Do you know you can get bank loan without collateral security?

Want to set up a business? Worried about funds? Don’t worry, Credit Guarantee Scheme (CGS) may come to your help.  

In my practice, I have come across many entrepreneurs who have rock solid ideas but fail to execute due to lack of funds. In order to support such entrepreneurs, Government of India launched Credit Guarantee Scheme (CGS). To operationalize the scheme, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

Objectives of the scheme

• Offer credit facility against the primary security of the assets financed. For example, if the funds are sought towards procurement of plant and machinery, the banker will give loan taking machinery as the security. Additional security (popularly known as ‘collateral security) such as land, building, deposits are not required.

• Offer composite credit i.e., both term loan and working capital loan facility. 

• The scheme reassures the borrower that, in the event of a MSE unit, which availed collateral free credit facilities, fails to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 75 / 80/ 85 per cent of the credit facility.

Maximum Credit Limit

Fund and non-fund based (Letters of Credit, Bank Guarantee etc.) credit facilities up to Rs.1 Crore per eligible borrower are covered under the guarantee scheme provided they are extended purely on the project viability without collateral security or third party guarantee.

Eligible borrowers

The coverage of the Scheme is extended to all new and existing Micro and Small Enterprises (both in the Manufacturing Sector as well as in the Service Sector, excluding retail trade) as defined under MSMED Act, 2006.The manufacturing units where the investment in plant and machinery does not exceed Rs.10 crore and the units in service industry where the investment in equipment does not exceed Rs. 5 crore are eligible for getting collateral free loan facility under this scheme.

Lending Institutions

All scheduled commercial banks (public, private or foreign banks) including Regional Rural Banks, SIDBI are eligible to lend funds under CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) scheme.

Guarantee Fee and Interest on Loan

An upfront guarantee fee is payable at 1% (% as applicable from time to time)  of the credit facility sanctioned by the borrower. Similarly, annual service fee is also payable every year.  The lending institution has to follow the guidelines of RBI regarding charging of interest on the credit. The rate of interest will be in line with other similar loans offered by them.

Existing NPA account

The credit facility that has already become Non Performing Asset cannot be covered under the Scheme.

Third Party Guarantee

As per the extent guidelines no third party guarantee should be obtained if the account is to be covered under the Credit Guarantee Scheme. However, in case the constitution of the borrower is proprietary or partnership, the personal guarantee of proprietor/ partner is not treated as third party guarantee. Personal guarantee of directors, were borrower constitution is a company would be treated as third party guarantee

Repayment of the loan

Working Capital (WC): One year, repayable on demand. Working capital limits will be renewed every two year. However, performance of the unit and conduct of account will be reviewed annually for continuation of limits. Term Loan is given for a maximum of 7 years including moratorium period.

KYC Compliance: The borrower should open an operative account (current account) which is Know Your Customer (KYC) compliant with proper introduction, address proof, etc.

Documents to be submitted

• Proof of identity, address

• Assets and liabilities statement of the promoter with latest income tax returns.

• Rent agreement / lease deed

• Copy of MSME registration certificate

• Profile of the unit, projected balance sheet ( project report)

• Quotation/ estimate for machinery or assets to be purchased

• Statutory clearance/registration such as pollution control board certificate, factories act, etc.

Practical Issues

Wow! One can avail loan without collateral security upto Rs.1 crore! Great, isn’t it? But, hold on. It is not that easy. If you approach any banker to get loan under this scheme, they won’t show much interest.

Especially for a startup company in service industry like IT or IT enabled business, it is very difficult to get this loan.

For manufacturing units, if it is running for 1-2 years with a good track record, good orders in hand/pipeline and good relationship with the bank manager, etc., it will be easy to get loan under this scheme.

Generally, though government keeps telling about helping small enterprises, the loan facility is not reaching the needy customers. However, if you are an eligible borrower, you must try to get loan under this scheme. If the banker refuses to lend, you must fight out and get the loan.