Credit Guarantee Fund Trust for Micro and Small Enterprises


On a New Mission


Credit Guarantee Fund Trust for Micro and Small Enterprises

On a New mission to Serve The Nation

 

The last decade has seen a focused attention from banks to Micro, Small and Medium Enterprises (MSMEs). As a result, there has been growth in the flow of credit to MSMEs. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has provided guarantee for an aggregate of Rs 1 trillion bank credit to roughly two million Micro and Small Enterprises (MSEs) units funded by its Member Lending Institutions (MLIs).

After gaining experience in the field of credit guarantee, now, Small Industries Development bank of India (SIDBI), which is one of the settlors of the CGTMSE along with Ministry of Micro, Small and Medium Enterprises (MoMSME), has in hand the task of implementing a new Government of India initiative through National Credit Guarantee Trust Company (NCGTC), a trustee company formed by the Ministry of Finance, Department of Financial Services.  NCGTC, which has been set up with assistance from SIDBI, is for providing guarantee cover for other segments like education loans, skill development loans, loans for start-ups, factoring credit etc.

Under the new initiative of bringing various credit guarantee programmes under a unified architecture of a common trustee organization, the Govt. of India along with SIDBI has embarked upon a very unique ‘access to finance’ intervention cutting across a variety of socially relevant sectors. This would make NCGTC a single operational entity for comprehensive credit guarantee schemes with enough operational synergy, offering economies of scale and leveraging technology.

 

With its deep domain knowledge of credit guarantee business, systems and processes in place and linkage with commercial banks and infrastructure for covering and settlements of proposals, SIDBI with its talent pool and credit guarantee experience, has enough bandwidth for supporting the efforts of the Government in this endeavor.

MSME sector plays a crucial role in India’s socio-economic development. With its contribution of 45 per cent to India’s overall manufacturing output, employment for 80 million people, over 40 per cent of India’s exports, besides a broad level support to the growth of large corporate business, MSMEs have a deep influence in the economy. India’s small enterprises manufacture thousands of products, which would be highly cost efficient, if they are supported with timely credit and at a reasonable cost. But, the sector has to face many challenges, which include insufficient level of formal credit-flow, lack of information regarding creditworthiness of entrepreneurs, absence of credit history, high risk perception amongst the bankers, non-availability of risk capital and a host of other funding related issues. 

In most cases, being start-ups and ventures by first generation entrepreneurs or technocrats, availability of credit has been a concern from formal banking system which seldom warrants credit without adequate securities. Without credit support, most business units cannot come up efficiently and stay alive for long or may not achieve the scale-up. Lack of collateral security at their disposal for seeking credit should not be construed as their ineligibility for credit. On the one hand, banks are not supposed to lend depositors' money without adequate guarantee of securities. At the same time, business units promoted by first time entrepreneurs with limited means, under-privileged and underserved sections of society and geographies are to be extended credit for supporting the growth of the national economy. Thus, a lender faces a conflict and the same needs to be resolved.

The remedy for resolving this conflict lies in intervention of an efficient and well-funded credit guarantee system, capable of assuring the lenders with coverage of default risk and motivating them with a comfort to go to riskier zones as perceived by them. The establishment of ‘Credit Guarantee Fund Trust for Micro and Small Enterprises’ (CGTMSE) in July 2000 could help the banking system hammer out the puzzles of lending to MSEs without collateral securities. It was the lack of collateral security that resulted in denial of credit to most of the MSEs. But, the establishment of CGTMSE could address this concern to a great extent. In fact, CGTMSE was formed with an objective of rendering a substitute of collateral or third party guarantee for smooth flow of credit facilities to MSEs.

Progressing at a gradual pace in its initial days, rapidly in the last few years, CGTMSE's Credit Guarantee Scheme (CGS) has become very popular among the lending institutions, the MLIs, associated with CGTMSE. In the first year of its operation, it had only 19 MLIs. Today, each of the commercial banks and other members in the country, irrespective of their size and across all geographies, proudly say they support deserving MSEs without collateral guarantee. Now, there are133 MLIs having memorandum of understanding (MoU) with CGTMSE,  which include 27 public sector banks, 20 private banks, 4 foreign banks and other financial institutions (State Financial Institutions) and Regional Rural Banks (RRBs).  These members are eligible for guarantee cover from the Trust on their credits to the MSEs up to Rs 1 crore (up to Rs 50 lakh in case of RRBs). They actively promote MSE credit under the CGS. CGTMSE initiated with guarantee cover for MSE loans up to Rs 10 lakh and gradually experimented and scaled up to Rs 25 lakh to Rs 50 lakh and finally to Rs 1 crore as on date.  The product was also tweaked to bring in certain concessionalities for micro enterprises, businesses promoted by underserved geographies and backward sections of the societies.

