Complete, Structured Guide on the CGTMSE (Credit Guarantee Fund Trust for Micro & Small Enterprises) Scheme in India

1. Introduction & Background

• CGTMSE stands for Credit Guarantee Fund Trust for Micro & Small Enterprises.
• It was set up jointly by Ministry of MSME, Government of India and SIDBI (Small Industries Development Bank of India) in 2000 to operationalize a credit guarantee scheme for micro & small enterprises (MSEs).
• The main idea: To facilitate access to institutional credit for MSMEs, especially those which lack collateral or third-party guarantees, by providing a guarantee cover on loans extended by lending institutions (banks, NBFCs, etc.).
• Over time, the scheme has been revised, ceilings increased, and additional benefits introduced.

2. Objectives / Purpose

1. Promote collateral-free credit: To reduce the dependence on security (collateral / third-party guarantee) for obtaining credit by MSMEs.
2. Encourage credit flow to underserved / unserved MSMEs: Especially new enterprises, first-generation entrepreneurs, units in remote or backward regions.
3. Mitigate risk for lenders: By providing a partial cover against defaults, thus incentivizing banks to lend more freely to small units.
4. Support rehabilitation of stressed MSMEs: Through schemes like the “Credit Guarantee Scheme for Subordinate Debt (CGSSD)” for stressed or restructured MSMEs.

3. Key Features / Highlights

Here are the main features and recent updates:

4. Eligibility Criteria

4.1 Eligible Borrowers (MSE Units)

• Both new and existing Micro & Small Enterprises (MSEs) engaged in manufacturing or service activities (as defined under MSMED Act / relevant notifications) are eligible.
• Excluded / not eligible: agricultural activities; Self-Help Groups (SHGs); Joint Liability Groups (JLGs) (unless specified) are generally excluded.
• Borrowers must be assessed as viable / creditworthy by the lending institution.
• The borrower must not be a defaulter with any bank / financial institution.
• It is mandatory (for certain credit limits) to obtain PAN (Permanent Account Number); for credit facilities above ₹5 lakh, PAN is required.
• Udyam Registration: The borrower must have Udyam registration and the Udyam number should be provided at the time of application.

4.2 Eligible Lending Institutions (Member Lending Institutions, MLIs)

• Scheduled Commercial Banks (public, private, foreign) are eligible.
• Regional Rural Banks (RRBs) classified as “sustainable viable” by NABARD.
• NBFCs, Small Finance Banks (SFBs), etc., as per scheme guidelines. (In recent updates, more types of financial institutions have been included)
• Institutions like NSIC, NEDFi, SIDBI also allowed.

5. Coverage / Extent of Guarantee & Recent Updates

5.1 Basic Coverage Rules

• The scheme guarantees a certain percentage of the amount in default up to a maximum limit.
• For micro enterprises and small credit amounts, the coverage is higher (e.g. up to 85%).
• For larger amounts, the coverage percentage may be lower.
• For special categories (women-led enterprises, SC/ST entrepreneurs, enterprises in NE region, aspirational districts, ZED certified units, persons with disability), the scheme provides higher guarantee coverage (for example 90%, or some extra %).
• For MSEs in identified credit-deficient districts (ICDD), additional 5% cover over the base cover (i.e. uplift) from Dec 15, 2023.

5.2 Recent / Important Updates

• Ceiling (maximum credit facility / guarantee) has been raised. As of April 1, 2025, credit guarantee up to ₹10 crore is allowed. (DCMSME)
• For guarantees above ₹1 crore, the annual guarantee fee has been reduced in the revised scheme.
• Benefit enhancements: For example, guarantee coverage for women entrepreneurs has been enhanced (from 85% to 90%) in certain cases.
• The scheme also provides for a Credit Guarantee Scheme for Subordinate Debt (CGSSD) to support promoters of stressed / restructured MSMEs (SMA-2, NPA).

6. Documents Required & Process / Steps to Avail Credit Under CGTMSE

6.1 Documents & Pre-requisites

Some common documents / requirements:

• Udyam registration certificate / Udyam number. (cgtmse.in)
• PAN of the enterprise / promoter (especially for credit above ₹5 lakh).
• KYC documents – identity proof, address proof of applicants / promoters.
• Business registration / incorporation documents (proprietary, partnership deed, LEI, certificate of commencement, etc.)
• Project report / business plan, financial statements, projections
• Loan application to MLI with details of amount, purpose, security (if partial), repayment schedule, etc.
• Any additional documents required by the bank / financial institution or scheme guidelines.

6.2 Steps / Process Flow

1. Approach a Member Lending Institution (MLI): The MSE approaches a bank or eligible institution registered under CGTMSE.
2. Loan appraisal / evaluation: The lender carries out credit appraisal, viability study, etc.
3. Apply for guarantee cover: Once the lender sanctions or approves in-principle, a guarantee application is submitted to CGTMSE through the prescribed system / portal.
4. Payment of guarantee fee: The applicant (or as per scheme, MLI / borrower) pays the required guarantee / service fee.
5. Disbursement: The loan is disbursed by the MLI to the borrower.
6. Monitoring / servicing: The borrower makes repayments as per schedule.
7. Default / invocation: In case of default, the MLI may invoke the guarantee (subject to terms), and CGTMSE will pay the guaranteed portion.
8. Settlement / claim: The MLI submits the claim to CGTMSE, and after verification, the guaranteed portion is paid to the MLI.

