The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is seeking to expand its coverage of small-scale units by enhancing its collateral-free credit guarantee cap from Rs 50 lakh to Rs 1 crore. The trust is tying up with private and public sector banks to facilitate access to such credit to entrepreneurs.
The Micro, Small and Medium Enterprises Development Act 2006 defines micro enterprise as that in which the investment in fixed assets does not exceed Rs 25 lakh, while small units have plant and machinery worth anything between Rs 25 lakh and Rs 5 crore. By facilitating collateral-free credit of up to Rs 1 crore, the trust would be able to serve more small enterprises.
On Wednesday, the trust signed a memorandum of understanding with Punjab National Bank, country?s second-largest bank, for a pilot project christened Risk Sharing Facility and intend to involve 3-4 more lending institutions in this initiative by December. Small Industries Development Bank of India would be the second lender to enter into an agreement with CGTMSE in Mumbai on Thursday. The initiative holds significance as it would help prospective and existing entrepreneurs raise a higher sum from banks without keeping any asset as security. There are around 1.3 lakh entrepreneurs in the micro, small and medium enterprises (MSME), contributing around 40% of the country?s exports.
For a loan of up to Rs 50 lakh, the trust guarantees 75-80% repayment. In case of loans of a sum between Rs 50 lakh and Rs 1 crore, it would guarantee 50% sum.
The trust relies on the lender?s project appraisal policy to give guarantee. However, it has assumed a strict stance for loan of higher than Rs 50 lakh. ?Only investment grade projects would be considered for guarantee under the new project,? CGTMSE?s chief executive officer O S Vinod said.
?Taking guarantee from the trust reduces the risk weightage of loans and enhances the capital adequacy of the lender. Under the new project, we guarantee repayment of 50% sum lent and hence, the risk weightage comes down from 100% to 50%. With a reduced weightage, banks can lend more money to the sector,? said RM Malla, chairman and managing director of SIDBI, who also heads CGTMSE.
A loan not backed by guarantee carries 100% risk weightage and the capital adequacy of banks falls with more such loans, under the Basel II norms. A higher sum could be advanced with lower risk weightage. The credit guarantee institution is an initiative taken by the government and Sidbi to promote micro and small enterprises, since 2000. ?The number of applications coming for guarantee has started increasing only in the last three years, when we passed most of the proposals,? Malla said.
With 65,000 branches of 65-member lending institutions under its network, the trust has processed over 1.14 lakh proposals till date. These guarantees were extended for up to 75% (80% in some cases) of loans worth Rs 4,500 crore. The trust has had to pay out about Rs 1,100 crore till date, from the Rs 3,318 crore it guaranteed.
In 2008-09 so far, 17,458 enterprises have been accorded guarantees for Rs 644.83 crore. Malla said. The trust has a target to process 50,000 applications this fiscal. The trust has a corpus of Rs 1,600 crore, of which 80% is contributed by government and the rest by Sidbi. For the pilot project, it has earmarked Rs 25 crore and aims to cover 50 units by December. The fund is likely to grow to Rs 2,500 crore by 2011, Malla said.
