Credit Guarantee Fund Trust for Small Industries (CGTSI) has been set up by Govt. of India and Small Industries Development Bank of India (SIDBI) to facilitate flow of collateral free credit to eligible small scale entrepreneurs from formal banking sector. CGTSI is operating its guarantee scheme through a network of its 33 Member Lending Institutions (MLIs). With the active support of its 19 MLIs, CGTSI has approved guarantee cover for 5849 units for loan amount aggregating Rs 6279.37 lakh as on October 15, 2002.

The objective of the Credit Guarantee Scheme
In order to resolve the problems relating to collateral security, Govt. of India launched a Credit Guarantee Fund Scheme for Small Industries in May 2000. The objective of the Guarantee scheme is to help the new and existing industrial units in SSI as also units in Information Technology and Software Industry to access credit without the hassles of collateral security from the eligible institutions. The eligible institutions are Scheduled Commercial Banks, select Regional Rural Banks, NSIC and NEDFi. The loan limit under the scheme, which was Rs.10 lakh per borrower, has been enhanced to Rs.25 lakh per borrower in terms of special policy package announced by the Hon’ble Prime Minister on August 30, 2000, when the Scheme was formally launched.

CGTSI is the Implementer
Credit Guarantee Fund Trust for Small Industries (CGTSI), set up by Govt. of India and SIDBI, the Settlors to the Trust, is operating the guarantee scheme. GOI and SIDBI have contributed Rs.125 crore to the corpus fund of CGTSI in the ratio of 4: 1. The Settlors have agreed to enhance the corpus fund of the Trust to Rs. 2500 crore.

CGTSI helps availability of collateral-free credit to the SSI sector by mitigating 75% of the credit risk of the eligible lenders viz. banks / institutions which are referred to as Member Lending Institutions (MLIs). These MLIs sanction credit to eligible borrowers based on the viability of the projects and seek guarantee cover from CGTSI against the payment of one time guarantee fee of 2.5% of sanctioned credit facility and thereafter, annual service fee of 1% on the outstanding credit. CGTSI guarantees up to 75% of the credit risk subject to loan cap of Rs.25 lakh and guarantee cap of Rs.18.75 lakh per borrower.

Zero Risk weights and Provisioning for guaranteed portion of the loan
In terms of the RBI circular dated June 07, 2001, SSI advances guaranteed by CGTSI will attract zero risk weight for the guaranteed portion and that in case of the advances covered by CGTSI guarantee becomes non-performing, no provision needs to be made for the guaranteed portion.

Guarantee Scheme a financial instrument
Government of India, as a facilitator has introduced the guarantee scheme which is a boon to SSIs, particularly the first generation entrepreneurs desiring to set up knowledge-based industries, ancillary units as also existing units to take up modernization and upgradation programme to remain competitive in the emerging challenging situation. In the given backdrop, success of the guarantee scheme will get reflected only when MLIs treat the guarantee scheme as an opportunity to support in larger number the viable proposals requiring loans up to Rs.25 lakh particularly when credit risk to the extent of 75 per cent is borne by CGTSI. This calls for change in mind-set of the bankers, which should consider the guarantee scheme as a financial instrument, not merely to comply with the given directions from the RBI, but consider the guarantee as ‘an opportunity’ to extend collateral-free credit in support of viable projects requiring higher quantum of loan assistance.