasing its credit guarantee scheme for micro and small enterprises (MSE) in the upcoming 2009-2010 budget through its Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE). The existing guarantee for member lending institutions of this scheme does not cover bank loans to MSEs that are secured by collateral. A finance ministry source claims that the Reserve Bank of India (RBI) has put forward this proposal and is working on it with the ministry.

Currently the CGTMSE encourages banks to provide loans to MSEs that do not have any collateral. In return banks do not bear all the risk in the case of default and do not need to set aside money for the risk of defaults on these loans. The government becomes responsible for paying the loan out of this fund should default occur. The new proposal would extend coverage to microfinance loans where collateral has been obtained. At present the scheme provides a guarantee of 85 percent of a loan up to Rs 5 lakh (approx. USD 10,000) and 75 percent of a loan up to Rs 50 lakh (approx. USD 100,000). The maximum coverage for a Rs1 crore loan is Rs 62.50 lakh (approx. USD 135,000).

A general manager with an Indian public sector bank, who did not wish to be named, said that the proposed extension of the scheme’s scope “will help us to fall back on the government in case there is a default by small and micro enterprises (SME), which have availed loans pledging collateral. SMEs are not very forthcoming when you try to forfeit their collaterals. That problem will be solved after this.” However, a 2007 report suggests that the current credit guarantee coverage has been obtained in only 10 percent of eligible accounts. Banks indicated that assets in the MSE segment are less than 2 percent of their loan portfolio. There was no information as to how much capital would need to be raised to cover the extended guarantee.

The MSE sector in India currently accounts for around 1.28 million small businesses which employ about 40 million people. According to a CGAP (Consultative Group to Assist the Poor) report the agenda of the Indian Government and RBI is one of financial inclusion. This report observed that 80 percent of the 321 million Indians living below the poverty line lack access to formal financial services. Less than 59 percent of Indians have a bank account and less than 14 percent have a loan. The MIX Market, the microfinance information clearinghouse, lists 116 MFIs operating in India.

The CGTMSE was established in August 2000 by the Government of India and the Small Industries Development Bank of India (SIDBI). Together they pledged to raise capital of Rs. 2,500 crore (approx. USD 520 million). Capital raised as at 30 March 2009 was Rs.1,736 crore (approx. USD 358 million). At this date 146,326 proposals for Rs. 4,725 crore (approx. USD 974 million) had been approved by the scheme since inception. A May 2009 MicroCapital story reported that the CGTMSE intends to provide credit guarantee support to 57,500 MSE in 2009. The CGTMSE currently has 81 member lending institutions.

By Sally Levy, Research Assistant

Additional Resources:

Livemint.com: Extended credit guarantee likely for small units

Credit Guarantee Trust for Micro and Small Enterprises: Home

MicroCapital Story: Indian Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Seeks to Provide Guarantees to 57,500 MSEs in 2009

CGAP: Notes on Regulating Branchless Banking in India

MIX Market: India