Thus, CGTMSE is playing a significant role in boosting India’s MSE business by ensuring institutional credit flow up to Rs 1 crore to each deserving MSE without collateral securities and/or third party guarantees. Entrepreneurs say it is a great relief for them. Many entrepreneurs have said that they would not have received credit at all from Banks but for CGTMSE– or ended up in the hands of private money lenders, as they did not have anything  at their disposal to offer as collateral for a loan from banks. In many cases of commercial banks, it is observed that managers at the branch level have taken special care to help their MSE client get CGTMSE guaranteed credits. That is a great relief for many small enterprises. In the last five years, the credit guarantee proliferated rapidly as thousands of commercial bank branches are promoting the collateral free MSE loans to their customers. 

Indeed, there has been a stupendous growth in loan for MSEs as commercial banks have been actively focusing on their MSE business. As of now, the MLIs of CGTMSE have disbursed over a trillion rupees to as many as two million MSE units with the credit guarantee cover of CGTMSE. Though, with the credit support, the aggregate size of their contribution to the economy is yet to be ascertained precisely, these units might have generated direct employment to over five million people, if average two to three people are employed on an average by each of the units, and indirectly to many more, leading to the improvement of overall socio-economic conditions in the country. This is the additionality which the CGTMSE has brought to the eco-system.

Over the years, there has been a growth in the corpus fund of CGTMSE as committed by the contributors, but the demand for guarantee cover has been much higher, thanks to the growth of commercial banks’ collateral free MSE credit business. It is still growing but with no space for CGTMSE to be aggressive without increase in corpus fund for guarantee. Banks are lending aggressively to the MSE sector and showing a good growth in MSE business. As at the end of March 2015, CGTMSE provided guarantee cover to over 3.27 lakh proposals of State Bank of India covering a sum of over Rs 15,792 crore, the highest amongst the MLIs. Canara Bank stood second with more than 2.28 lakh proposals for an aggregate of Rs 7,383 crore. The other banks, among top five large MLIs, include Bank of India, Punjab National Bank and Indian Overseas Bank. “The growth in approval of guarantees is expected to continue,” according to  Dr.Kshatrapati Shivaji, IAS, Chairman of CGTMSE in its annual report for the year 2014-15.

In terms of number of proposals and the aggregate credit amount covered last year, Maharashtra stood first followed by Tamil Nadu, Kerala, Karnataka, Uttar Pradesh as the other States among the top five States. Cumulatively, Uttar Pradesh saw the largest number of proposals being covered by the credit guarantee scheme. In the year 2014-15, the average size of loan ticket covered under the scheme stood at Rs 5.27 lakh, indicating the fact that largely micro enterprises were the major beneficiaries of the scheme. Lenders show great enthusiasm to lend to small enterprises. This is the second additionality which the operations of CGTMSE have brought about in the eco-system.

However, as a credit guarantor, CGTMSE has huge challenges.  Over the years, CGTMSE has leveraged its corpus substantially, to create an impact in terms of the guarantees issued. No doubt, the guarantee comfort has motivated the MLIs to support entrepreneurs from underserved geographies and to underprivileged social segments. The high leverage, along with the rapid rise in claim settlements in last three years, has stretched the resources of CGTMSE, necessitating further augmentation of corpus to render support to the lending institutions for expansion of MSE credit.

The Government, with its focus on boosting the MSE sector and ensuring necessary credit flow, is  ceased of  the necessity of boosting  CGTMSE’s corpus, especially in an atmosphere where MSMEs are important  players to make the government’s overall business policy a success. The economy has experienced a lot of stress in the last three years. As a result the banking sector has witnessed very high NPA levels. That would naturally lead to some slippages in the MSE credit qualities. Ultimately, as a credit guarantor, CGTMSE also shares the pressure, says Mr.Pradeep Malgaonkar, Chief Executive Officer, CGTMSE. It is natural that the claims for settlement also could go up. The risk of defaults often goes beyond the control of lending institutions, as the borrowers are vulnerable to the poor domestic and international political and economic conditions. So the risk is unforeseeable. "But in every atmosphere, as a credit guarantor, we have to be ready with resources to compensate the MLIs," says Mr Malgaonkar. This certainly means necessity of higher corpus for providing credit guarantees. 

