Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Presentation on Credit Guarantee Scheme

Micro, Small & Medium Enterprises New Nomenclature & Classification Service (Ceiling on investment in Equipment) Manufacturing (Ceiling on investment in Plant & Machinery) Rs.25 lakh Micro Rs. 10 lakh Small Rs.2 crore Rs.5 crore Medium Rs.5 crore Rs.10 crore

Micro & Small Enterprises - Importance Provide employment to more than 40 Million persons Largest employment generating sector after agriculture Employment potential at low capital cost Constitute 95% of industrial units Total of 13 Million registered / unregistered MSEs Key contributors to national economy 45% of manufacturing output 40% of total exports 9% of Gross Domestic Product Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises Guarantee Framework - Need Policy makers world over Strive for equitable wealth distribution Desire to direct credit flow to specific sectors Seek to evolve mechanisms to achieve developmental objectives Aspire for financial inclusion / overall economic development Govern Banks for social empowerment Facilitating Collateral-free Credit to Micro & Small Enterprises

Guarantee Framework - Need Banks exposed to various risks while lending Default Risk factor - deterrent in MSE lending Collateral - conventional risk mitigation tool Lack of Collateral – commonly stated obstacle Micro & Small Enterprises adversely affected Need for alternate risk mitigation mechanism Facilitating Collateral-free Credit to Micro & Small Enterprises

Credit Guarantee – Global scenario Advocated as effective credit supplementation tool Largely promoted / sponsored by Government Dates back to 1936 in Japan Gained acceptance in Europe – 1950’s Well evolved in most developed economies Multiple agencies operate in some countries Facilitating Collateral-free Credit to Micro & Small Enterprises

Credit Guarantee in India Export Credit Guarantee Corporation of India Ltd – established in 1957 – to cover risk of exporting on credit Credit Guarantee Scheme for Small Scale Industries introduced in July, 1960 with Reserve Bank of India (RBI) as Administrator. RBI operated the scheme up to March, 1981 Credit Guarantee Corporation of India Ltd – established in 1971 – to guarantee loans under priority sector Merged with Deposit Insurance Corporation in 1978 to form Deposit Insurance and Credit Guarantee Corporation (DICGC) Credit guarantee schemes of the Corporation discontinued as the credit institutions gradually opted out of the scheme Facilitating Collateral-free Credit to Micro & Small Enterprises

CGTMSE - Establishment Set up as a Trust in August, 2000 and administered by a Board of Trustees Government of India and Small Industries Development Bank of India (SIDBI) – the settlors – Contribution ratio 4 :1 Initial Corpus – Rs.125 crore ; Present Corpus – Rs.1907 crore ; Committed Corpus – Rs.2500 crore Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises CGTMSE - Objectives Shift from collateral to merit based lending Act as catalyst of entrepreneurship promotion Facilitate institutional credit flow to MSE sector Address growth constraints of MSE sector Enable financial inclusion / employment generation Revive confidence in credit guarantee mechanism Facilitating Collateral-free Credit to Micro & Small Enterprises

