One of the most significant features of planned economic development in India has been the development of village and small-scale enterprises. The country accorded high priority to this sector on account of its employment potential, comparatively less requirement of capital, short gestation period, use of traditional skill, useful links with medium and large scale sector, wide geographical dispersal, promotion of balanced regional development, etc. The sustained growth of SSI sector in the last 5 decades has been made possible by the special attention bestowed by the policy makers. This has helped increase rural industrialization, per capita income and the standard of living of the rural population.

Collateral is an impediment in the growth of SSI

The development of SSI sector, interalia, depends on the supportive role of financial intermediaries, be it banks or financial institutions, needs no extra emphasis. Finance for investment, working capital or for expanding the productivity, is an important input for sustained growth of all SSIs. Banks earmark 40% of the net bank credit for priority sector of which SSI is an important component. Further out of total SSI advances, 40% is to be made available to units with investment in plant and machinery up to Rs.5 lakh, 20% to units with investment between Rs.5 lakh and Rs.25 lakh and remaining 40% to other SSI units. Credit to SSIs from PSBs has been of the order of 15% of net bank credit during the decade 1991-2000. Nevertheless, many of the SSIs, particularly the first generation entrepreneurs, have not been able to access bank credit because of their inability to provide adequate collateral security to the lenders. This is despite the direction from RBI to all SCBs (including RRBs) to extend credit to SSIs without insisting on collateral security for loans up to Rs.5 lakh. 

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.

Keeping in view the current trend in percentage of default of around 20 per cent in the small-scale industry, the corpus fund (Rs.125 crore which would get enhanced to Rs.200 crore in FY 2001-02) will give leverage to the Trust guaranteeing eligible loans 5 times the size of the corpus fund.

Member Lending Institutions (MLIs) of the Trust

Banks started becoming MLIs since October 2000. By June 2001, all Public Sector Banks except Indian Bank, UCO Bank and United Bank of India have become MLIs of the Trust for availing of guarantee facility. The Board of State Bank of India has accorded approval for SBI becoming MLI of the Trust. Soon SBI and its associates would be enlisted as MLIs of the Trust.

National Small Industries Corporation Ltd and North Eastern Development Finance Corporation Ltd have also become MLIs of the Trust. 

Update on the Scheme

Some of the MLIs have started availing of guarantee facility since January 2001. By May end, nine MLIs have got approval of guarantee cover in respect of 1395 tiny projects coming up in 27 states. These projects involved an investment outlay of Rs.12 crore and credit off take of Rs.8.7 crore. These projects are expected to generate production of the value of Rs.56 crore and exports of Rs.66 lakh.

While 57 per cent of the units availed of loans below Rs.50,000, 38 per cent availed of loans over Rs.50,000 but below Rs.1,00,000. Thus, 95 per cent of the beneficiaries under the Credit Guarantee Scheme have been those who availed credit of less than Rs.1 lakh.

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.