Credit Guarantee Scheme for Stressed/NPA MSMEs

Credit Guarantee Scheme for Stressed/NPA MSMEs

To provide emergency credit support to MSMEs impacted by COVID -19, Ministry of Micro, Small and Medium Enterprises (MSMEs) has introduced the Distressed Asset Fund – Subordinated Debt for Stressed MSMEs. In this connection, another funding scheme of the Credit Guarantee Scheme for Subordinate Debt (CGSSD is launched to help the distressed MSME. As part of this Scheme, the guarantee coverage will be provided to schedule commercial banks for facilitating support to stressed MSME.

The promoters who can take debt from the banks to further invest in the stressed MSMEs as equity. This sub-debt facility is provided to the promoters of those operational MSMEs which are a distressed or nonperforming asset (NPA). The present article briefs the Credit Guarantee Scheme for Subordinate Debt (CGSSD) scheme

Distressed Asset Fund – Subordinated Debt for Stressed MSMEs

The Distressed Asset Fund – Subordinated Debt for Stressed MSMEs is a scheme of Ministry of MSME under which credit facility is provided to the Promoters of the stressed MSMEs by Scheduled Commercial Banks for infusing the same as equity, quasi-equity, sub-debt in the unit.

Credit Guarantee Scheme for Subordinate Debt (CGSSD)

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) will operate the Credit Guarantee Scheme for Subordinate Debt (CGSSD) scheme and it provides guarantee coverage to Member Lending Institutions (MLIs) for the credit facility extended to the eligible MSMEs under the Distressed Asset Fund – Subordinated Debt for Stressed MSMEs scheme.

The primary objective of the CGSSD scheme is to offer credit facilities through lending institutions to the promoters of stressed MSMEs.

The Maximum sub-debt amount Eligible under the Scheme

Under the Scheme, the Promoter(s) of the MSME unit will be given credit facility equal to 15 % of their stake in the MSME entity (equity plus debt) or Rs.75 lakh whichever is lower according to the last audited Balance Sheet.

Eligible MLIs

All Scheduled Commercial Banks are eligible as Member Lending Institutions (MLIs) under the Credit Guarantee Scheme for Subordinate Debt (CGSSD)

Duration of the Scheme

The Scheme would apply to all credit facilities sanctioned under CGSSD scheme for a maximum period of 10 years from the guarantee availment date or 31.03.2021, whichever is earlier or till an amount of Rs 20,000 crore of guarantee amount is approved.

Eligible Borrowers

  • The CGSSD Scheme is applicable for those MSMEs whose accounts have been standard as on 31.03.2018 and have been in regular process operations, either as standard accounts or as Non-Performing Assets accounts during the financial year 2018-2019 and financial year 2019-2020
  • The personal loan will be provided to the promoters of the MSME units.
  • The CGSSD Scheme is valid for MSME units which are stressed, viz. SMA-2 and NPA account as on 30.04.2020 that are eligible for restructuring as per RBI guidelines on the books of the Lending institutions.

Note: Fraud/ Willful defaulter accounts will not be considered under the proposed scheme.

Eligible MSME

The following type of the MSME’s constitution is included under the CGSSD Scheme:

  • MSME units such as Individuals
  • Proprietorship
  • Limited liability partnership
  • Partnership,
  • Private Limited Company
  • Registered company

Loan Amount Eligible under the Guarantee Coverage

The guarantee coverage will be provided to the eligible borrower for the credit facilities extended under the CGSSD Scheme:

  • The promoter of the MSME unit will be provided credit equal to 15 % of  the stake (equity plus debt) or Rs 75 lakh whichever is lower
  • The financial assistance provided is to be operated as a separate loan account and the promoter need to infuse the sub-debt / loan amount as promoter’s contribution in the form of equity (including sub-debt or quasi-equity) into MSME entity
  • Any guarantee approved under the scheme will be over and above the existing loan or guarantee sanctioned by the trust

Note: In case the MSME borrower has existing limits with more than one lender, the benefit of the CGSSD can be availed through one lender only.

  • A declaration from the borrower regarding its other banking arrangements and that it has not availed funding under the scheme from the other lenders to be obtained by the lending MLI.
  • MLIs will carry out the own due diligence to assess the viability, need and requirement of the sub-debt facility in respect of the restructuring of stressed MSME units.
  • According to the Issue, Rule, Application, and Conclusion (IRAC) norms the Post-restructuring, NPA classification of these accounts will be carried out.
  • The MSME need to repay the credit in the form of equity, quasi-equity and sub-debt to MLI units.

Interest Rate of Credit under the CGSSD scheme

  • Interest Rate on Credit Guarantee Scheme for Subordinate Debt (CGSSD) scheme shall be capped as under:
  • According to the RBI guidelines released on 04.09.2019 and 26.02.2020, all loans to MSMEs must be benchmarked to one of the external benchmark rates.
  • Banks will decide the spread over the external benchmark according to the approved policies. Hence, the loan provided under the CGSSD scheme must adhere to the RBI guidelines and linked to the external benchmark rates.

The tenor of Credit under the CGSSD scheme

  • The tenor of sub-debt facility granted under the CGSSD scheme will be based on the repayment schedule and it will be defined by the member lending institution.
  • The scheme offers a maximum tenor of 10 years from the guarantee availment date or 31.03.2021 whichever is earlier.
  • The maximum tenor for repayment will be 10 years. There will be a moratorium of 7 years (maximum) on the payment of the principal. The promoter is required to pay only interest till the 7th year.
  • The interest on the sub-debt under the scheme will be required to be serviced monthly, the principal need to be repaid within a maximum of 3 years after completion of the moratorium.
  • Pre-payment of loan is permitted at no additional charge or penalty to the borrower.

Security Details

The sub-debt facility sanctioned by Member Lending Institution will have the second charge of the assets financed under the existing facilities for the entire tenor of the sub-debt facility.

Guarantee Fee

Guarantee fees will be borne by the borrowers as per the arrangements between the borrower and the MLIs. 1.50% per annum on the guaranteed amount on an outstanding basis.

The extent of the Guarantee Coverage

90% guarantee coverage will be provided as per the scheme and remaining 10% from concerned promoters on the credit extended by the scheduled bank under the scheme.

CGSSD scheme Application

Promoters of MSMEs meeting the eligibility criteria as mentioned above can approach scheduled commercial banks to avail benefit under the CGSSD scheme. The bank will disburse loans to promoters within 2 working days after complying with all sanction terms. The format of the application is attached here for reference.

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Post by Renu Suresh

Renu is experience content writer specialised in compliances and company rules.