During 2014-15, CGTMSE received as many as 27,407 applications for invocation of guarantee out of which by the end of the financial year, it settled 26,183 cases as first installment. The increasing delinquency is a matter of worry for both lenders and the guarantor, especially when the guarantor has leveraged its corpus to the fullest extent with no leg room for expanding the coverage further unless fresh corpus is infused. As at the end of March 2015, the corpus fund of CGTMSE stood at Rs 2389 crore with government contribution of Rs 1911 crore and Rs 478 crore by Small Industries Development Bank of India (SIDBI) over the last 15 years against the committed corpus of Rs 2500 crore in the ratio of 4:1 between the Union government and SIDBI. It expects the balance contribution of Rs 111 crore to come in soon.

In the prevailing atmosphere with demand for MSE credit on the rise, CGTMSE needs a deep chest to accommodate increasing number of proposals to help commercial banks lend more to the sector. Reading the scenario closely, CGTMSE initiated some remedial measures to address the issue of its stressed resource position. It expects increase in the corpus to deleverage the position and also proposed for sharing the risk by MLIs to 50% for the credit facilities exceeding Rs 50 lakh as indicated by Dr.Shivaji in the Annual Report. With CGTMSE cover, lenders have the advantage of providing zero capital adequacy for the entire portion of loans covered by the CGS. There are also solutions by way of sharing the risk proportionately between the Trust and the lenders after a careful study of the nature of default.  According to Dr. Shivaji, who is also Chairman and Managing Director of SIDBI, CGTMSE has been in the process of examining the best practices followed by various credit guarantee organisations in Asia to overcome the challenges faced by it. With this aim, in September 2015, it organised 25th Asian Credit Supplementation Institutions Confederation (ACSIC) Training programme for officials of 17 credit guarantee organisations from 11 Asian countries. This initiative is said to have helped it understand the innovations and learnings of its Asian peers. According to Dr Shivaji,“with appropriate risk mitigation measures, we can build a robust credit guarantee mechanism for CGTMSE also. ” As a credit guarantor with a proven track record having 15 years of experience and excellent vision for the sector, SIDBI is set for managing other huge national tasks of providing credit guarantee for education loans and skill development, Prime Minister’s Mudra Yojana, credit for start-ups as well as factoring under the newly formed National Credit Guarantee Trustee Company (NCGTC), besides guarantee for other socially and commercially important sectors.

“Yes, we always believe it is better to have all credit guarantee systems under one umbrella, so that we can use our talent, technology and knowledge of the credit guarantee business to the optimum level for the benefit of all segments. We will rely on our technology base for offering convenience to the member lending institutions dealing with us,” says Mr Malgaonkar. Since the operation is increasingly technology-driven in nature, it can comfortably operate with a lean team. NCGTC is primarily managed by SIDBI, with representatives from Ministry of Finance and Indian Banks’ Association on its Board.

Under the management of NCGTC, the Education Trust will have a corpus contribution of Rs 3,500 crore to be infused over five years beginning with Rs 500 crore in the initial year. The corpus for this will be contributed by the Ministry of Human Resources Development (HRD) from its own fund. Credit Guarantee Fund Scheme for Education Loans would guarantee security for loans by commercial banks. Any loan sanctioned with an interest rate two per cent above the base would not fall under the guarantee category. The target set under this scheme is to cover guarantees of around `75,000 crore for education over a period of five years with `10,000 crore in the first year with increase of 20 per cent per annum, subsequently.

Likewise, for skill development loans, the corpus for guarantee is set at `1,000 crore with contribution of `500 crore each a year by the Government through budgetary allocation.  Credit Guarantee Fund Scheme for Skill Development would guarantee, as the name itself indicates, skill development loans sanctioned by MLIs, as per the direction of the Government of India. The Ministry of Finance, as Settlor, would establish a fund for guaranteeing loans sanctioned under the scheme. In this case also a skill development loan sanctioned with interest rate of more than two per cent over the base rate of the lending institution would not qualify for guarantee cover.

Establishment of a credit guarantee mechanism has been a long standing demand by factoring service providers, who were not so optimistic about their business, mainly because of high instances of default and lack of mechanism to recover the dues either from the enterprises which have factored their invoices or from their debtors. Now, with the establishment of Credit Guarantee Funds for Factoring, the factoring business is likely to get a major relief. The Fund will have a corpus of `500 crore, which will enable the guarantor to leverage five times the size of corpus for factoring transactions. The aim is to promote factoring without recourse.

With this, NCGTC, as an umbrella organization, is set to become a comprehensive credit guarantee providing institution, beyond just MSEs and those catering to the MSEs’ interest. It is aiming at becoming a technology-centric process driven company to manage an extensive national mission of providing credits through formal lending channels. Yet, it knows there is a need for flexibility in the system and understanding with lenders by which risk can be mitigated, especially under unforeseen circumstances, besides sufficient guarantee corpus for the interest of the national economy as well as for the socio-economic development of the country. Every challenge it takes on its shoulder is with a sense of mission and spirit for serving the country’s economy.