Understanding CGTMSE Annual Guarantee Fee Structure for MSME Loans
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) plays a pivotal role in enabling collateral-free credit for MSMEs. However, to avail of CGTMSE’s loan guarantee, micro, small, and medium enterprises need to pay an annual guarantee fee.
This article will cover all key details about the CGTMSE annual fee structure. We will understand the various types of fees charged, applicable rates, payment timelines, risk-based pricing models, and recent changes that impact costs for MSE borrowers.
Introduction to CGTMSE and its Credit Guarantee Scheme
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is a trust set up by the Government of India and SIDBI to implement the Credit Guarantee Scheme for Micro and Small Enterprise loans.
Some key details:
- Purpose: To enable collateral-free credit access for MSEs by providing guarantee coverage to loans.
- Guarantee Cover: Up to 75% of the loan amount in case of NPA/default.
- Eligible Loans: Term loans and working capital facilities up to ₹2 crore to micro and small units.
- Member Lenders: Banks, NBFCs, and MFIs registered under the scheme.
The CGTMSE guarantee scheme has been hugely successful in enabling formal debt access, with over 30 lakh MSE loan accounts guaranteed in fiscal year 2019-20 alone. However, to avail of the guarantee cover, borrowers need to pay an annual guarantee fee to the Trust as per prevailing rates and structure.
What is the CGTMSE Annual Guarantee Fee (AGF)?
The Annual Guarantee Fee (AGF) is the annual service charge payable by MSE borrowers to avail guarantee coverage from CGTMSE on their loans. It is charged as a percentage of the credit facility sanctioned or renewed.
Key details about CGTMSE’s AGF include:
- Purpose: To cover the risk and service costs of providing the guarantee.
- Charged over and above normal interest rates.
- Payable yearly for the facility tenure to maintain cover.
- Generally passed on by lenders to borrowing enterprises.
- Default on AGF makes guarantee cover liable for withdrawal.
Thus, the AGF forms an integral component of the CGTMSE scheme enabling lenders to provide collateral-free loans without additional risk. However, it also increases the effective cost of borrowing for MSEs availing guarantee cover.
Breakdown of AGF Rates Across Loan Sizes
CGTMSE prescribes tiered AGF rates based on the sanctioned loan amount to account for varying risk profiles:
Credit Facility | AGF Rate |
---|---|
Up to ₹5 lakh | 1.00% per annum |
Above ₹5 lakh upto ₹50 lakh | 1.50% per annum |
Above ₹50 lakh upto ₹200 lakh | 2.00% per annum |
Above ₹200 lakh | 2.50% per annum |
Additional details:
- Applicable on the outstanding amount against facilities covered.
- Women entrepreneurs get a 0.25% concession in AGF rates.
- Micro enterprises are fully exempted from AGF.
The tiered slab rates balance risk coverage viability with keeping borrowing costs affordable for smaller MSME loans. It accounts for lower default risks in smaller ticket-size loans.
When is the AGF Payment Due?
The AGF is payable annually before a pre-defined date intimated by lending institutions to the borrower.
The annual AGF payment enables a 1-year cover for the guaranteed facility. Non-payment of fee will make the guarantee liable for withdrawal/invocation by CGTMSE.
In the case of term loans, the AGF is payable every year till the loan matures or till 75% of the claim amount against that facility is settled by CGTMSE – whichever happens first.
For working capital loans, the guarantee can be renewed annually by payment of AGF within a specified number of days before expiry to maintain continuity of cover.
What Happens if a Loan Becomes an NPA?
For loans that turn into NPAs, AGF payment is still required to keep the guarantee active until the time the first installment of the CGTMSE-assisted claim is settled (75% of the eligible cover amount).
Once the first claim installment is paid, AGF requirements are waived. However, subsequent installments are only released after recoveries from a decreed debt account exceed 10% of the total outstanding amount guaranteed.
This ensures some accountability by borrowers even post-default to access full claims. Lenders can choose to absorb the AGF in select stressed cases to maintain cover eligibility for potential NPA accounts.
Lower AGF Rates for Special MSE Categories
To further financial inclusion, CGTMSE offers concessions on AGF rates for loans provided to certain Priority Sector MSEs:
MSE Category | AGF Concession |
---|---|
Loans upto ₹5 lakh to micro enterprises owned by women | 25% rate discount |
Loans in NER, J&K, Uttarakhand, Himachal | 25% rate discount |
Loans to SC/ST entrepreneurs | Loans up to ₹5 lakh to micro enterprises owned by women |
MSEs operated by PwD entrepreneurs | 50% rate discount |
Loans in 125 aspirational districts as per Niti Aayog | 25% rate discount |
This helps reduce the cost of credit to some extent for such Special Category MSEs. Banks also receive priority lending status for advancing loans under such concessional AGF rates.
Risk-based Pricing Model for Lender AGF
While MSEs pay AGF rates as prescribed in slab structures, CGTMSE has a risk-based pricing approach internally for collecting guarantee fees from its member lending institutions (MLIs).
Under this model, lenders with weak portfolio performance and higher defaults have to pay a higher risk premium compared to lenders with superior portfolio health and recovery track records.
Parameters like historical defaults, sectoral exposure, geographies, claim settlement track record, etc. decide the risk pricing for MLIs. This balances the cost of scheme viability with better risk management practices adopted by lenders.
Major Changes in CGTMSE AGF Structure
In recent years, some significant changes have been introduced in the CGTMSE annual guarantee fee structure and rates:
- Upper ceiling raised: Increased from ₹100 lakh per borrower to ₹200 lakh.
- Higher tolerance for legal delays: The frame increased for initiating legal action against the guarantor in case of defaults.
- Lowered rates: AGF rates were reduced in 2018 by up to 25 basis points across loan slabs.
- Claim withdrawal ceiling removal: Earlier this was at 10% of accumulated Guarantee Fee Fund corpus – now removed.
- Claim settlement transfers enabled: CGTMSE settlements can now be transferred directly to the lender’s account via RTGS/NEFT payments.
These changes have been introduced by CGTMSE to further lower costs and improve access experience for micro and small enterprises seeking collateral-free loans.
In conclusion,
the CGTMSE annual guarantee fee (AGF) structure balances multiple objectives of being risk-adjusted, affordable, and viable simultaneously. The tiered rates account for lower default risks in smaller ticket size MSE loans while larger loans pay higher premiums based on relatively higher risks.
Recent changes like upper ceiling raises, legal action tolerance increases, rate cuts, and process improvements have further enhanced the scheme’s borrowing experience and value proposition for MSEs. With over 30 lakh loan accounts guaranteed and growing annually, it continues to provide crucial formal credit access on a collateral-free basis – thereby powering the growth of India’s vitally important MSME sector.
Going forward, further optimization of pricing models and leverage of technologies like fintech and analytics can help strengthen the operational efficiency and coverage span of the CGTMSE credit guarantee scheme. However, at its core – balancing enables access, risk coverage, and sustainability considerations – will continue to shape the future evolution of CGTMSE’s annual fee structure.