Formal credit continues to elude many small and medium businesses in India. But what insights can we pick up from a government scheme that is bridging this gap?
The Context
A massive chunk of India’s economic activity is owed to the efforts of the country’s small businesses, the kind whose stories are barely known or heard. To be precise, Micro, Small and Medium enterprises or MSMEs account for 29% of India’s gross domestic product (GDP), 40% of manufacturing output and 33% of the country’s exports. Yet, MSMEs continue to struggle to access formal credit needed for growth and support, both, during normal and distressed times.
The difficulties faced by MSMEs to raise timely funding has led to a huge credit gap of INR 16.67 lakh crores in 2018. According to various industry estimates only 8-16% of India’s MSMEs are funded by formal banking channels. The rest are forced to borrow from moneylenders at exorbitant rates and often have to deal with other unsavoury elements of informal credit. The credit gap continues to grow, creating one of the largest global credit crises, that’s linked to India’s wealth creation, economic opportunity and employment.
Access to formal business credit is not a new problem. There have been efforts by stakeholders to find solutions. Over two decades ago, the Government of India and the Small Industries Development Bank of India (SIDBI) came together to establish Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to enable better and timely credit flows into the MSME ecosystem. The CGTMSE scheme continues to this day and is perhaps ever more relevant in today’s post-pandemic context.
Here’s a look into what this scheme offers to uplift the long standing challenge facing business owners, while also examining recent trends in business lending.
Now, the basics: What is the CGTMSE scheme?
Easy credit access to micro, small and medium enterprises by way of business loans, without traditional risk underwriting practices – or loans that require land, building, machinery or some other collateral. The CGTMSE was set up as a Trust in August 2000 with an initial corpus of INR 125 Cr. The current corpus is INR 7500 Cr.
The main objective of this scheme is to provide business loans free from collateral and third-party guarantees. The aim is faster sanctioning and quick disbursement of loans to MSMEs, for many of whom even a few weeks or months without access to capital, could lead to questions of survival. With the increasing adoption of technology-based operations, the integration between the borrowers and lenders is becoming better. Under this scheme, loan sanctioning is subject to furnishing proper documents, including financial statements and Income Tax returns for the last three years.
Eligibility: In order qualify under the scheme, borrowers should be businesses that are:
- existing or new borrowers that are registered micro and small enterprises
- engaged in manufacturing, services and/or retail trade sectors
Ineligible categories: Borrowers such as educational institutions, self-help groups, training institutions and people engaged in agriculture (farmers or farming businesses).
To instill confidence in the system, the CGTMSE in FY18 improved some features of the scheme to make it more attractive and accessible. This included increasing the guarantee of coverage, introducing hybrid products and onboarding a greater variety of member lending institutions (MLIs) including banks and non-banking financial corporations (NBFCs) across different states to make the scheme more widely available.
Here are some of the key benefits for borrowers under this scheme:
- Credit facilities (including fund based and non-fund based facilities) are extended by lenders upto INR 2 Cr.
- High guarantee coverage ranging from 75-85% for manufacturing and service entities, and 50% for retail trade businesses.
- Special benefits for women entrepreneurs and entities in north-eastern regions (including Sikkim).
- Guarantee fee is based on the outstanding amount of loan vs. the sanctioned amount––to that extent that yearly borrowing cost reduces.
- Interest rate charged is as per RBI guidelines and is eligible for coverage.
- Allowance of partial collateral security (hybrid model): under this, CGTMSE gives a guarantee cover for the portion of credit not covered under the collateral security.
- The same borrower with existing collateralized credit facilities can be allowed to borrow under the CGTMSE scheme.
How does the scheme work?
The model is quite simple: An eligible borrower approaches a bank or NBFC (member lending institution) and applies for a loan. The MLI in turn applies for a guarantee to CGTMSE to cover all eligible loans. The loans under the scheme are disbursed based on the guarantee approved by the Trust and are monitored for performance on a timely basis by MLIs.
Where can this be availed from?
Nearly 126 Banks, NBFCs and other lending institutions were operating as MLIs across India at the end of FY20. Depending on the location of borrowing business, a corresponding MLI can be approached for a loan.
The extent of loans that can be approved under this scheme by different Member Lending Institutions (MLIs) are as follows:
| Member Lending Institution | Loan (INR in lakhs) |
| Small Finance Banks | 50 |
| Regional Rural Banks / Financial Institutions | 50 |
| Retail Trade (Scheduled Commercial Banks) | 100 |
| Micro and small enterprises – Scheduled Commercial Banks and Non-banking Finance Companies | 200 |
Note: Business loans that are already covered by the following schemes, are not eligible for the CGTMSE scheme:
- a) Deposit Insurance Credit Guarantee Corporation (DICGC) scheme
- b) Mudra Guarantee Scheme through National Credit Guarantee Company
- c) Any other guarantee scheme of the Govt
- d) Non-performing loans of credit facilities already extended
The guarantee, which is the maximum cover available, differs across the category of eligible borrowers as shown in the table:
| Category | Upto INR 5 lakhs | > INR 5 lakhs to INR 50 lakhs | > INR 50 lakhs to INR 200 lakhs |
| Micro Enterprises | 85% | 75% | 75% of defaulted amount |
| Maximum (INR lakhs) | 4.25 | 37.50 | 150.00 |
| Women/North East region | 80% | 75% of defaulted amount | |
| Maximum (INR lakhs) | 40.00 | 150.00 | |
| All others | 75% | 75% of defaulted amount | |
| Maximum (INR lakhs) | 37.50 | 150.00 | |
| MSE Retail Trade | 50% of defaulted amount subject to a maximum of Rs.50 Lakhs | ||
The Govt’s impetus to promote MSMEs has gained momentum
Over the last three years(FY2017-20), the government has increased the guarantee corpus by 3x to INR 7500 Cr to make the scheme available to a wider category of borrowers and to make it competitive with respect to other guarantee schemes (like Mudra guarantee scheme). In the micro segment (loans upto INR 15 lakhs), new products (hybrid models and inclusion of retail trade) were introduced and guarantee cover was increased to loans upto INR 2 Cr (vs. INR 1 Cr) previously. Since then, incremental guarantees approved witnessed a massive jump of two and a half times (2.5X) to INR 2.28 lakh Cr and the share of new products increased to 35% of the guarantees approved.
