Business Loan Without Collateral in India

A major requirement for starting a new business is capital in the form of equity or debt. In the case of first-generation entrepreneurs, both equity and debt are hard to come by and is a major hurdle for much first time / first-generation entrepreneurs. Therefore, in an effort to promote first-generation entrepreneurs and their dreams of setting up a business, the Government of India through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) provides access for first-generation entrepreneurs to bank credit without the hassles of collaterals / third party guarantees.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Scheme (CGS) so as to strengthen credit delivery system and facilitate the flow of credit to the MSE sector and first-time entrepreneurs. To operationalize the scheme, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The Credit Guarantee Scheme (CGS) seeks to reassure the lender that, in the event of an 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.

Scheme: Loans Approved under CGTMSE

New and existing Micro and Small Enterprises engaged in manufacturing or service activity excluding 'Retail Trade' is covered under the CGTMSE Scheme and is eligible to receive a bank loan from CGTMSE Member Lending Institutions without any collateral or third party guarantees. Regional Rural Bank / Financial Institution can offer up to Rs.50 lakhs of credit facilities to a single eligible borrower in the Micro and Small Enterprises sector. Scheduled Commercial Banks and select Financial Institutions can extend up to Rs.100 lakhs of credit facilities to an eligible borrower under the scheme. Credit facilities can be extended by way of term loan and/or working capital facilities.

Loans NOT Approved under CGTMSE Scheme

Some of the credit assistance that will not be eligible for cover under CGTMSE are credit facilities granted to any borrower, who has availed himself of any other credit facility covered under this scheme and where the lending institution has invoked the guarantee provided by the Trust or has not repaid any portion of the amount due to the Trust or by reason of any default on the part of the borrower in respect of that credit facility. Further, any credit facility which has been sanctioned by the lending institution against collateral security and/or third-party guarantee is also not eligible for cover under the CGTMSE scheme. Finally, any credit facility which has been sanctioned by the lending institution with interest rate more than 3% over the Prime Lending Rate (PLR) of the lending institution is not eligible for cover under the CGTMSE scheme.

Obtaining Loan under CGTMSE Scheme

To obtain a loan under the CGTMSE Scheme, the borrower must approach one of the CGTMSE Member Lending Institutions and apply for credit under the scheme. The lending institution shall evaluate credit applications by using prudent banking judgement and shall use their business discretion / due diligence in selecting commercially viable proposals and conduct the account(s) of the borrowers with normal banking prudence. The lending institution shall ensure that the guarantee claim in respect of the credit facility and borrower is lodged with the Trust in the form and in the manner and within such time as may be specified by the Trust in this behalf and that there shall not be any delay on its part to notify the default in the borrowers to account which shall result in the Trust facing higher guarantee claims.