Credit Guarantee Scheme (CGS) Operated through Banks / Lending Institutions registered as Member Lending Institutions (MLIs) Scheduled Commercial Banks / select Regional Rural Banks (RRBs) / other lending institutions as approved by Ministry of MSME eligible to register as MLIs 97 Banks / RRBs / other lending institutions registered as MLIs with CGTMSE Operations done through web-based B2B E-Business software Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises CGS - Definitions Collateral Security – Security provided in addition to the primary security, in connection with the credit facility extended to the borrower Primary Security – Assets created out of the credit facility extended and / or existing unencumbered assets which are directly associated with the project or business for which the credit facility has been extended Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS – Cardinal Principles Lender should extend credit without obtaining any Collateral Security / Third Party Guarantee Interest Rate levied should be in accordance with Government / Reserve Bank of India guidelines / not more than 3% of lending Bank’s PLR Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS – Eligible Credit facilities Credit facility upto Rs.100 lakh sanctioned to MSEs (both manufacturing and service sector including small road and water transport operators, small business, professionals, self-employed persons and all other service enterprises under the ambit of MSEs as per RBI guidelines on “Lending to Priority Sector” but excluding retail trade) Both Fund & Non-fund based Credit facilities viz., term loan, working capital, composite credit, LCs, Guarantees, etc. can be covered. Credit proposals above Rs.50 lakh will have to be rated internally and should be of investment grade Credit Facility of above Rs.100 lakh can also be covered, but Guarantee Cover will be limited to Rs.62.50 lakh. No collateral security / third party guarantee shall be obtained by the MLI for credit facility above Rs.100 lakh The loans should have been extended without any collateral including third party guarantee. The borrower should preferably avail of credit facility from single eligible institution. Interest rate shall not exceed 3 per cent over and above the Prime Lending Rate of the lender, excluding the annual service fee. Facilitating Collateral-free Credit to Micro & Small Enterprises 13

CGS – Special inclusions Certain activities under Agri-Clinics and Agri-Business Centres (ACABCs) like Tissue Culture, Feed Processing & Testing Units, Honey & Bee product processing units, Seed Processing Units, Setting up of Information Kiosks / Cool Chain, etc. made eligible for guarantee cover under the scheme Borrower may be sanctioned distinct / separate credit facilities, but only credit facility not backed by collateral security / third party guarantee can be covered under the Scheme Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS – Extent of Guarantee Credit facilities extended by more than one bank and / or financial institution jointly and / or separately to eligible borrower upto a maximum of Rs.100 lakh per borrower subject to ceiling amount of individual MLI or such amount as may be specified by the Trust, in the order in which the application for guarantee cover has been lodged Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS – Extent of Guarantee Borrower Category Maximum Guarantee Cover, where credit facility is Upto Rs.5 lakh Above Rs.5 lakh upto Rs.50 lakh Above Rs.50 lakh upto Rs.100 lakh Micro Enterprises 85% of Amount in Default / Rs.4.25 lakh 75% of Amount in Default / Rs.37.50 lakh Rs.37.50 lakh plus 50% of amount in default above Rs.50 lakh / Rs.62.50 lakh Women Entrepreneurs / Units located in North East Region (incl. Sikkim) 80% of Amount in Default / Rs.40 lakh Rs.40 lakh plus 50% of amount in default above Rs.50 lakh / Rs.65 lakh All other category of borrowers 75% of Amount in Default / Rs.37.50 lakh Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS – Tenure of Guarantee Tenure of Guarantee Cover for Term Credit, Combined Working Capital & Term Credit and Composite Credit is tenure of Term Credit / Composite Credit or loan termination date, whichever is earlier Where Working Capital facility alone is covered, the tenure is for a block of five years or loan termination date, whichever is earlier. Thereafter, MLI should apply for renewal of Guarantee Cover If tenure of Term Loan is 3 years, tenure of working capital will also be 3 years. After 3 years, if guarantee cover is to be continued for working capital, application for renewal to be lodged online Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises CGS – Cost of Guarantee Credit Facility Upfront Guarantee Fee Annual Service Fee North East Region (incl. Sikkim) Others Upto Rs.5 lakh 0.75% 1.00% 0.50% Above Rs.5 lakh to Rs.50 lakh 1.50% Above Rs.50 lakh to Rs.100 lakh MLIs at their discretion may pass on the cost of Guarantee Cover to the borrowers. However, responsibility of payment of Guarantee / Service Fee to the Trust will be on MLIs Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS - Yearwise Performance (as at October 31, 2009) Period MLIs availing guarantee cover Guarantees approved Amount (Rs. Crore) FY2001 9 951 6.06 FY2002 16 2296 29.52 FY2003 22 4955 58.67 FY2004 29 6603 117.60 FY2005 32 8451 267.46 FY2006 36 16284 461.91 FY2007 40 27457 704.53 FY2008 47 30285 1055.84 FY2009 57 53708 2199.40 FY2010 (Nov 30,2009) 69 78266 3589.86 Total (May not tally due to modification/ cancellation) 227457 8328.89 Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS – Slabwise Coverage (as at November 15, 2009) Slab Number Amount (Rs. Crore) % age No. Upto Rs. 5 lakh 184069 2202.15 83 27 Above Rs.5 lakh 37866 5965.14 17 73 TOTAL 221935 8167.29 Facilitating Collateral-free Credit to Micro & Small Enterprises Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS – Overall Impact (As on November 15, 2009) Cumulative Guarantees approved No. of MSE units / facilities Loan Amount (extended by MLIs) 2,21,935 Rs.8167.29 crore Turnover of guaranteed units Rs. 54065 crore Exports by guaranteed units Rs. 1669 crore Employment generation (No. of persons) 28.73 lakh No. of MLIs registered 97 Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises CGS – Top 10 MLIs – FY2010 (Based on approvals for FY2010 as at November 15, 2009) SNo MLI No. Amount (Rs. Crore) 1 Punjab National Bank 12687 503.59 2 State Bank of India 12596 474.10 3 Bank of India 10358 671.35 4 Canara Bank 4297 171.70 5 Allahabad Bank 4143 113.23 6 State Bank of Bikaner & Jaipur 3123 32.50 7 Syndicate Bank 2251 109.8 8 Bank of Baroda 2170 158.06 9 Indian Overseas Bank 1857 58.47 10 Union Bank of India 1846 100.75 Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises CGS – Benefits Credit facilities guaranteed under the Scheme carry Zero per cent Risk Weight / Provisioning for guaranteed portion (RBI Circular DBOD No.BP.BC.128/21.04.048/00-01 dated June 07, 2001) Reduction in waiting period for recovery through legal process, realising the time value of money with hassle free & quick recovery of major portion of defaulted amount Quicker dispensation of credit due to time saved on security creation / Title related issues of collaterals In case of collateral, it is Bank’s responsibility to insure / secure the property when asset is taken over Overall significant saving in Time & Energy cost of Bank’s Human Resources Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises CGS - Benefits Credit Guarantee Scheme - A tool for Widening of credit portfolio Better management of risk Faster recovery of dues Enhancement of profitability Facilitating Collateral-free Credit to Micro & Small Enterprises

