What is CGTMSE?

CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) is a credit guarantee scheme set up by the Government of India (Ministry of MSME) and SIDBI.

The scheme provides a guarantee cover to banks and financial institutions for loans given to Micro and Small Enterprises (MSEs) without taking any collateral or third-party guarantee.

CGTMSE itself does not lend money to businesses; instead, it supports banks by absorbing part of the loss if a borrower defaults, thereby encouraging banks to lend to small businesses that are otherwise creditworthy but lack security.

Traditionally, banks relied heavily on collateral such as land or buildings while sanctioning loans. Many MSMEs, especially first-generation entrepreneurs, service providers, and small manufacturers, could not offer acceptable security despite having viable businesses. This resulted in credit exclusion, slower MSME growth, and fewer employment opportunities.

To overcome this structural problem, CGTMSE was developed so that the government could act as a guarantor, reduce the lending risk for banks, and enable wider credit flow to the MSME sector without insisting on collateral.

The Main Purpose of CGTMSE is to:

• Promote collateral-free lending to MSMEs

• Encourage banks to finance new and small entrepreneurs

• Reduce banks’ credit risk through risk-sharing

• Support MSME growth, employment generation, and formalization

• Strengthen financial inclusion and entrepreneurship in India

The scheme is not meant to replace credit appraisal but to support well-appraised but unsecured MSME loans.

CGTMSE Coverage is Available to:

• Micro and Small Enterprises only (Medium enterprises are not eligible)

• Manufacturing and service sector units

• New as well as existing businesses

• Entities such as proprietorships, partnerships, LLPs, and private limited companies

Eligible loans include term loans, working capital, or composite loans, generally up to ₹5 crore, provided the loan is collateral-free and meets CGTMSE guidelines.

Loans are Sanctioned and Disbursed by:

• Public and private sector banks

• Regional Rural Banks

• Approved NBFCs and financial institutions

After sanctioning an eligible loan, the bank registers the account under CGTMSE and pays the applicable guarantee fee and annual service fee. CGTMSE then provides a guarantee cover to the bank, not to the borrower.

The CGTMSE Fund is Built and Sustained Through Multiple Sources:

• Initial capital contribution from the Government of India and SIDBI

• Annual budgetary support from the central government

• Guarantee fees and annual service fees paid by banks for each covered loan

• Income earned by investing the corpus in safe government securities

• Recoveries from defaulted accounts, where CGTMSE receives its share

This multi-source funding model ensures the scheme remains financially sustainable and does not rely solely on tax money for every default.

What Happens if a Borrower Defaults?

If a borrower fails to repay and the account becomes NPA, the bank must:

1. Follow due recovery procedures as per RBI and CGTMSE norms

2. Observe the required lock-in period

3. File a claim with CGTMSE after meeting eligibility conditions

Upon approval, CGTMSE reimburses the bank a pre-defined percentage of the outstanding amount (depending on loan size and category).

The guarantee usually ranges from 50% to 85%, meaning CGTMSE shares the loss while the remaining portion is borne by the bank.

Recovery efforts continue even after claim settlement, and any recovered amount is shared proportionately with CGTMSE.