As new business owners, acquiring business funds may be difficult and exhausting. Availing of loans from banks may be scary due to the inevitable guarantee or security you have to provide while fulfilling the loans. However, the recent initiatives which are provided by the government and banks are collateral-free loans.
Businesses which have huge capital investments and need tens and thousands of crores to run are not eligible for collateral-free loans, due to the sheer size and complexity of the business. But MSMEs which run on a small scale and which are mostly founded by small-town folks are eligible to acquire collateral-free loans.
Let us understand a bit more about collateral-free loans.
Collateral refers to an asset or valuable item that one has to pledge as a guarantee while taking a loan from the bank. On failure of repayment of the loan by the borrower, the collateral can be seized by the bank to fulfill the quantum of the loan. Most banks do not provide loans without any collateral or guarantee.
A collateral-free loan is a scheme that eliminates the need to provide collateral to banks. In order words, you can now go and avail of loans from the bank without providing any collateral or guarantee. You can approach a lender and borrow money from him at a certain rate of interest, without pledging any asset or valuable item.
Credit guarantee fund trust for Micro and Small enterprises also known as CGTMSE, was set up by the government of India in collaboration with SIDBI (small industries development bank of India), to make collateral-free loans available to MSMEs.
Features of CGTMSE
he main objective of the CGTMSE scheme is the creation of seamless credit flow into the MSME and SME sectors of the economy. It is important to have a good credit flow into these important sectors as they form the backbone of the economy. The stand-out features of CGTMSE are as follows:-
1. There should be a mandatory repayment of at least 75% to 85% in case of default in payment of principal loan amount up to Rs.50 lakh
2. The maximum guarantee provided is 50% for loan amounts greater than Rs.50 lakh but lesser than Rs.1 crore
3. 85% of repayment of loans up to Rs.5 lakhs for micro-enterprises
4. The guaranteed amount of repayment in case the MSMe is run by a woman is 85% or if the business is located in Northeast India
5. The loan recovery amount in the case of CGTMSE includes repayment of the entire loan amount including the interest component for 3 months and/or the outstanding loan amount along with accrued interest
6. Rehabilitation of business units if the failure is beyond the control of management extends up to 1 crore as support to the lender to restructure the broken parts of the business.
Up to 5 lakh
More than 5 lakh up to 50 lakh
More than 50 lakh up to 2 crores
85% of the amount defaulted which amounts to a maximum of 4.25 lakhs
75% of the amount defaulted which amounts to a maximum of 37.50 lakhs
75% of the amount defaulted which amounts to a maximum of 1.5 crore
To avail of a collateral-free loan, the lender must follow a series of steps for an easy and smooth flow of credit facilities. Some of the documents required to avail of the CGTMSE loan include the following
1. The entity has to be established as an independent and distinct business in any of the categories like a partnership, limited liability partnership, proprietorship, or limited company with the required document of incorporation, tax registrations, necessary approvals, and certificates required to establish the required business
2. The lender needs to submit a business project report defined based on market analysis and study, the factors which are important to be considered are cost and financials, promoter profile, and business models
3. The business project report and other important documents are required to be submitted to the lender for easy processing of the loan. If everything is properly filled in and if the documents are legitimate, then the important step of CGTMSE loan processing is complete
4. The lender has to evaluate and gauge the plausibility of the required loan. If the lender is satisfied with the proceedings and if it aligns with their policy, they will move towards the process of sanctioning the loan amount
5. After sanctioning the loan amount, it is the responsibility of the lender to file a guarantee cover at the CGTMSE
SMEs and MSMEs contribute about 10% of the GDP in India. Additionally, they employ 7 crore people as per a conservative estimate. Considering the constraints faced by the sector in accessing credit facilities, the CGTMSE goes a long way in removing the hurdles allowing the lenders to be liberal in extending credit.
Yes, on condition that the lender is listed as a commercial bank in Schedule I of the RBI Act, 1934
The tenure for cash credit is 12 months, while a term loan is a maximum of 5 years
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