Role of Credit Guarantee A weak project cannot be turned into a viable one with guarantee cover and is only an additional comfort to the lender, as is collateral security Banks should evaluate credit applications by using prudent banking judgement / due diligence / business discretion in supporting only viable projects under the Credit Guarantee Scheme and conduct the account(s) of the borrowers with normal banking prudence Facilitating Collateral-free Credit to Micro & Small Enterprises

Facilitating Collateral-free Credit to Micro & Small Enterprises The last couple of years of years have seen a sharp increase in the number of guarantees being approved which is a growing sign of acceptance of the scheme amongst banks and other MLIs. During FY2009, an all time high of 53,708 guarantees amounting to Rs 2199 crore were approved. In the current financial year, so far 78262 guarantees approvals for Rs 3589 crore have been extended. Cumulatively, 227457 guarantees amounting to Rs 8328.89 crore have been approved under the scheme as on November 30, 3009. Facilitating Collateral-free Credit to Micro & Small Enterprises

We welcome suggestions, advice and other inputs to improve our services Contact us at : Credit Guarantee Fund Trust for Micro and Small Enterprises 7th Floor, SME Development Centre Plot No.C-11, ‘G’ Block Bandra Kurla Complex Mumbai-400051 Phone : 022-26541803-07, 61437800 (24 lines) Fax : 022-26541821 Website : www.cgtmse.in Facilitating Collateral-free Credit to Micro & Small Enterprises

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