Credit and finance for MSMEs: The government’s Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which implements the credit guarantee scheme for micro and small enterprises (MSEs), has reduced the annual guarantee fee (AGF) for member lending institutions (MLIs) by 10 per cent in order to encourage them to enhance credit flow to MSEs. The discount would be applicable for lenders with better CGTMSE loan portfolio in terms of risk.
According to a circular issued on November 30, 2022, by CGTMSE to all lenders part of the scheme, the AGF for loans up to Rs 10 lakh has been reduced from the standard rate of 0.75 per cent across all activity including trading to 0.68 per cent. Likewise, for Rs 10 lakh to Rs 50 lakh loans, the AGF has been dropped from 1.10 per cent standard rate to 0.99 per cent while for loans ranging from Rs 50 lakh to Rs 2 crore, the AGF stands at 1.08 per cent from earlier 1.20 per cent.
“In the current scenario when the (interest) rates are going up, this guarantee fee was adding to the overall cost of the borrower. At times, it was around 3 per cent and if you add GST to it, then the landed cost was sometimes in excess of 3 per cent. So, there was a huge demand from the borrower side to reduce the cost. The idea here is to help MSEs,” Sandeep Varma, Chief Executive Officer, CGTMSE told FE Aspire.
The AGF will be charged on the guaranteed amount for the first year and on the outstanding amount for the remaining tenure of the loan.
Depending on the degree of risk, MLIs with high risk will be charged a risk premium of a minimum of 15 per cent and a maximum of 70 per cent of the standard rate. For instance, loans up to Rs 10 lakh will attract 0.86 per cent to 1.28 per cent fee while loans between Rs 50 lakh to Rs 2 crore will attract fee between 1.38 per cent and 2.04 per cent. Loans between Rs 10 lakh and Rs 50 lakh will be levied from a minimum of 1.27 per cent to 1.87 per cent rate based on the level of risk.
“CGTMSE has engaged the services of external agency to carry out the analysis of the portfolio of CGTMSE. The agency, inter alia, has also categorised the MLIs based on critical factors such as NPA rate, claim rate, quick mortality ratio, netflows etc.,” the circular read.
“If their CGTMSE portfolio is not good, risk premium would be there. Idea is to control the moral hazard issue here,” Varma added. Moral hazard is an economic term that refers to a situation when a party can take advantage of a deal or situation, knowing that all the risks and fallout will land on another party.