Budget 2023 Simplified: Boost to Credit Guarantee Scheme for SMEs

In the ever-evolving world of business, one thing is for sure: access to funding can make or break a company’s success. Collateral-free business loans are one option for small and medium-sized businesses (SMEs) to get the necessary funding without risking their assets. In India, the government has launched the Credit Guarantee Scheme to encourage such loans, and with the Budget 2023 proposals, the scheme is set to be further simplified.

The Credit Guarantee Scheme

The Credit Guarantee Scheme (CGS) under CGTMSE is a government initiative jointly launched by the Ministry of Micro, Small and Medium Enterprises (MSMEs) and the Small Industries Development Bank of India(SIDBI) in 2000. The aim of the scheme is to provide collateral-free business loans to the MSME sector by facilitating the flow of credit from financial institutions to these businesses. Under the scheme, the government provides a credit guarantee to lending institutions, which encourages them to lend to MSMEs without the need for collateral loans.

According to Economic Survey 2022–23, India’s MSMEs are recovering quickly and the Emergency Credit Linked Guarantee Scheme (ECLGS) has helped them withstand the impact of COVID-19 through robust credit disbursement. The survey also revealed that credit growth to the MSME sector has been remarkably high, averaging over 30.5% during Jan-Nov 2022.

As of November 30, 2022, 1.2 crore MSMEs benefited from the ECLGS scheme and raised collateral-free business loans worth Rs 3.6 lakh crore, according to data from the National Credit Guarantee Trustee Corporation (NCGTC). The NPA reported by the banks for the MSME borrowers who availed credit under ECLGS was lower than the ones that did not avail it.

Increase in the Corpus of the CGTMSE

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is the nodal agency for the implementation of the Credit Guarantee Scheme. Finance Minister Nirmala Sitharaman announced revamped credit guarantee scheme with a Rs 9000 cr corpus w.e.f 1st April 2023. This additional funding is expected to help small businesses get Rs 2 lakh crores in guaranteed credit without needing collateral and reduce the cost of borrowing by 1%, thus making collateral-free business loan interest rates cheaper than before.

Benefits of the Budget 2023 Proposals

The Budget 2023 proposals are expected to provide several benefits to SMEs, lending institutions, and the economy as a whole. Some of the benefits are:

Easy access to credit: The scheme underwent a revision in the month of November and December 2022. The annual guarantee fee for Member Lending Institutions was reduced by 10%, aimed at encouraging them to boost credit flow to micro and small enterprises. The scheme was also extended to women and SC-ST entrepreneurs, MSEs certified with the Zero Defect and Zero Effect scheme, and MSEs located in aspirational districts across the country. The simplification of the application process and changes announced recently will make it easier for MSMEs to access credit, especially those that may not afford collateral loans. This will provide a much-needed boost to the SME sector, which is a key driver of economic growth in India.

Encouragement to lending institutions: Credit guarantee institutions lower the risk for lending institutions by providing guarantees that cover part of the default risk. This guarantee ensures repayment of all or part of the business loan in case of default. This not only helps micro and small businesses without collateral to obtain collateral-fee business loans but also enhances overall credit availability in the economy, as many MSMEs without collateral would not have otherwise received credit from lending institutions. Furthermore, credit guarantee also reduces the need for lending institutions to set aside capital as provisions, which leads to a reduction in their capital adequacy ratio. By providing guarantees for a portion of a financial institution’s loan portfolio, the capital adequacy requirements against the guaranteed portion are correspondingly lower, leading to further credit enhancement in the economy.

Recommendations

1. The funds under CGTMSE can only be used for availing term loan or business loan. However, extending the scope of CGTMSE to include invoice financing, bill discounting, and factoring can have a significant impact on MSMEs and bridge the working capital gap which stands at 20–25 lakh crores currently as per the RBI data.
2. Guarantee fee charged by CGTMSE from Member Lending Institutions is believed to be high by many banks. Rationalization of this fee for claiming guarantee cover would help in tapping a larger share of MSMEs loans. Also, coverage should be mandatory for all MSME loans up to Rs 2 crores.
3. The limit for collateral-free loans provided by CGTMSE for micro and small businesses in manufacturing, services, and trading should be increased to INR 20 lakhs from the existing limit of INR 10 lakhs.

Conclusion

The Credit Guarantee Scheme has been a game-changer for the SME sector in India, providing access to collateral-free finance to a large number of businesses. The Budget 2023 proposals to simplify the scheme will provide a much-needed boost to the sector and the economy as a whole. The recent expansion of the scheme to new sectors will also help in the revival of sectors that have been impacted by the pandemic. These proposals are a step in the right direction and will help in the creation of jobs and the growth of the economy. It is hoped that these proposals will be implemented soon and the benefits will be realized by the SME sector and the economy as a whole.