Lenders’ Performance under this Govt-backed Scheme
To make risk sharing granular, six NBFCs were onboarded as lending institutions in FY18. By FY20, there were 27 NBFCs registered with the Trust, of which 11 are Fin-Tech based. NBFCs accounted for 38% of the guarantees approved in FY20 (vs. 20% in FY19), with high volumes and smaller loan sizes (INR 1-2 lakhs).
Some of the top performing NBFCs are Tata Motors Finance and Magma Fincorp with an average loan size of INR 10-12 lakhs. Bajaj Finance recorded the highest number of disbursals (21% in FY20 amounting to 173,993 loans) with an average loan size of INR 2 lakhs, catering to the bottom end of the micro segment.
Public and Private Banks
The commercial lending segment has been dominated by India’s Public Sector Banks (PSBs). And even in the CGTMSE scheme, nearly 65% of approved guarantees were for loans given through PSBs till FY18. Recent data shows that the share of loans through PSBs for guarantees approved is 45%, while NBFCs account for 25%.
Top performing PSBs with average loan sizes are:
- State Bank of India (INR 7-10 lakhs)
- Bank of India (INR 10-12 lakhs) catering to the top end of micro segment
- Bank of Baroda, Union Bank of India and Canara Bank (INR 4-7 lakhs) cater to the lower end of the micro segment.
Private banks and foreign banks mostly cater to small and medium enterprises with an average loan size of INR 30 lakhs. HDFC Bank Ltd is the most popular private lender with an average loan size of INR 40-42 lakhs. Sadly, the participation of foreign banks in the scheme has dwindled to an insignificant share since FY18.
Smaller loans show big time growth
The share of approvals for micro loans (upto INR 25 lakhs) saw an increase in the last three years as more NBFCs came onboard. These account for nearly 70% of loans approved. With the inclusion of retail trade in guarantee cover and special benefits for the North-East region, the scheme is expected to continue to mainly cater to micro enterprises, more commonly referred to as kirana stores or ‘mom and pop’ shops. However, the share of small segment loans (INR 25 lakhs to 1 Cr) has reduced to 26% in FY20 from 35% in FY18.
This could have led to a mix of collateral free and collateral-based loans. Approval rates in the medium segment (5%) seems to have become stagnant, as lenders would be hesitant in lending to borrowers without collaterals, as the loss from such loans going bad, even after receiving guarantee cover, would be significant.
Conclusions and Insights
Overall, the scheme seems to favour the micro lending category where average loan size is small and the loss can be absorbed by most MLIs. The increase in guarantee cover from INR 1 Cr to INR 2 Cr has had a modest impact in terms of approval rates under this scheme. As there is lack of clarity by the government on the compensation of loss accruing to lenders on the uncovered part of the guarantee. Most lenders aren’t yet ready for a write-off to the extent of 25-35% of the loan amount as it could impact their portfolio adversely.
_____
End of matter
Authored by: Ramnath Sundar (freelance writer/analyst)
To be converted into infographic:
Pareto wins? India’s top 10 states still account for nearly 70% of loans approved; Maharashtra is the leading state for business credit approvals
Nationally, the pockets of dominance when it comes to the value of loan approvals are the more developed and industrialised belts. The Western (Maharashtra 13% and Gujarat 8%) and Southern states (Tamil Nadu 9% and Karnataka 9%) are leading the rest. Among the Northern states, Uttar Pradesh is a leading contributor (9%) while the rest of the North accounts for 17%. There is no particular concentration in the East (West Bengal, Bihar, Jharkhand and Odisha), and it accounts for only 13-14% as a whole.
In terms of approval volumes, Uttar Pradesh and Tamil Nadu rank almost similarly with average loan size of INR 3.5 lakhs that indicate a growing proportion of retail trade. The average loan size is higher at INR 6 lakhs in Gujarat, Maharashtra and Karnataka. Except in these states, the loan value indicates that the scheme is catering mostly to the micro and small segment across India.
As regards North-eastern region, despite value based approvals doubling between FY17- FY20, they still account for a miniscule 2% of the overall guarantees approved. However, after providing special concessions to the North-East region, the volume of approvals has almost tripled, which implies higher loan approvals in retail trade. But the average loan size has shrunk to INR 5 lakhs in FY20 from INR 8 lakhs in FY18.