Also, for working capital, the guarantee is for 5 years (or as permitted) and needs renewal if continuing.

The scheme guidelines provide detailed timelines, documentation, and submission rules.

7. Advantages / Benefits & Risks / Limitations

7.1 Benefits

• Collateral-free / security-free lending: Helps startups / small units that don’t have fixed assets.
• Encourages lending: Bank / lenders get a cushion, reducing risk, thus more willing to lend to MSMEs.
• Better access to formal finance: Reduces dependence on informal, expensive lenders.
• Inclusive development: Helps credit reach remote / backward / underserved areas and special categories (women, SC/ST, PwD).
• Boost to entrepreneurship & MSME growth: Facilitates expansion, modernization, technology upgrade, etc.
• Risk sharing: The risk of default is partially borne by CGTMSE.

7.2 Limitations / Risks / Challenges

• Partial coverage only: The guarantee is not for 100% of the loan; the residual risk remains with the lender.
• Default / invocation issues: Verification and claim settlement processes can delay recovery.
• Moral hazard: Lenders may become lax in credit appraisal, relying on guarantee cover.
• Awareness / reach: Many MSMEs don’t know about or avail the scheme.
• Administrative / procedural delays: Documentation, processing, scrutiny can be cumbersome.
• Premium / guarantee fee: Although relatively nominal, it adds to the cost of credit.
• Exclusion: Some activities, groups (like agriculture, SHG) are excluded.
• Cap / ceiling limits: Even with increased ceiling, very large enterprises or high credit demands may exceed the limit.

8. Recent / Upcoming Changes & Special Schemes Under CGTMSE

• As per the MSME / DCMSME official guidelines, effective 01 April 2025, the ceiling for credit guarantee has been increased to ₹10 crore.
• Annual Guarantee Fees have been revised / reduced for guarantees above ₹1 crore.
• Additional benefits for special categories (women, SC/ST, etc.), and higher coverage in identified credit-deficient districts.
• The CGSSD (Credit Guarantee Scheme for Subordinate Debt) is a scheme under CGTMSE to provide guarantee cover for subordinate debt given to promoters of stressed MSMEs (i.e. accounts in SMA-2 or NPA, being restructured) as quasi-equity funding.

9. Important Terms / Definitions

• MLI (Member Lending Institution): A bank or financial institution registered under CGTMSE to extend loans and avail guarantee cover.
• Credit facility: The sanctioned loan / credit line (could be term loan, working capital, composite).
• Guaranteed portion / extent of cover: The portion (percentage) of the loss / default amount that CGTMSE will pay to the lender, subject to maximum caps.
• Guarantee fee / Annual Guarantee Fee (AGF): The fee charged for providing the guarantee cover.
• Invocation / claim: The process by which the lender claims the guaranteed amount from CGTMSE in the event of borrower default.
• Tenure / guarantee period: The period for which the guarantee cover is valid (for term / composite or working capital).
• Hybrid security / partial collateral: When part of the loan is secured by collateral / guarantee, and part is unsecured (covered by CGTMSE).
• SMA-2: Special Mention Account – category used in banking for loans showing incipient stress. (Used in context of stressed MSMEs)
• Subordinate debt / quasi-equity: Debt that ranks below other debts in a company’s capital structure, often used for restructuring.

10. Case / Example (Hypothetical)

Suppose an MSME approaches Bank X for a term loan of ₹50 lakh. The bank assesses viability and sanctions ₹50 lakh. Under CGTMSE:

• Let’s say for ₹50 lakh, the guarantee cover is 75%. (The exact coverage depends on scheme rules, special categories, etc.)
• The borrower (or as per scheme, the combination of borrower and lender) pays a guarantee fee (say 0.6% annually, for example).
• Over the loan tenure, the borrower repays. If the borrower defaults (say defaults ₹10 lakh), the bank can invoke the guarantee and get 75% of ₹10 lakh = ₹7.50 lakh from CGTMSE, reducing the bank’s loss.
• The remaining portion (i.e. 25% of default or beyond the cap) is borne by the bank / lender.

This mechanism encourages the bank to lend, and gives some protection, yet also enforces prudent appraisal (since the lender is not fully indemnified).

11. Key Challenges, Observations & Effectiveness

• The success of CGTMSE depends heavily on efficient claim settlement, minimal delays, and clarity in rules.
• Over time, periodic adjustments to ceilings, fees, categories are needed to keep the scheme relevant.
• The scheme has helped many MSMEs access finance which would otherwise be difficult.
• Issues remain in awareness, exclusion errors, processing bottlenecks, and moral hazard.
• It must be complemented with other support measures (skill, marketing, technology) for MSME growth.