Credit and Finance for MSMEs: CGTMSE was jointly set up by MSME Ministry and SIDBI in 2000 to catalyse the flow of institutional credit to MSEs. 8.36 lakh guarantees were approved for an amount of Rs 36,954 crore in FY21 under the scheme.
Credit and Finance for MSMEs: Non-banking financial company (NBFC) lenders to micro, small and medium enterprises (MSMEs) have sought restoration of guarantee cover under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme to 75 per cent which was reduced earlier this year to 50 per cent. Back in February 2018, among the policy changes announced to the scheme, the guarantee coverage extent was increased to 75 per cent from 50 per cent for proposals above Rs 50 lakh.
“The cover needs to be taken back up again to 75 per cent as CGTMSE was one scheme that had started to gain traction. During the Covid period, many MSMEs had suffered and as a result, the portfolio of lenders had also suffered. While it will take some time before those portfolios are repaired by themselves but the attractiveness of the scheme would determine how well this is taken up,” Alok Mittal, Co-founder and CEO, Indifi Technologies told Financial Express Online.
CGTMSE was jointly set up by MSME Ministry and SIDBI in 2000 to catalyse the flow of institutional credit to micro and small enterprises (MSEs). According to the CGTMSE portal, 8.36 lakh guarantees were approved for an amount of Rs 36,954 crore in FY21.
In April this year, the Finance Industry Development Council (FIDC) – a representative body of assets and loan financing NBFCs had also reportedly requested the Finance Ministry and former MSME Minister Nitin Gadkari for restoration of the guarantee cover to 75 per cent. On Monday as well, it urged SIDBI for the same, among other requests.
“The recent reduction in the amount of payout admissible under the CGTMSE scheme to twice the amount of guarantee fee plus the recoveries has severely dampened the risk appetite of NBFCs in financing MSMEs. With the CGTMSE cover becoming lesser and costlier, NBFCs have no choice but to become risk-averse or to insist on secondary collateral to manage their risks. This may severely restrict the flow of funds from NBFCs to MSMEs. We request restoration of the earlier limits for admission of claims under the scheme,” Mahesh Thakkar, Director General, Finance Industry Development Council – a representative body of assets and loan financing NBFCs told Financial Express Online.
The market for MSME lending is enormous in India. According to the World Bank estimates, the MSME credit gap in India has been worth around $380 billion. In fact, the bank credit share to micro and small enterprises (MSEs) in India currently is around only 10 per cent of the total gross bank credit. According to the latest Reserve Bank of India (RBI) data on sectoral credit deployment, banks had deployed Rs 11.10 lakh crore in lending to MSEs in August 2021 while the overall gross bank credit was Rs 108.97 lakh crore during the month.
“The direction of the restoration of CGTMSE coverage is right particularly for micro-enterprises that are even less included in discussions on organised finance. CGTMSE pool has a lot of conditions and also the operational procedure is more difficult and then there is a process in terms of what you can claim and what you cannot claim. However, remember that the number of loans CGTMSE is handling is humongous and the scheme needs to validate that it is not paying out non-eligible cases. At this time, MSEs have fought through the stress and so the important aspect is to make credit available to them,” Sanjay Sharma, Managing Director, Aye Finance told Financial Express Online.
CGTMSE would have made “a lot of sense when lenders were not sure of the second wave but assuming that the third wave won’t strike or perhaps not as severe as the second wave, the important thing is credit availability.” Sharma said that “Lenders’ challenge today is not that whether we will see losses as many customers have survived and are therefore better positioned. So, the credit guarantee for such recovered customers is not a challenge as much as it is for those who are in the middle of the problem. The challenge is also that under CGTMSE, you cannot give credit to anyone who is already delinquent. It is like a chicken and egg situation though.”
Among other requests from FIDC was to extend CGTMSE coverage to loans given to education institutions, acceptance of arbitration as a valid legal step taken for debt recovery under the ECLGS scheme, refinancing mechanism for NBFCs, etc. Most NBFCs, except ones very highly rated NBFCs, depend upon banks and this has resulted in the inadequate and erratic flow of funds to NBFCs and increased concentration risk at a systemic level, the body said in a letter to SIDBI. Hence, “There is a dire need for an effective refinance mechanism to ensure diversity and greater regularity in sources of funds to NBFCs.”
“With respect to refinance mechanism, there is a liquidity issue and the cost of capital has gone through the roof for NBFCs. Over the last two years, the bank rate has come down by about 150 bps whereas the cost of borrowing for smaller NBFCs has gone up and the spread has actually widened by 300 bps. So there need to be more efficient ways of getting capital to NBFCs to lend to MSMEs,” added Mittal.